The difficulties faced by Guangzhou's automotive industry reflect more than just strategic and internal issues; they are also a microcosm of the transformational pain faced by the entire automotive industry.

On October 24, GAC Motor announced that its headquarters would relocate from the CBD of Guangzhou's Zhujiang New Town to Panyu Auto City, where GAC Motor Trumpchi, GAC Aion, and GAC Motor Research Institute are located, on November 2 this year. The company noted that as the competitive landscape evolves, the disadvantages of its strategic management and control model have become increasingly apparent. Therefore, proactively adapting to industry changes and finding suitable development paths and institutional mechanisms is a top priority.

Behind GAC Motor's departure from Guangzhou's CBD lies the company's near-lagging revenue and profit growth rates in recent years, exposing the veil of traditional automakers in the era of new energy vehicles.

This has also cast a shadow over Guangzhou's automotive industry.

Last year, Guangzhou produced a total of 3.1792 million vehicles, with leading automaker GAC Motor accounting for 2.5288 million of these. This means that GAC Motor's performance significantly impacts Guangzhou's automotive industry and even has a notable effect on the city's industrial manufacturing.

In parallel with GAC Motor's decelerating growth, Guangzhou slipped in the national city GDP rankings in the first half of this year, surpassed by Chongqing, whose secondary industry grew faster. Meanwhile, Chongqing surpassed Guangzhou in both total vehicle production and growth rate due to its rapid development in new energy vehicles, becoming the "Number 1 Auto City" in the first half of the year.

However, this is not the first time that Guangzhou's automotive industry has encountered a crisis.

When a city loses its way

In recent years, as China's economic development has entered a new stage, Guangzhou has garnered significant attention every time local economic data is released. People are curious about why this established first-tier city, the "strongest provincial capital" in the country, and millennial trading hub, is experiencing economic slowdown, leading to concerns about its development vitality and growth momentum.

According to recently released data, Guangzhou's regional GDP for the first three quarters of 2024 was 2,214.995 billion yuan, representing a year-on-year growth of 2.0% at constant prices. Among this, the primary industry value added decreased by 2.6% year-on-year, the secondary industry value added increased by 1.1% year-on-year, and the tertiary industry value added increased by 2.4% year-on-year.

While this growth rate is modest, the underlying factors are noteworthy: As a first-tier city and hub of the automotive industry, Guangzhou's economic growth is constrained by its automotive sector.

Currently, the automotive manufacturing industry accounts for nearly 30% of Guangzhou's total industrial output value above a designated size, making it a pillar industry. However, in the first three quarters of this year, the value added of Guangzhou's automotive manufacturing industry decreased by 17.4% year-on-year, a further decline from the 16.4% drop in the first half of the year.

In contrast, major automotive cities like Beijing and Chongqing saw their automotive manufacturing value added increase by 18.4% and 25.9%, respectively, in the first three quarters.

When announcing Guangzhou's third-quarter economic data, the Guangzhou Municipal Bureau of Statistics candidly admitted that the automotive manufacturing industry is still in a period of deep adjustment during its kinetic energy transformation.

Just a year ago, Guangzhou produced 3.1792 million vehicles, ranking first among Chinese cities for four consecutive years, earning it the title of "Number 1 Auto City" in the country.

However, beneath these figures, Guangzhou's new energy vehicle production accounted for only about 20% of its total vehicle production in 2023, lower than the national average of 31.6% during the same period. The high proportion of traditional fuel vehicles and low proportion of new energy vehicles have provided opportunities for other cities to overtake Guangzhou.

For example, Chongqing, which surpassed Guangzhou in GDP this time, owes its success primarily to its robust automotive industry, which saw a year-on-year increase of 30.3% in value added, contributing to a 5.1 percentage point increase in the city's industrial growth rate.

Most importantly, leading enterprises such as Changan Automobile and Seres have created a new ecosystem for Chongqing's automotive industry, providing the city with confidence and driving its vehicle production back to the top spot nationally.

Meanwhile, Suzhou, with a GDP gap of about 200 billion yuan from Guangzhou, achieved a 10.5% growth in its automotive manufacturing output value. Together with the electronic information industry, they contributed 73.0% to the growth of the city's total industrial output value above a designated size. Notably, Suzhou's new energy vehicle exports surged ninefold in the first half of the year, becoming a highlight of the city's foreign trade.

Shenzhen, which is actively embracing emerging industries such as new energy, intelligent and connected vehicles, and low-altitude and aerospace economy, and striving to build a world-class automotive city of the new generation, is far ahead in this race.

How can Guangzhou reclaim its title as the "Number 1 Auto City"?

From "dividend" to "burden"

Like Guangzhou, Chongqing also failed to seize early opportunities as the automotive industry was poised for an electric transformation. In 2013, BYD started production in Xi'an; in 2016, Changzhou partnered with Lixiang One; and in 2018, Tesla prepared to build a factory in Shanghai. However, Chongqing's new energy vehicle production reached only 43,000 units in 2020, accounting for less than 3% of the national total, far below its share in the overall vehicle production sector.

Under the combined influence of these factors, Chongqing's automotive industry fell into a prolonged downturn. Its ranking in the national automotive landscape gradually slipped from the top to fifth place, even dipping to seventh in 2019, behind cities like Guangzhou, Changchun, Shanghai, Liuzhou, Beijing, and Wuhan.

As the automotive industry struggled, Chongqing's economy also took a hit. At its peak, the automotive manufacturing industry contributed nearly a quarter of Chongqing's industrial output value, making it the city's largest industrial pillar. However, in 2018, the value added of Chongqing's automotive manufacturing industry plunged by 17.3%, dragging down the city's GDP growth rate to 6.0%, the lowest since 1990.

To revive its automotive industry, Chongqing introduced several policies and regulations in late 2018. Six years later, driven by the robust automotive industry, Chongqing's GDP grew by 6.0% in the first three quarters of this year, with the value added of its automotive manufacturing industry surging by 25.9%.

Similar to Guangzhou, where the automotive industry relies heavily on joint ventures with foreign brands like Toyota, Honda, and Nissan, Chongqing's automotive industry was also significantly influenced by joint ventures like Chang'an Suzuki, Ford, and Mazda. However, as the market share of Japanese automakers declined, Guangzhou's automotive industry underwent significant changes.

As a crucial representative of Guangzhou's automotive industry, GAC Motor failed to shoulder the responsibility of transformation.

According to GAC Motor's 2024 interim financial report, the group achieved revenue of 45.808 billion yuan in the first half of the year, a year-on-year decrease of 25.62%. Net profit attributable to shareholders of the listed company was 1.516 billion yuan, down 48.88% year-on-year. Excluding non-recurring gains and losses, net profit attributable to shareholders of the listed company was -338 million yuan, a year-on-year decline of 112.51%.

Regarding the performance in the first half, GAC Motor attributed the changes primarily to the "price war" in the domestic automotive industry, which led to increased business and administrative expenses. The change in net cash flow from operating activities during the reporting period was mainly due to an increase in net cash flow from financial enterprises' operating activities compared to the same period last year.

On the other hand, as of September 2024, GAC Motor's vehicle production was 161,200 units, down 33.43% year-on-year. Cumulative production for the year reached 1,333,700 units, a decrease of 26.08% year-on-year. Vehicle sales were 182,600 units, down 25.03% year-on-year, with cumulative sales for the year reaching 1,335,000 units, a decrease of 25.59% year-on-year.

Currently, sales of GAC Toyota and GAC Honda still account for over 60% of GAC Motor's total sales. In other words, joint ventures remain GAC Motor's primary source of sales. However, as the independent segment grows stronger, the share of joint ventures within the group has shrunk, particularly in the fuel vehicle market, which is gradually being eroded by the new energy vehicle market.

More seriously, amid sluggish sales, these two joint ventures have resorted to layoffs to reduce costs and increase efficiency.

In July last year, GAC Toyota embarked on a large-scale layoff in the Chinese market, affecting over 1,000 employees. By the end of the year, GAC Honda also announced layoff plans, affecting around 900 employees.

In May this year, layoff news surfaced once again. GAC Honda laid off over 1,700 additional employees, bringing the cumulative layoff scale to about 20% of its Chinese workforce.

Joint ventures are no longer the "evergreen tree" for GAC Motor. Previously, GAC Motor's joint venture projects with Fiat Chrysler, Acura, and Mitsubishi ended in failure, and now Honda and Toyota are also facing difficult choices in their development.

It is evident that as China's new energy vehicle market undergoes rapid transformation, traditional automakers are increasingly confronted with challenges in the new energy sector. Amidst this tumultuous environment, GAC Motor is under greater pressure than ever before.

Opportunities for trial and error

One of the primary challenges facing Guangzhou's automotive industry as it transitions to new energy and intelligent connectivity is how to withstand pressure, stabilize its foundation, and lead the industry away from its dependence on past production models, amidst declining sales and profits.

For instance, independent new energy brands such as GAC Aion and XPeng are making breakthroughs.

Currently, GAC Aion has established over 120 tier-one suppliers and hundreds of upstream supply chain enterprises or projects within the province, directly contributing an annual output value of 20 billion yuan. According to plans, GAC Aion aims to achieve full local support for its core supply chain by 2025, providing stronger support for building a world-class "automotive Silicon Valley" in the Guangdong-Hong Kong-Macao Greater Bay Area.

Just a few days ago, XPeng Chairman He Xiaopeng announced that the first batch of XPeng P7+ vehicles rolled off the production line at the company's Guangzhou plant and were gradually being dispatched to dealerships nationwide. This model received over 30,000 pre-orders within 1 hour and 48 minutes of its pre-sale launch.

Apart from leading enterprises taking the lead in transformation, addressing the prominent mismatch between components and vehicle manufacturing and strengthening supply chains and core technologies around supply chains is a top priority for Guangzhou's automotive industry transformation.

In 2022, the ratio of complete vehicles to components in Guangzhou's automotive industry was only 1:0.47, indicating a low localization rate for core components. Components such as battery materials, automotive-grade chips, intelligent driving systems, and in-vehicle operating systems are crucial for new energy vehicle manufacturing, but Guangzhou still has shortcomings in these areas.

"The automotive supply chain in the Yangtze River Delta region is complete, with a pronounced industrial cluster effect. For some of our components, such as chips and tires, we prefer suppliers from the Yangtze River Delta region," said an employee of a Guangzhou-based automotive company, acknowledging the industry's heavy reliance on component enterprises in the region.

"Taking Huadu District as an example, the automotive component enterprises in this region primarily support Dongfeng Nissan, resulting in a highly specialized supply chain that makes these enterprises vulnerable to risks. Therefore, these automotive component enterprises need to consider how to expand their customer base in other regions to diversify risks," the employee added.

Despite the overall sluggish growth of Guangzhou's automotive manufacturing industry, there are still bright spots. For instance, investment in Guangzhou's automotive component manufacturing industry grew by 45.3% in the first three quarters, and production of multi-purpose vehicles (MPVs), which cater to market demand, accelerated for the third consecutive year, with output increasing by 18.2% year-on-year.

This reflects Guangzhou's efforts to "correct" its automotive industry structure.

In fact, apart from GAC Motor, Guangzhou's automotive industry is witnessing an increasing number of "masterpieces."

Currently, Guangzhou is home to leading autonomous driving companies such as Pony.ai, WeRide, Ruqi Limousine & chauffeur, WowAir Technology, and Antu Zhixing. Recently, WeRide officially listed on Nasdaq, becoming the first global general autonomous driving company and the first global Robotaxi company to go public. Ruqi Limousine & chauffeur also listed on the Hong Kong Stock Exchange recently.

It is noteworthy that both companies have received strategic investments from GAC Motor.

Moreover, relying on its traditional automotive manufacturing base and a relatively complete automotive supply chain system, Guangzhou has become the only city in China to officially license and commercially demonstrate L4 autonomous vehicles.

Furthermore, by formulating autonomous driving policies and regulations and providing conveniences for enterprises, Guangzhou attracts upstream and downstream industries to settle in the city, improving its autonomous driving industry. For instance, it has successively introduced or incubated companies such as Huawei's Guangzhou R&D Center, Daoyuan Technology, Siwei Electronics, Jubay Technology, and Xinyue Energy, accelerating the development of an intelligent vehicle industrial cluster.

That being said, this is not the first time that Guangzhou's automotive industry has encountered a crisis. The difficulties faced by Guangzhou's automotive industry reflect not only strategic and internal issues but also the transformational pain experienced by the entire automotive industry. Finding new growth engines and achieving a qualitative leap from quantitative changes have become daunting challenges for many traditional automakers.

Both Guangzhou's automotive industry and GAC Motor now stand at a crossroads, requiring them to bravely shed the heavy burden of past rapid expansion, confront the reality of the industry's new and old kinetic energy transition, and actively explore new growth opportunities.

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