Foreign companies Are Losing Ground in China: Industrial-Age Playbooks Can’t Win in a Digital-Age Battle

Early last month, Starbucks announced that it would sell a 60% stake in its China business to Chinese private equity firm Boyu Capital for about USD 4 billion. The two parties will form a joint venture, with the Chinese side taking the lead in driving Starbucks' expansion in China in order to stay competitive in an increasingly fierce market. In fact, this shift is not unique to the food and beverage sector — over the past five years, foreign companies in the automotive industry have also faced significant challenges in China.

An Unavoidable Reality: Foreign companies Are Losing Ground in China

For the past two decades, China has been the most important single market for foreign automakers. However, over the past five years, structural changes in China's automotive industry have caught the entire global automotive sector off guard. Nearly all foreign brands have faced their largest-ever "slowdown" in China. The market share of joint venture brands has dropped from their absolute dominance to about 30%. Japanese automakers have collectively fallen behind in the era of new energy vehicles, with the era-defining models like the CR-V and Camry seeing their iconic status come to an end. The German and American automakers are clearly lagging behind in terms of intelligent features, with the ID series even launching a generation behind. Meanwhile, the Korean and French brands are nearly invisible in China. In the rapidly growing smart electric vehicle (EV) market, foreign brands account for less than 20% of the market share, with only Tesla managing to compete at scale.

Meanwhile, Chinese brands are rising at an astonishing pace. Not only has their market share nearly reached 70%, but the entire supply chain capability is also undergoing a comprehensive, systematic improvement. In addition to leading the core three-electric technologies, the performance of traditional powertrains is also continuously improving. The intelligent cockpit has entered the AI era, and both autonomous driving and user experience are evolving through monthly iterations and interactions. This has truly realized the full-link acceleration of the automotive supply chain ecosystem.

Foreign companies have been deeply rooted in China for decades and have witnessed the industry's monumental changes firsthand. So why have they experienced continuous setbacks? Why can't they seem to get in sync with the market's rhythm? They cannot afford to abandon the world's largest single automotive market, yet they are unsure how to fully commit.

In my view, the core logic behind this issue is that the vast majority of foreign companies are still relying on "industrial-era methods," trying to win a battle that has already entered the "digital era." In the digital age, speed, iteration, collaboration, user experience, and ecosystem are the key factors that determine ultimate success.

Foreign vs Chinese companies: A Competition Between Two Eras' Systems

The competition in the era of smart electric vehicles is not about "product vs product," but about "system vs system."

More and more successful Chinese automotive companies are native to the digital era, while the vast majority of foreign automakers are extensions of industrial-era systems, struggling to bridge the gap with the new era. There is a structural generational difference between these two systems. This is not an issue that can be solved by a single company; it is a systemic difference in terms of cognition, culture, organization, supply chain, R&D paradigms, and pricing models.

We will explore this in detail across four dimensions.

1. Organizational Efficiency: C-OEMs Builds Cars at Internet Speed, Foreign Companies Struggle to Catch Up at Industrial Speed

In the industrial era, the global organization was primarily structured in a "pyramid hierarchy": the headquarters controlled product definition and resource allocation, global platforms were centrally planned, R&D processes were standardized, SOPs were defined on an annual basis, software decisions required cross-national communication, and local teams were mainly execution-focused, akin to manual laborers.

In contrast, Chinese EV companies—particularly the new forces and the next-generation domestic brands—are typical of digital-era organizations. Their organizational structures are highly flat, with most teams working on parallel project-based development. Issues are resolved on the same day, OTA updates are rolled out monthly, and there is a strong sense of ownership with a focus on cross-departmental collaboration.

The "speed gap" between these two organizational structures is magnified in the era of smart electric vehicles. In the digital age, organizational speed = user product experience speed. If the organizational structure is slow, product development and iteration are inevitably slow.

Case Study: Volkswagen ID. Series OTA Speed vs. Chinese New Force Brands OTA Speed

The OTA update cycle for the Volkswagen ID.4/ID.3 is approximately quarterly to semi-annually. In contrast, the leading Chinese new force brands have an OTA frequency that is generally far higher than that of foreign automakers:

• Li Auto carried out more than 40 OTA updates in 2023, approaching a "weekly update" pace;

• XPENG has maintained a "monthly iteration" and even "3–6 weeks per update" rhythm over the long term;

• AITO (A Huawei-backed brand) typically follows a "1–2 months per update" high-frequency schedule.

The number of items per update can range from dozens to even hundreds, and the experience gap between the two is exponentially expanding.

2. Supply Chain Gap: China is the Only Country in the World with a "Full-Link Accelerator"

In fact, more and more foreign companies have realized that building factories in China does not equate to true localization. Much of the localized R&D is focused on product function adaptation and after-sales service, while their supply chain logic remains:

• A global, unified supplier system

• A global, unified certification system

• A global, unified engineering standard

• Part adjustments require cross-national processes

• Software and hardware are developed separately

• Coordination is required across layers from headquarters → region → China

China's supply chain logic is entirely different:

• High-density supply chain clusters

• A 4-hour industry collaboration circle

• Engineers co-creating on-site

• Extremely short validation cycles

• Intense supplier competition

• Rapid iteration of smart components (domain controllers, radar, cameras)

• Local co-development has become the mainstream model

This is why the Chinese automotive industry can iterate on a monthly basis, while foreign brands can only make model changes on an annual basis.

Taking CATL as an example, the R&D cycle for new systems typically falls within 12–18 months, with core technologies such as cathode systems, structural components (e.g., CTP, CTC), thermal management, BMS, and other components achieving quarterly-level iterative collaboration. Chinese OEMs and battery manufacturers commonly adopt a "co-development + rapid validation" collaborative model, with version updates advancing on a quarterly basis.

In contrast, most foreign automakers, due to their reliance on global platforms and unified certification systems, must go through complete R&D and global validation cycles for battery material changes, supplier switches, and architectural adaptations, which typically take 30–48 months. These changes require cross-regional approvals and must meet multi-market regulations and unified platform strategies, significantly slowing down the update pace.

This difference in iteration cycles means that Chinese models often advance to new generations of technology in battery structure, safety, energy density, and cost control much faster, while foreign models' battery systems typically lag behind by a complete R&D cycle.

Now, CATL has captured more than 45% of the European market share, which is a clear victory of speed and system efficiency.

3. Innovation Model Gap: Foreign Companies Focus on Safety and Stability, While China Focuses on "Iterating While Experimenting"

The innovation logic of foreign companies is "plan thoroughly before acting". They often follow a 5–7 year platform cycle, with annual small upgrades, OTA updates as a non-core feature, and a focus on minimizing risk. The supply chain prioritizes safety and stability.

In contrast, the innovation logic of Chinese companies is "small steps, fast running, and rapid iteration". They often release products when they satisfy 80% of the required functionality, and continuously optimize based on real-world usage and feedback. If the market responds positively, the product quickly becomes an industry standard, with performance constantly improving and costs optimized. If the response is poor, it is swiftly abandoned.

Take the hidden door handles as an example.
This design was initially popularized by Tesla and quickly adopted by Chinese automakers. However, in large-scale user and extreme environment testing, it exposed safety issues such as freezing, failure to open when the battery is dead, and difficulties in emergency rescue. As national standards GB15086 and GB7258 tightened regulations on emergency door opening capabilities and reliability under freezing conditions, regulatory authorities also included this feature in key safety checks. As a result, many automakers proactively adjusted their designs for new models.

This case clearly illustrates the typical mechanism of Chinese industry: rapid trial and error, quick correction, and swift formation of industry consensus. When an innovation does not align with real-world usage scenarios or safety regulations, Chinese companies often converge on the correct direction within one to two product generations.

The OTA model further demonstrates this approach. In 2023, Li Auto conducted 41 OTA updates throughout the year, ensuring the car became newer with each drive. Compared to traditional vehicles, this represents a completely different product paradigm.

These two fundamentally different innovation models highlight a key point: in terms of speed, foreign companies cannot compete with the pace of Chinese companies. However, overly fast iteration can also introduce significant safety risks, a problem that is increasingly recognized by many Chinese companies. The focus should not solely be on speed, but rather on innovation and iteration under the premise of ensuring safety.

4. Pricing Model Gap: Foreign Companies Rely on "Brand Premium and Amortization," While China Relies on "Efficiency and Scale"

In addition to organizational capabilities, supply chain systems, and innovation models, pricing strategy is also a critical issue.

Generally speaking, foreign companies' pricing structure is based on elements such as brand premium, global R&D cost amortization, global unified cost structure, and lifecycle pricing models (which do not easily adjust prices). They generally do not want to make too many adjustments in individual markets.

In contrast, Chinese companies' pricing strategies are often cost-based pricing (with extremely efficient supply chains), scale-based pricing (the more they sell, the cheaper it gets), and experience-based pricing (such as cockpit and intelligent driving features). Especially in the field of technological innovation, the pricing strategy also takes into account the influence of capital amplifying industrial value, with extreme cases where some companies are willing to operate at a loss just to grab a share of the market. While this single-line commercial thinking may seem illogical, it finds logical coherence in the capital markets.

Overall, the question often posed by foreign companies is: Why can Chinese companies achieve "fast, good, and cheap"? The essence of this question lies in China's system speed. China's strength does not come from a single company but from the entire ecosystem's ability to move quickly. China's "ecosystem speed" comes from a variety of factors: the huge engineer population dividend, the world's densest supply chain, the OTA + software-driven paradigm, the extremely high competitive pressure between OEMs, continuous innovation driven by intense competition among Tier1/Tier2 suppliers, policy drivers, synchronous infrastructure upgrades, organizational flatness, fast decision-making, large-scale real-world scenario data from the local market, and the ability to quickly scale up manufacturing and iterate.

The speed of a single company can never outperform the speed of an entire ecosystem.

Do foreign automakers still have a chance to break through? Yes, but they must "reconstruct"!

The way forward for foreign companies is not about catching up, not about lowering prices, not about marketing, and certainly not about "holding onto traditional advantages." There is only one path forward: to compete at China's speed, make better use of China's resources, and then feed back into the global market to enhance overall competitiveness. China should not only be seen as the largest single market but also as the frontline of innovation — in China, for global.

To truly achieve this, foreign automakers must undergo five major reconstructions:

1. Organizational Reconstruction: Upgrade China from a Market Center to an Innovation Center

This means that the local teams in China must have:

• Local product definition rights

• Local software rights

• Local supply chain decision-making rights

• Local architecture rights

• Local budget rights

Without these rights, there is no speed.

2. Supply Chain Reconstruction: Deep Localization, Not Just "Leveraging China's Manufacturing"

True immersion in the industry means co-creating innovative applications in core technology fields with Chinese companies, such as domain controllers, intelligent driving, and battery solutions. This involves shortening component certification cycles, promoting the development of local validation systems, and building a genuine "China-speed supply chain", rather than symbolically establishing local R&D centers or signing strategic agreements. It is essential to identify touchpoints within the industry chain, develop products, run successful case studies, and then feed this back into global operations.

3. R&D Paradigm Reconstruction: Shifting from Hardware-Centered to Software-Centered

As the automotive industry enters the SDV (Software-Defined Vehicle) era, the supply chain is no longer just about hardware accumulation, but an integrated ecosystem of embedded hardware, software, data, and services. OTA updates must occur at high frequencies, intelligent driving must have scenario-based models, and both software and hardware must be developed in parallel. Moreover, the rapid advancement of AI large models is accelerating the development of intelligence in vehicles.

4. Pricing Model Reconstruction: Shifting from Brand Pricing to Experience Pricing

In the era of intelligent vehicles, users are purchasing experiences, which come from various aspects such as the intelligent cockpit, intelligent driving, continuous OTA updates, and the service ecosystem. Products must feel fresh and new regularly, rather than relying solely on the brand halo of a logo. Therefore, the pricing logic must shift from brand pricing to experience pricing.

5. Ecosystem Reconstruction: From the "Joint Venture" Model to the "Co-Creation" Model

In fact, the joint venture model is very suitable for foreign companies to deeply localize, but today's joint ventures are very different from the partnerships of thirty years ago. Looking at joint ventures such as Leapmotor and Stellantis, Volkswagen and XPENG, Horizon Robotics and Continental, we can see that the focus now is on productizing and scaling Chinese companies' innovative R&D capabilities in China, and then quickly leveraging foreign companies' global networks for distribution.

Therefore, co-developing platforms with Chinese supply chains, collaborating with tech companies on intelligent driving and cockpits, optimizing processes with local manufacturing systems, and building intelligent experiences with local data ecosystems not only enhance understanding of the local market but also improve competitiveness in the global market.

Industrial-Era Methods Cannot Win the Digital-Age Battle

As echoed in the opening, the setbacks foreign automakers are experiencing in China are not accidental, nor due to bad luck, but rather an inevitability of the era.

The competition in the era of smart electric vehicles is essentially a battle of speed, systems, supply chains, software, and ecosystems. It is not about whether a single company or team is working harder or not; it is about whether the entire system can operate at the speed of the digital era.

The reality foreign companies must accept is this: industrial-era organizations, processes, pricing models, and supply chain systems cannot compete in the digital era. In China, only companies that can adapt to China's speed and fully leverage its ecosystem will have a better future.

Written by Xiaoying Zhou — CEO and Editor-in-Chief, Gasgoo International