(Yicai) Nov. 26 -- Foreign automakers could lose as much as USD20 billion a year in profit in China as competition with Chinese rivals cranks up and the market shifts to electric and smart vehicles, according to the head of China auto research at Swiss investment bank UBS.

Foreign car brands and their joint ventures typically earned about CNY150 billion (USD20 billion) annually, but that dropped by a third last year and almost halved in the first six months of this year, Paul Gong said at a seminar in Hong Kong yesterday.

They also face a surplus production capacity of 10 million vehicles, prompting the need for downsizing, Gong said, adding that their capacity utilization rate sank to 56 percent in 2023, down from 73 percent in 2020, while that for domestic brands climbed to 84 percent from 65 percent

The main reason for this change is the rise of Chinese brands, which have taken market share from the multinationals, he said. 

Foreign carmakers long dominated the Chinese market through JVs, but their reliance on fossil fuel-power vehicles and slower adaptation to electrification have weakened their position. Domestic passenger cars had more than 70 percent of the market for the first time last month, up from 59.7 percent a year ago, according to the China Association of Automobile Manufacturers.

Gong said global automakers must recalibrate their strategies in China, focusing on the niche and premium markets while pursuing organizational restructuring and redefining China’s role within their global operations.

By leveraging China’s strengths in technology and cost efficiency, foreign automakers could enhance their offerings and explore growth opportunities in markets less accessible to Chinese brands, such as the United States and Canada, Gong added.

He underscored China’s standing as a global research and development hub, equipped with advanced electrification and intelligent technologies. China produces twice as many graduates in science, technology, engineering, and mathematics each year as the United States and Europe combined, providing a vast talent pool for auto innovation.

Gong warned that foreign automakers that exit China risk losing access to cutting-edge technologies, which could hinder their own development. Some foreign brands, despite not selling actively cars in China, have chosen to partner with local auto firms to strengthen their technological capabilities.

Chinese businesses are expanding their global influence, presenting strong long-term investment potential, according to Gong. Domestic brands make up roughly a fifth of global auto production, which jumps to 60 percent for EVs, yet they account for just 10 percent of the market value of automakers worldwide. Gong said he is optimistic about long-term investment in Chinese vehicle brands.

Editor: Emmi Laine