• Time is running out for traditional foreign automakers to adapt to China's electric car market, signaling to industry analysts that companies must double down on local partnerships to survive.
• U.S. automaker General Motors, Germany's Volkswagen and Japan's Nissan each saw their China revenue drop between 2019 and 2023, according to CNBC's calculations of company data.
• "Western [automakers] are waking up to the fact that they can't just sit here and watch their market positions just erode and erode," said David Norman, a Hong Kong-based mergers and acquisitions lawyer at A&O Sherman.

BEIJING — Time is running out for traditional foreign automakers to adapt to China's electric car market, signaling to industry analysts that companies must double down on local partnerships to survive.

Fossil fuel-based automakers have struggled to hold their ground in the world's largest car market, which has swiftly transformed into one where new energy vehicles now account for more than half the country's car sales.

If the foreign brands "can't launch competitive clean energy vehicles in the China market soon, the only hope for salvaging any market share is likely via partnership with a domestic player," said Tu Le, founder and managing director of Sino Auto Insights.

"But is it too little too late? Perhaps for a number of foreign brands," he said.

U.S. automaker General Motors, Germany's Volkswagen and Japan's Nissan each saw their China revenue drop between 2019 and 2023, according to CNBC's calculations of company data.

In 2023, South Korea's Kia reported China sales more than 30% lower than 2020 levels. Tesla in comparison said its China sales surged by more than six times between 2019 and 2023.

As investor concerns grow, management are deliberating plans. GM CEO Mary Barra said on an earnings call last month the company had meetings lined up with shareholders and joint venture board members to discuss "restructuring" in order to improve profits in China, once GM's top market by revenue.

U.S., German and other foreign automakers that entered China decades ago were required by Beijing to form joint ventures with local companies, typically state-owned.

Only in 2022 did Chinese authorities allow foreign car companies to fully own their local production. But it was a lucrative market, with GM and Volkswagen holding the top two spots by market share as recently as 2022.

China's BYD and Geely have since climbed, cementing their first and second places in the market, respectively, according to October data from the country's passenger car association.

"Western [automakers] are waking up to the fact that they can't just sit here and watch their market positions just erode and erode, and they have to do something, they have to do something big," said David Norman, a Hong Kong-based mergers and acquisitions lawyer at A&O Sherman.

He represented Netherlands-based Stellantis last year in its roughly $1.59 billion purchase of a 20% stake in Chinese electric car company Leapmotor.

"To take the crystal ball out, I think we will see more tie-ups for sure," said Norman. "The technology lead that Chinese NEV companies have is substantial and growing."

Chinese electric car companies have integrated smartphone-like entertainment displays, projectors and driver-assist technology into their vehicles to stay afloat in a fiercely competitive local market.

While Tesla's version of driver-assist has yet to gain full approval in China, domestic players have developed their own. Xpeng, BYD and other local companies use Nvidia's chips, while Chinese telecommunications giant Huawei has built driver-assist and in-car entertainment systems for other automakers.

"I think to have competitive vehicles in China, [foreign] companies need to have an advanced driver system that's comparable to what you see on some of the Chinese vehicles," said Stephen Dyer, co-leader and head of AlixPartners' Asia automotive practice.

He expects foreign automakers will partner with Chinese companies on driver-assist, not just for the local market but also overseas.

Already, Volkswagen last year invested $700 million in Chinese electric car startup Xpeng to create models for delivery in China in 2026. The prior year, the German automaker announced plans to invest 2.4 billion euros ($2.5 billion) for a partnership between its car software subsidiary and Chinese autonomous driving chipmaker Horizon Robotics.

Other significant partnerships in advanced driver-assist technology include Toyota's announcement last year for a joint venture to mass produce cars with Chinese autonomous driving startup Pony.ai.

Chinese companies may not be easy to buy

It remains to be seen whether foreign automakers can build an effective edge by partnering with Chinese companies that are selling their own cars or tech in the same market.

"Domestic new energy vehicle brands are too competitive," Weng Yajun, a Shanghai-based partner in M&A at JunHe Law, said in Chinese, translated by CNBC. "You may put in all your effort but still only sell a few cars."

Weng expects industry players will fight "to death" for survival, rather than acquisitions in the near term

Automakers in China have slashed prices in order to attract buyers, while launching a slew of new models in just one year. Even state-owned car companies are struggling.

That means foreign automakers must compete with state-owned ones for any local acquisitions, said Yiming Wang, analyst at China Renaissance Securities. He added that the Chinese startups are also not yet at a point where they want to sell themselves, despite operating at losses.

Volkswagen's stake in Xpeng remains the most high-profile tie-up so far between a foreign automaker and Chinese electric car startup in the China market.

The German company is trying other strategies to recover its market share. Its Audi brand, together with partner SAIC, a Chinese state-owned automobile manufacturer, this month launched a new electric car brand in China that does away with the four-ring logo, instead spelling out "AUDI" in rounded capital letters.

Foreign automakers' market share in China will likely drop next year, with some brands essentially exiting the country, said Jing Yang, director of Asia-Pacific corporate ratings at Fitch Ratings.

Global car companies also face competition from Chinese automakers that are expanding abroad, Yang pointed out. She noted that despite tariffs, such as in the European Union, "Chinese companies will not easily give up overseas expansion for the sake of higher profitability."