The Hangover: Foreign Carmakers’ China Strategies

The last few years have seen foreign carmakers’ China operations shift from cash cows to drags on profits. Their responses to that sea change vary. Some are exiting or downsizing their China presence, while others are doubling down with new EV investments. A growing number is repurposing idle plants into export bases. A few remain undecided, straddling strategies as losses mount. These diverging approaches carry implications well beyond corporate bottom lines. They will ultimately reshape global supply chains, could expose foreign suppliers to new risks, might weaken state-owned enterprise (SOE) partners in China, and will influence Western policy debates on the pros and cons of remaining open to China. The next two to three years will be crucial in determining whether foreign firms can indeed reset their China footprint, or whether the market will become a permanent drag on global profitability.

Cash cow

For much of the 2000s and 2010s—and for most OEMs until 2022—China was, simply put, a cash cow. Despite high market access barriers including mandatory joint ventures (JVs) and high tariffs (25% until lowered to 15% in 2018), foreign operations in China required relatively little investment yet delivered outsized returns. Foreign carmakers dominated the market, with Volkswagen (VW) alone reaching nearly a 20% market share in 2019. In the 2010s, nearly every foreign carmaker earned substantially higher margins in China than in other global markets (Figure 1).

JV earnings were an important profit source for foreign OEMs in China, but not the only one. For example, we estimate that in 2019, only 37% of Toyota’s profits in China came from its JVs with FAW and GAC. Meanwhile, 42% came from exports—mainly Japan-made Lexus vehicles—8% from component sales to its JVs, and 12% from royalties for technology use and R&D cost recovery. For details on the profit estimates see the Appendix.

Applying the same profit estimations to other major foreign OEMs, we see that China’s importance however differs widely carmaker to carmaker. For some, their China business was merely a profitable side gig, while for others, China profits became critical to their global bottom line (Figure 3).

German carmakers, along with Nissan, GM, and Tata-owned Jaguar Land Rover (JLR), leaned heavily on Chinese earnings between 2015 and 2019. Without those profits, these OEMs would have been smaller, less appealing to shareholders, and likely less competitive in third markets. JLR would almost certainly have slipped into the red, while Volkswagen might have struggled to absorb the costs of Dieselgate and its fines—potentially weighing on global sales.

The experience of Toyota, Hyundai, and Kia shows, however, that success in China is not a prerequisite for global competitiveness. Toyota has become the world’s largest carmaker despite a relatively modest China footprint. Hyundai and Kia, for their part, have grown despite running loss-making China operations after the 2017 THAAD dispute triggered consumer boycotts that cratered sales.

Golden goose no more

In any case, the China boom years are over. Foreign OEMs, once holding around 60% of the market, now sell 40% of vehicles in China, and their market share is still trending downward. Even as China’s overall auto market expanded, foreign OEM sales fell 22% between 2020 and 2024, and their exports to China dropped 38% over the same period.

Several forces have eroded foreign OEMs’ market shares and profits. Domestic competition has intensified, propped up by billions of yuan in state grants aimed at building national champions. The property downturn has curbed demand for high-end vehicles, hitting foreign brands hardest. A sector-wide price war is squeezing margins, while tax changes and trade-in policies encourage consumers to trade down—often to Chinese OEMs’ advantage.

Shifting consumer preferences are also a factor. A more patriotic Chinese youth increasingly prefers domestic brands. Aggressive EV adoption targets and supportive policies have left incumbent foreign carmakers trailing in the rollout of competitive new models, weakening their brand image. In the context of the US-China trade war, finally, retaliatory Chinese tariffs on US-made cars have cut into margins for exporters such as Mercedes-Benz and BMW (which export substantial volumes out of the US).

Some problems were also homegrown. For Ford, slow model rollouts and quality issues added to the pressure—its US-developed Mustang Mach-E failed to win over Chinese buyers. GM’s sales and profits had also already fallen sharply before 2020. German OEMs, along with Nissan and Honda, saw their downturn begin after 2022, as they struggled to launch compelling EVs. VW’s Wolfsburg-developed ID series flopped in China, seen by consumers as overpriced and hampered by weak software. One exception was Toyota, which saw China profits rise considerably in 2020 and 2021, driven by Lexus exports and strong JV sales. Still, by 2024, Toyota too faced a sharp profit drop.

The final challenge for incumbents has been the rise of Tesla—the only foreign carmaker to enter and thrive in China’s auto market in recent years, while also eroding sales and profits for traditional OEMs. Compared to its peers, Tesla’s trajectory has been inverted: As its sales and China profits surged, those of the incumbents declined. Tesla entered China in 2013 and began local manufacturing in 2020. It was the first foreign automaker permitted to fully own its plant, sidestepping the requirement for a joint venture partner.

It is important to note that while Tesla is likely even more dependent on China for profits than German OEMs, the sources of those profits are fundamentally different. German automakers still earn most of their China income—though at shrinking margins—by selling vehicles to Chinese consumers, whether locally produced or imported. Tesla, by contrast, likely earns the bulk of its China profits from two sources: the sale of regulatory credits—its CFO disclosed that three-quarters of Tesla’s global credit sales in 2024 (Q1–Q3) occurred in China—and a highly profitable export business built on China’s low production costs. In short, German OEMs depend on Chinese consumers, while Tesla depends on Chinese workers and credits.

What next? Foreign OEMs’ new China strategies

The question for incumbent foreign OEMs is what now? For most of them, decisions about their China business are becoming more urgent as joint ventures shift from delivering profits to generating losses. In 2022-2023, before Changan Ford returned to profitability, Ford’s China operations incurred impairment charges (a non-cash expense reflecting a write-down of asset values) worth $825 million. Honda’s JV with GAC booked a $450 million impairment alongside a $111 million loss in 2024. Over the last few years, Hyundai and Kia had to transfer several hundred million dollars to their China JVs to prevent their China subsidiaries from going bankrupt. GM, meanwhile, reported a $4.4 billion loss from its China JVs in 2024, driven largely by write-downs of asset values.

Beyond commercial considerations—such as whether to invest in local R&D, expand EV capacity, or deepen supplier ties—geopolitics now looms large, too. The US America First Investment Policy links openness to foreign investment to an investor’s China exposure, reflecting a hardening toward China that could end up hurting many foreign OEMs. Increasingly, governments around the world scrutinize exports from China if they risk displacing domestic production, particularly when exporting OEMs benefit from state support or partial state ownership back home.

Other factors also shape automakers’ strategic decisions. For some OEMs, like Stellantis or Renault, the China market has always been a side show, making the decision to scale back or exit easier. For others, like Volkswagen and GM, China is (or was once) central to global growth, so their assets on the ground are substantial, as are sunk costs in the market, making strategic choices more complex. On the flipside, carmakers are also asking how they can benefit from—and potentially regain—tech leadership in China’s fast-moving EV market, to compete in third markets, where Chinese carmakers are expanding fast.

In that context, different China playbooks are emerging, with various risks and benefits:

Pack up and leave

For OEMs racking up losses, the most straightforward option is to exit China and stop the drain on resources. With US tariffs, sluggish European growth, and rising Chinese competition abroad, some players may lack the capital to reinvest meaningfully in their China operations to attempt a turnaround. After years of losses (Figure 7), Mitsubishi and Fiat-Chrysler (now part of Stellantis) exited their JVs with Guangzhou Motor. Others have scaled back rather than left entirely: BAIC Hyundai sold two of its five China plants over the past five years. In 2020, Dongfeng also bought one of Renault’s plants as the French carmaker scaled back its China operations.

Leaving does not necessarily mean severing all ties with China. Apart from a handful of luxury imports, Stellantis has exited the China market, but it has entered an internationally focused JV with Chinese EV maker Leapmotor. Under the deal, Stellantis provides overseas assets and know-how in exchange for a share of global sales profits.

Renault, which has also substantially scaled back its China operations, has taken a similar path. The company has struck a global partnership with Geely covering overseas production and engine development. In Brazil and Korea, Renault already builds vehicles on a Geely platform, and it recently established an R&D center in Shanghai to expand procurement of Chinese parts for its non-China business.

Despite China’s size, exiting or downsizing there is not necessarily fatal for an OEM. If a company never built a sizeable China business, never put China at the core of its strategy, and never sunk billions of dollars into China investment, then leaving China may not be the end of the road. Hyundai and Kia are proof: Both have thrived and expanded globally despite loss-making China JVs.

Still, exit strategies come with real risks. First, no carmaker will find it easy to walk away—or justify walking away—from the world’s largest auto market. And while China is a tough environment, the EU and US are hardly easy alternatives, with their own regulatory, competitive, and political headwinds. Second, even with innovative tie-ups outside China, OEMs without deep China exposure may be slower to anticipate how Chinese automakers will compete in third markets. Finally, if multiple foreign OEMs pull out just as Chinese automakers expand abroad, the ex-China market could quickly become overcrowded, intensifying competition and eroding profits.

Double down

Because China remains profitable for them—and, more importantly, because it has historically been their most profitable market by a wide margin—German carmakers are doubling down. They are expanding EV production capacity, building new R&D centers, and deepening local partnerships. Volkswagen has been especially active: It launched a JV with JAC Motors in 2017 and expanded it in 2020 and 2024, set up a JV with chipmaker Horizon Robotics in 2022, and took a stake in Xpeng in 2023.

Toyota, while never as dependent on China as its German peers, is the world’s largest and most profitable carmaker and still enjoys a strong China business. To maintain its global lead, it appears determined to keep a substantial presence in China. Earlier this year, for example, the company announced plans to localize Lexus production.

The logic for doubling down is straightforward: Use global profitability to outlast weaker, loss-making Chinese and foreign rivals, especially as Beijing faces fiscal constraints that limit how much it can subsidize the sector. Mercedes-Benz CEO Ola Källenius captured the mindset: “You must control your nerves, keep investing, keep innovating, and ensure that at the end of that Darwinian battle, you are one of the combatants that are left.”

Carmakers doubling down may bet that even if foreign players’ market share keeps shrinking, there will always be some space left for international players in China’s market. Beijing, mindful of its own auto export ambitions, has an incentive to keep foreign OEMs engaged to head off protectionist pushbacks in third markets. And if others—GM, Honda, Hyundai—scale back investment, the double downers have a stronger shot at being among the three or four foreign “survivors” in China. Splitting the last 15–20% of the market among them could still be an attractive prize (after all, 10% of the China market equals 2 to 2.5 million sales units).

Double downers also seek to leverage China as a global innovation hub. They think that competition with Chinese firms in third markets is inevitable, given that not all international markets will close themselves off to Chinese cars. The only way to compete is hence to tackle Chinese competition head on and turn China into an innovation hub that helps lower costs not just in China but globally. VW, for example, is targeting a 40% cost reduction in China and is already exporting China-developed EV technology. Skoda is reportedly preparing an India-bound platform derived from VW’s new China architecture.

Not all agree with the double down approach. Ford CEO Jim Farley has cautioned against it: “If you just reinvest in a new cycle of EVs in China, there is no guarantee, or no data, that would suggest the Western companies win.” The success of the double downers hinges on the next generation of flagship vehicles. Mercedes is betting on its new CLA, BMW on the Neue Klasse, VW on its ID.Aura, ID.ERA, and ID.EVO models, and Toyota on localized Lexus and bZ EVs. These will reach the market in 2026–27 and will provide an early verdict on whether doubling down can pay off or whether Jim Farley is right.

Even if these investments succeed, the strategy comes with trade-offs. Localizing production reduces previously lucrative export earnings and value-add creation in Germany and Japan. Partnerships where foreign OEMs are no longer the technology provider erode or even reverse royalty income. The component business—once highly profitable—faces shrinking margins as Chinese suppliers dominate the EV ecosystem. All this may mean that the double downers are also antagonizing their home governments as their home operations are increasingly in competition with their China operations.

Export pivot

In line with Farley’s skepticism, Ford has taken a different path. The company has pared back loss-making China operations and scaled down investment aimed at competing locally, instead turning its assets into a profitable export base. Its JV with Changan returned to profitability in 2024 after years of losses and shrinking market share—after it started exporting at scale toward the end of 2023. JMC, the partially state-owned maker of the Ford Territory SUV, in which Ford holds a 32% stake, has also delivered steady, if modest, profits from its export strategy. Kia is another foreign carmaker that regained China profits thanks to exports (Figure 9).

While the lines can blur—a “double downer” may also pivot toward exports—the distinctions are clear. Double downers commit sizeable new investment, focus primarily on defending domestic sales in China, and pursue deep tie-ups with local firms. Export pivoters, by contrast, make more limited “one last go” investments, orient sales toward overseas markets, and rely on more modest partnerships.

More OEMs are trying to emulate the Ford and Kia model. In May 2025, Mazda announced a $1.4 billion (CNY 10 billion) investment in its JV with Changan to double production capacity, mainly for export, with a target of $1.4 billion (CNY 10 billion) in annual export value. Around the same time, Nissan unveiled its own $1.4 billion (CNY 10 billion) investment in China, even as it closes plants elsewhere, including in Japan. The plan centers on restructuring JVs to produce in China for export—excluding the US. Nissan also formed a new JV with long-time partner Dongfeng Motor, committing $140 million to export cars and parts.

For years, exporting from China held little appeal for foreign OEMs. JV structures meant sharing profits with state-owned partners, while strong domestic sales kept capacity fully utilized. Now, idle plants, lower production costs, a depreciating yuan, and VAT rebates have made the China-for-export model far more attractive. The ability to take majority stakes in JVs adds to the appeal. BMW has done so with Brilliance Auto, and Nissan has taken a majority stake in its new export-focused JV with Dongfeng. But such moves remain difficult where SOE partners resist.

But the strategy has limits. More countries are erecting trade and market-access barriers to Chinese car exports. Ford and GM once shipped vehicles from China to the US, but new tariffs have rendered those unprofitable. Mexico—which accounted for a quarter of Kia and Ford’s 2025 sales from China and a full 64% of GM’s—is reportedly also considering tariff hikes later this year. Internal pushback is another risk: Headquarters of firms, especially those with powerful works councils or labor unions, may resist China exports if they threaten jobs at home. And given the scale of idle capacity in China, exports alone are unlikely to fill the gap—meaning OEMs may need to pair this approach with renewed local investment, to also reverse market share losses domestically, or further asset sales.

The undecided

Honda and GM sit somewhere in the middle. China is less critical to them than to the German OEMs, but still far more important than for Korean carmakers, Ford, or even Toyota. Both posted losses in at least some of their China JVs in 2024 and have dabbled in exports, though with limited commitment—shipments have trended down over the past year (except for SAIC-GM-Wuling, the budget-vehicle JV in which GM holds a minority stake).

Until recently, GM pinned its hopes on Ultium-based models to compete in China’s EV market. But, as Ford, Volkswagen, and others (Tesla aside) have found, foreign-developed EV platforms have failed to gain traction in China. In 2024, GM abandoned its Ultium project altogether. Honda has been more localized, developing its China-specific Ye series. While both companies are retrofitting plants or adding some NEV capacity, they have avoided the large-scale R&D spending and headline partnerships—such as VW-Xpeng or Toyota-BYD—seen among the double downers.

But with JV losses mounting, pressure is building for the undecided to pick a lane: double down with greater local investment, expand partnerships, sell assets, or pivot more decisively toward exports.

Outlook

How foreign carmakers restructure their China operations will shape not only their own individual fortunes, but also carry wider consequences for the sector. At home, they remain among the largest employers and R&D investors, meaning a profit downturn or a shift in production and R&D could have major domestic impacts. In China, their SOE partners often rely on them as their main source of profitability. And globally, suppliers that followed them into the China market are deeply exposed to changes in strategy of foreign OEMs.

Effects on foreign suppliers

Most foreign suppliers followed their OEM clients into China. As foreign carmakers lost market share, many suppliers tried to diversify their revenue sources by serving more Chinese OEMs. Strong overall auto production, buoyed by exports, has masked the impact of weaker demand from foreign OEMs, but risks are mounting. Chinese carmakers are pushing harder on costs—demanding frequent price cuts, renegotiations, and longer payment terms—which erodes margins and creates cash flow problems not only for Chinese suppliers but also for foreign ones. Despite an overall growing market, German supplier Schaeffler reported a 3.8% revenue decline in China from 2023 to 2024, citing “structural changes and reduced demand from foreign automobile manufacturer customers.”

Smaller firms, as well as those tied closely to individual OEMs, are most exposed. Hyundai Mobis, for example, saw its China revenues fall by $6 billion over the past decade—an 80% drop—due to its dependence on Hyundai and Kia. Japan’s Nippon Steel has decided to end its two-decade contract with Baosteel, reflecting lower output from its main Japanese OEM customers in China.

These trends mirror the strategic choices of foreign OEMs. As some exit or downsize, their suppliers face shrinking demand and stranded capacity. The export pivot of foreign OEMs may offer some suppliers a temporary lifeline, but only if they are integrated into those supply chains. For suppliers to the double downers, the pressure to localize R&D and technology partnerships risks reducing the role of traditional foreign suppliers altogether. And for the undecided, prolonged hesitation deepens uncertainty for their supplier networks.

In short, the fortunes of foreign suppliers are directly tied to the diverging paths of their OEM clients—making the ongoing shakeout in China’s auto sector just as existential for them.

Implications for Western policymakers

The decline and shifting strategies of foreign carmakers in China carry primarily negative consequences for foreign economies. In 2024, China’s imports of foreign-made cars and parts fell 28% compared with 2021 (the last year to see substantial export growth), with the pace of decline accelerating to 33% year-on-year in the first half of 2025. This reflects the competitive difficulties of foreign carmakers, Chinese tariffs on US-made cars, and company decisions to localize vehicle production and sourcing. The impact will be felt most acutely in major export hubs such as Germany and Japan, as well as smaller export powerhouses like Slovakia. At the same time, jobs, value added, and exports in these countries risk further compression as both foreign and Chinese OEMs expand their use of China as an export base.

Foreign OEMs are no longer aligned on China. In the 2000s and 2010s, the story was one of shared growth, even if some firms were more exposed than others. Today, as strategies diverge, a split is emerging in how carmakers lobby at home, and how policymakers respond. German OEMs illustrate the point. Even after recent declines in China sales, nearly 30% of their global profits still come from China. Beyond earnings, they are also seeking technology, innovation, and increasingly vehicles and parts from China. These firms will be reluctant to back protectionist measures for fear of retaliation in what remains both a profit and innovation hub. By contrast, companies scaling back their China presence are more inclined to push for barriers against Chinese carmakers abroad. Nowhere is this clearer than in the US market, where OEMs have become advocates for restricting access of Chinese carmakers.

Implications for China

The weak performance of foreign carmakers in China also matters for Beijing. Rising market share for Chinese brands may look like a win, but Chinese policymakers may also worry that a lack of profitability will drag down domestic players in the long run. More worrying, though, is the prospect of weakened foreign OEMs becoming advocates for protectionism on their home markets (see previous section). Beijing may even intervene in the market to prevent a further slide in their sales.

The decline of Sino-foreign JVs also threatens their SOE partners. With the exception of SAIC and Changan, most SOEs with major JV ties remain heavily dependent on them for profits (FAW’s financials are not disclosed). Several SOEs have already issued profit warnings due to the weak performance of their JVs. These SOEs are more than just major employers, they carry strategic technological weight. Dongfeng, for example, is helping early-stage Chinese chip suppliers scale and meet industry standards. Keeping these SOEs afloat may require more state support—an expensive proposition given falling fiscal revenues.

Appendix

While most carmakers disclose revenue by geography, they very rarely provide a breakdown of profits. To bridge this gap, we estimate foreign carmakers’ China profits based on four factors: joint venture (JV) earnings, royalties, exports, and sales of parts and components. This approach draws on methodologies employed by equity analysts, including Evercore ISI and Goldman Sachs.

JV earnings are taken from company financial statements where available, and in cases where foreign carmakers do not disclose such results, data reported by their Chinese JV partners is used instead. Royalty earnings, which are generally treated as trade secrets and not publicly available, are estimated by applying a 1.5% profit margin to JV revenues in order to account for the recovery of global R&D spending and the technology transfer provided. There are a few publicly available auto licensing cases. Energy Conversion Devices licensed battery technology to Hyundai Motor Group for a $3–5 million upfront fee plus royalties ranging from 0.5% to 3% of sales, depending on application. Similarly, in 1998 Edmond B. Cicotte licensed brake, clutch, and accelerator pedal technology to Williams Controls Inc. for a 3% royalty rate.

Export earnings are either reported directly by some companies or estimated where disclosure is absent. In such cases, China revenues (ex-JV) are used or derived by multiplying export sales by historic average sales prices, drawing on price data from Chinese auto sales platforms. Profitability is then estimated using an EBIT margin of 10% for mass-market carmakers and 15% for premium carmakers. These margins are higher than typical global automotive EBIT levels (7-10%), reflecting the relatively high profitability—and often luxury nature—of vehicles exported to China. To capture the effect of the intensifying price war in China, margins have been gradually revised downward from 2022 onward, reaching 7% and 10.5%, respectively, by 2024.

Finally, revenue from parts and components, including spare parts, is taken from company disclosures where available (some firms document sales to their China joint venture) or estimated as a share of JV revenue, set at 10% for mass-market and 15% for premium carmakers. To reflect the stronger pricing power of OEM-branded spare parts (especially for aftermarket parts) compared with independent suppliers, we apply EBIT margins of 10% for mass-market and 15% for premium carmakers.

While most foreign automakers rely on joint ventures and technology licensing in China, Tesla operates differently: it owns its Shanghai Gigafactory outright and does not license technology. In addition, Shanghai is not only a hub for domestic sales but also a major export platform for global markets. As a result, we use a tailored approach to estimate Tesla’s China-related profits that departs from the standard JV/royalty framework.

Tesla’s reported pre-tax profits by region are split into “United States” and “overseas.” Because the overseas profit pool includes vehicles exported from US plants, we first adjust the US profit pool upward to account for those exports. Using EV Volumes sales data, we identify the number of US-produced Tesla vehicles sold abroad, multiply by average sales prices taken from industry reports, and apply Tesla’s disclosed global automotive profit margin. This yields an estimate of export-related profit that we then add to the US pool.

The reduced foreign profit pool is allocated between Tesla’s Shanghai and Berlin factories based on their respective production shares. This step assumes similar operating margins across facilities, though it likely understates Shanghai’s contribution: Berlin has been heavily underutilized, resulting in elevated per-unit costs, and in 2022 CEO Elon Musk confirmed the plant incurred billions in losses. By contrast, Shanghai has consistently operated at scale, supporting both domestic demand and a significant share of global Tesla exports. Third party reports indicate that the plant has had a substantially higher profit ratio than Tesla’s US or Germany plants. This means its profitability is likely higher than suggested by a proportional allocation. Our methodology therefore provides a conservative estimate of the Shanghai plant’s role in Tesla’s global profit structure.