Foreign auto suppliers exiting China are no victims

By Tim Culpan

The steady drumbeat of automakers and suppliers cutting their presence in China is almost enough to inspire pity. There’s no need. Strategic reductions, including last week’s announcement by a major Japanese parts maker, are a sign of pragmatism and an acknowledgement that the world’s largest car market isn’t necessarily a profitable one.

Nidec Corp., which makes motors used in power steering systems and electric drive trains, said it would recognize a restructuring expense as it restarts the China strategy to cut costs and limit unprofitable orders. The company slashed its full-year operating income forecast by 18 per cent as a result. Nidec isn’t withdrawing completely, and instead will shift to localizing product development and procurement.

The Kyoto-based company knew that competition in the Chinese electric-vehicle sector would be fierce, but not this fierce. “The more we make, the more our losses grow,” Nidec co-founder Shigenobu Nagamori said. “Our customers and our competitors are all in the red.”

Going forward, the company believes that it can pick the money-making areas of the car sector — including parts of the fast-growing EV business — instead of expending energy in the hyper-competitive and unprofitable ones.

Chinese bought more than 30 million vehicles last year, double the 15 million purchased in the US. That should make it an attractive market for Japanese, South Korean, US and European carmakers and their suppliers. And for many years it was.

Graph showing global vehicle sales.

Then things started to change. Chinese automakers learnt quickly and used the close proximity to their customers to adapt models to local needs. Pricing power, government subsidies, and the speedy adoption of new-energy vehicles like battery and hybrid-powered models made foreign brands increasingly redundant. BYD Co. pipped Volkswagen AG to become the nation’s most-popular brand last year across both EV and combustion. The German name posted a fourth straight decline in annual unit sales, according to Bloomberg Intelligence.

In the fast-growing market for EVs — which comprised 37 per cent of sales in 2023 — Chinese brands have drowned out all but Tesla Inc. As a result, foreign providers have headed for the door. In March, Ford Motor Co. said it was cutting back in China with the blunt admission that “our costs are not competitive.” Even BYD suffered from the rivalry it helped spur; it posted solid growth in full-year net income, but missed analyst estimates as a price war at home drove down earnings.

Mitsubishi Motors Corp. in October said it will withdraw from a venture with Guangzhou Automobile Group — essentially ending car production in the country — after shuttering its own factory. China was once more profitable for Mitsubishi than even Japan, Europe and North America, then competition kicked in. From sales of 101.4 billion yen ($688 million) in 2018, revenue plunged to just 12.4 billion yen in 2022.

Nidec serves as a case study for why there’s no need to shed tears. Only 25 per cent of its revenue comes from automotive products, with 41 per cent from motors used in appliances and industrial products such as air conditioners, washing machines and generators. It also makes the tiny spindles in computer hard-disk drives. The global economic slowdown meant that even this small but lucrative business was hit, with a 21 per cent drop in revenue.

Even though long-term growth prospects for the hard-disk drive market pale in comparison to the Chinese EV business, Nidec is sticking with HDDs and de-emphasizing the world’s largest automotive sector. This is a savvy decision. The Japanese company has no more control over the highly concentrated hard-disk drive business than it does the car market. But autos are extremely fractured across both brands and geographies, so the firm still has a choice of which slice to operate in.

Nidec views China as a so-called CDQ market — where customers prioritize cost first, delivery time second, and quality third. Cost is not the Japanese company’s strength and it would rather focus on quality. So instead of looking at how much revenue it can derive from there, Nidec is calculating how much profit it can extract. It figured that despite its size, the world’s largest car market is a loser for them, while Western geographies are more lucrative.

Such pragmatism needs to be shown by more foreign suppliers attempting to crack China. There’s a lot of revenue on offer, but that won’t always translate into profit. Slower and more stable markets like Europe and North America may end up being a better bet.