Lessons from China: Will Legacy Auto Survive?

Résumé:

Lessons from China: Will Legacy Auto Survive?

Most incumbents lagged in developing new energy vehicles and moving toward a SDV (software defined vehicle) architecture. As a consequence, they lost market share in China, with low capacity utilization undermining previously high profits. I nevertheless argue that legacy firms have significant strengths that will come to the fore over the next several years.

First, the Chinese market is maturing, so car companies need to manage the replacement model cycle. Legacy firms thrived because they are good at that, whereas new entrants such as BYD are struggling. Second, they have a mature distribution system, with dealers able to tap service income streams; the distribution systems of new players depend on the profits from selling new vehicles, as their "parque" is new. (Half of all the vehicles BYD has sold are less than 2 years old.) Furthermore, their sales strategy has emphasized newness. As BYD and others round out their product offerings, that strategy will no longer be relevant. Third, these firms are experienced at restructuring and surviving market downturns.

Of course, the industry's cost structure makes shrinking to enhance profits challenging, while legacy firms must develop successful NEVs and implement SDV architectures to remain technologically competitive. That remains a work in progress. Market performance may prove my hypothesis false.

By the GERPISA conference in June, I will have model-level data from January 2020 through May 2026. That will allow an early snapshot at how well the 4 major legacy firms, Geely, VW, GM and Toyota, are adapting. I will also have more evidence of whether new entrants such as BYD