By Chengyi Lin and Lluvia Shen
How should incumbent electric-vehicle manufacturers respond to the growing competition posed by Chinese EV makers? Chengyi Lin and Lluvia Shen argue that, rather than following the playbook of their Chinese competitors, incumbents should adopt a more strategic approach tailored to their unique strengths.
China’s electric vehicle (EV) scene has experienced marked growth in recent years. Brands including BYD and Geely have grabbed significant global market share and put pressure on EV pioneer Tesla, as well as traditional automakers. This is largely due to their price advantage, knowledge of local conditions, and willingness to invest in on-the-ground infrastructure.
A dangerous knee-jerk response to the entry of lower-priced Chinese EVs would be to adopt a similar low-cost strategy.
In response to these strong challengers, most incumbents have focused on shoring up their existing internal combustion engine (ICE) vehicle market share and preserving residual value. But although this could be effective in the short term, it hardly spells long-term success amid the shift to more environmentally friendly EVs. The unravelling of the traditional auto incumbents has already begun, with Volkswagen closing multiple plants and the Stellantis Chief Carlos Tavares’s early resignation.
What can traditional automakers in the United States, European Union, Asia and beyond do to catch up? Here are four lessons they can apply to their EV journeys.
1. Differentiate through premium offerings
A dangerous knee-jerk response to the entry of lower-priced Chinese EVs would be to adopt a similar low-cost strategy. If not done well, this approach could lead to eroding margins, fewer innovations, and potentially deteriorating quality. Indeed, the airline industry offers a cautionary tale of the long-term consequences of a race to the bottom; the dramatic fall of Boeing is partly due to the company chasing cost savings and higher margins.
Still, challenges for incumbent automakers abound. Their battery technologies are far behind those of Chinese EV firms. Additionally, their EV products are generally less appealing in terms of the design and digital cockpit. Prices would therefore have to be set below Chinese offerings to lure consumers, which could mean selling at a loss. EV production costs are also much higher compared to both Chinese EVs and ICE vehicles, which makes EVs a much harder sell internally than traditional products.
A potential solution would be to go premium and advocate for consumer value, especially in terms of mid-price to high-end products. Many traditional automakers – think Mercedes-Benz and BMW – have built strong brands over their long histories. By maintaining the high quality, rich customer experience, and stable life-cycle value they are known for, they can continue to differentiate themselves by defending their premium segments. The brand experience goes far beyond the product, from pre-sales to post-sales services. Incumbents can leverage their existing networks and communities – which will take time for Chinese EV firms to build – in order to achieve this.
This strategy has worked in other industries. To counteract competition from fast-fashion labels and contract manufacturers, long-standing haute couture and luxury brands like Louis Vuitton and Hermès have focused on quality, design, and the total customer experience to add value beyond the functionality of their products. This has helped differentiate their offerings from mass-market items. In the tech world, Apple has managed to retain its premium positioning amid the rise of Samsung and Xiaomi by making the brand synonymous with constant innovation.
At this critical time, traditional automakers need to focus on strengthening and evolving their brands to avoid a direct price war with Chinese EV companies. This strategy calls for courage from leadership, as it may cause a short-term loss in market share but could pave the way for long-term success.
Some incumbents have already begun developing advanced technologies for their luxury product lines. For example, Mercedes-Benz has further enriched the in-car experience by introducing an immersive audio system from Dolby Atomos. It has also embarked on a partnership with battery maker CATL to create the EQS luxury sedan and teamed up with battery start-up Factorial to develop solid-state batteries that they hope will revolutionise EVs. BMW has added battery company Solid Power to their list of partners, while Volkswagen has worked with software company Cerence to integrate ChatGPT into their vehicles to enhance the user experience.
2. Forge the right partnerships
Speed is key in an era of rapid technological evolution. Although developing core technologies in-house provides full control and can yield long-term competitive advantage, progress can be slow. Collaborating with makers of EV batteries or even Chinese EV automakers themselves could be a viable alternative.
The right partnerships leverage the strengths of both parties. Incumbent automakers have the brand recognition, access to markets, distribution channels, and connections with local institutions and communities, while battery makers and Chinese EV manufacturers bring advance technologies and low production costs. This combination could accelerate incumbents’ time to market and potentially result in a superior product.
Both sides stand to gain from teaming up. Incumbents could stem the loss of market share, accelerate their product evolution, and uphold their brand image. Battery manufacturers and Chinese EV companies could benefit from the incremental revenues, which could help shore up their bottom line in the face of headwinds such as protective tariffs.
Such a strategy has worked well in other industries. A recent example comes from the world of generative AI, where the partnership between Microsoft and OpenAI combines the market power and corporate access of Microsoft with the rapid development of new technologies of Open AI. This approach is not without its challenges, though. The partnership agreement needs to be negotiated carefully to create a win-win situation. Mistrust or suspicion could eliminate potential benefits.
Encouragingly, many such collaborations have sprouted in recent years. For example, Stellantis has partnered with Chinese automaker Leapmotor to produce EVs in Poland for the European market. Volkswagen has also entered into an agreement with Chinese EV maker XPENG on platform and software collaborations to “drive its e-offensive in China”. The partnership between BMW and Zapata AI has boosted the former’s operational efficiency by reducing idle time and streamlining the achievement of production targets.
3. Orchestrate the mobility ecosystem
One subtle yet profound shift in the automotive industry has been the shake-up of the industry value chain. When it comes to the adoption of new technologies, channels, services, and infrastructure all become critical to attract early adopters and convert consumers.
As younger generations and urban dwellers reconsider the automotive ownership model, automakers old and new are experimenting with mobility solutions such as digital platforms, mobile interfaces, and real-time asset management to ensure availability of cars and lure consumers.
As an example, direct-to-consumer (D2C) stores by EV brands including Tesla and Xiaomi have disrupted traditional dealership networks. The D2C model allows for a direct feedback loop from the consumer back to the manufacturer. Take Tesla CEO Elon Musk, who famously hosts periodic meetings with early Tesla owners to get their input. This shortens the consumer feedback cycle.
As younger generations and urban dwellers reconsider the automotive ownership model, automakers old and new are experimenting with mobility solutions such as digital platforms, mobile interfaces, and real-time asset management to ensure availability of cars and lure consumers. These require broad collaborations across industries to build a new mobility ecosystem. Historically, post-sales services and petrol station networks have not been the centre of automakers’ attention. But creating efficient and accessible charging infrastructure will be essential to get customers on board with EVs.
Incumbents must therefore pay attention to shaping the entire EV ecosystem around their core product. This includes everything from garnering customer feedback and constructing charging stations to influencing policy. The good news is that they have several advantages over newcomers.
First, their deep understanding of the local context could help them build viable solutions without stepping into obvious traps. For example, strategically placing charging stations in and around Paris’s city centre requires tacit knowledge of the local context, which Chinese EV makers may not possess.
Second, incumbents are likely already embedded within their local communities. They often represent national, regional, or local pride, provide employment opportunities, directly or indirectly support local economies, and sponsor local activities and events. For instance, automakers have long been the backbone of the German economy and attract international conferences such as the International Motor Show Germany and incubators like Startup Autobahn.
Third, incumbents could be better positioned to shape regulations and policy. For example, reconfiguring electricity grids in a country to support EV charging goes beyond laying new pipes. The decision is likely to affect various political and economic parties and must be tied back to the national energy security plan. A domestic brand could be much more mindful and influential on this front than foreign newcomers.
Successful examples can be found in retail. In the US, Walmart managed to leverage their scale, technology, and supply chain power to reconfigure their systems around e-commerce and fend off Amazon’s aggressive challenge. They converted many of their Supercenters into warehouses, which won support from their employees and the communities they were operating in. A similar story can be found in China, where JD.com extended their original brick-and-mortar network and built new ecosystems around e-commerce logistics – from last-mile deliveries to local convenience stores. Today, the company stands strong against digital natives like Alibaba and PinDuoDuo.
4. Explore alternative technologies
The Chinese EV industry got a head start on battery technologies in the domestic market. Building on its dominance in current lithium-based batteries, China has already moved on to developing solid-state batteries for EVs. It will be challenging for incumbent automakers to level the playing field in a short period of time. They should therefore explore other pathways for technological advancement. For instance, in addition to establishing themselves as a pioneer in solid-state battery research and production, Toyota has gone against the grain by exploring an alternative battery technology – the hydrogen cell.
Similar lessons can be drawn from the tech industry. Since Microsoft, Google, and Alibaba successfully moved into cloud, fencing off cloud natives such as Salesforce, they invest heavily in GenAI to continue their domination. Today, as they battle it out in the GenAI race, they continue to invest forward in quantum computing, which will become the next battleground in the coming decades.
As incumbents try to catch up with Chinese EV brands on battery technologies, it is equally important to look into the future. It is often challenging for a large incumbent to break with the past, overcome operational and cultural barriers, and speedily roll out new inventions. Beginning work on what they anticipate will be the next wave of disruptive technologies could be a good way for incumbents to leapfrog the competition.
Making the leap
The EV war has only just begun. When facing the new challengers from China, the pressure to put up good quarterly performance figures may influence incumbents to focus on direct competition in the immediate term, which could lead to panic, fear, and chaos.
In fact, incumbents have much more to offer from their brand power, knowledge of and relationships with local communities, and market influence. To regain their footing and take a step forward, established automakers should explore strategic options such as premiumisation, alliances and partnerships, end-to-end ecosystem orchestration, and alternative technologies. This could help them re-establish themselves as pioneers in the long run.
Chengyi Lin
Lluvia (Xin) SHEN
