To remain competitive in China, the world's automotive industry leaders must collaborate with local companies, according to analysts.

• The electric car market in China is rapidly evolving, and traditional foreign automakers are struggling to keep up. This suggests that companies must prioritize local partnerships in order to remain competitive.
• Between 2019 and 2023, the revenue of U.S. automaker General Motors, Germany's Volkswagen, and Japan's Nissan in China decreased, as calculated by CNBC using company data.
• David Norman, a Hong Kong-based mergers and acquisitions lawyer at A&O Sherman, stated that Western automakers are becoming aware of the fact that they can't maintain their market positions if they don't take action.

The electric car market in China is rapidly evolving, and traditional foreign automakers are struggling to keep up. This suggests that companies must prioritize local partnerships in order to remain competitive.

In the world's largest car market, new energy vehicles now account for more than half the country's car sales, while fossil fuel-based automakers struggle to maintain their position.

According to Tu Le, founder and managing director of Sino Auto Insights, the only way for foreign brands to salvage market share in China is through partnership with a domestic player, as they are unable to launch competitive clean energy vehicles in the market soon.

"Perhaps for many foreign brands, is it too little too late?" he remarked.

Between 2019 and 2023, the revenue of U.S. automaker, Germany's, and Japan's Nissan in China decreased, according to CNBC's analysis of company data.

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

As investor concerns intensify, management is considering implementing plans to enhance profitability in China, which was previously GM's top revenue market. During a recent earnings call, GM CEO Mary Barra announced that the company had scheduled meetings with shareholders and joint venture board members to discuss "restructuring."

Beijing mandated foreign automakers, including those from the U.S. and Germany, to establish joint ventures with local companies, which are often state-owned, when they first entered China decades ago.

In 2022, Chinese authorities permitted foreign car companies to wholly own their local production, despite it being a lucrative market. As recently as 2022, GM and Volkswagen held the top two spots in market share.

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

Western automakers are realizing they can't simply watch their market positions decline and must take significant action, as stated by David Norman, a Hong Kong-based mergers and acquisitions lawyer at A&O Sherman.

Last year, he represented Stellantis, a Netherlands-based company, in its approximately $1.59 billion acquisition of a 20% stake in Leapmotor, a Chinese electric car company.

""I believe we will witness more tie-ups as a result of the substantial and growing technology lead of Chinese NEV companies," said Norman."

To remain competitive in the local market, Chinese electric car companies have integrated smartphone-like entertainment displays, projectors, and driver-assist technology into their vehicles.

Although Tesla's driver-assist technology has not yet been fully approved in China, domestic companies have developed their own versions. Xpeng, BYD, and other local companies use Tesla's chips, while Huawei has built driver-assist and in-car entertainment systems for other automakers.

To be competitive in the Chinese automotive market, foreign companies must have an advanced driver system comparable to that of some Chinese vehicles, according to Stephen Dyer, co-leader and head of AlixPartners' Asia automotive practice.

He anticipates that foreign automakers will collaborate with Chinese companies on driver-assist technology, not only for the domestic market but also globally.

In 2026, Volkswagen will launch electric car models in China after investing $700 million in a Chinese electric car startup last year. The previous year, the German automaker announced plans to invest 2.4 billion euros ($2.5 billion) in a partnership between its car software subsidiary and a Chinese autonomous driving chipmaker.

Last year, Toyota announced a joint venture to mass produce cars with Chinese autonomous driving startup Pony.ai.

Chinese companies may not be easy to buy

Whether foreign automakers can gain a competitive advantage by collaborating with Chinese companies that are also selling their own vehicles or technology in the same market remains uncertain.

"Shanghai-based partner in M&A at JunHe Law, Weng Yajun, stated in Chinese, translated by CNBC, that domestic new energy vehicle brands are too competitive, and despite putting in a lot of effort, one may only sell a few cars."

Weng anticipates that industry players will prioritize survival over acquisitions in the near term.

In an effort to attract buyers, automakers in China have reduced prices and introduced numerous new models within a year, despite state-owned car companies also facing difficulties.

Despite operating at losses, Chinese startups are not yet interested in selling themselves, according to Yiming Wang, analyst at China Renaissance Securities. He stated that foreign automakers will face competition from state-owned ones when it comes to local acquisitions in China.

In the China market, the most notable partnership between a foreign automaker and a Chinese electric car startup is Volkswagen's stake in Xpeng.

The German company is attempting to regain its market share through different strategies. Along with partner SAIC, a Chinese state-owned automobile manufacturer, Audi launched a new electric car brand in China this month, replacing the four-ring logo with "AUDI" spelled out in rounded capital letters.

It is predicted that the market share of foreign automakers in China will decrease next year, with some brands possibly withdrawing from the country, according to Jing Yang, director of Asia-Pacific corporate ratings at Fitch Ratings.

Chinese automakers, despite facing competition from global car companies, are expanding abroad, according to Yang. She emphasized that even with tariffs, such as those in the European Union, Chinese companies will not abandon overseas expansion in pursuit of higher profitability.