MARTYN DAVIES | Competing against the China price

The megatrend of this century has been the economic rise of China and its impact on the global economy.

On the demand side, China’s insatiable appetite for commodities for its infrastructure build, urbanisation and manufacturing industry has underwritten the growth of all resource-exporting countries that have the necessary rail and port infrastructure networks to export to China.

On the supply side, China’s export of manufactured goods has been a force for global deflation while also displacing industries in both developed and developing economies.

China is a mercantilist power, a doctrine previously employed by European powers in centuries gone by. The strategic alignment of interests between Beijing and its state-owned or aligned corporations feeds into the so-called China model.

This is defined by persistent export-led growth and trade surpluses, a state-directed industrial policy, subsidies and financial support directed to key state-owned companies, a managed monetary policy to support export competitiveness, and strategic control over supply and value chains from critical minerals to advanced manufacturing.

But for countries to counter China’s mercantilist strategies and the disruptive impact on their own domestic industries, they need to deeply understand its structures and systems.

Premature de-industrialisation

Historically, a country’s developmental success is associated with its level of industrialisation. A high employment-generative manufacturing sector with growth in exports was seen as indispensable to economic progress.

But South Africa has suffered from “premature deindustrialisation” — a consequence of inflated input costs, policy and an overall lack of competitiveness. The country’s industrial resilience has been low.

Compounding the erosion of South Africa’s manufacturing sector has been the intensity of competition emanating from China. In fact, South Africa’s exports to China have moved down the value chain in recent years.

The export basket has shifted from one that included manufactured goods to one almost entirely dominated by raw materials. For instance, in the early 2000s vehicles were South Africa’s second-largest export to China. Now this category accounts for less than 0.5% of its total export share.

Contending with the ‘China price’

Global value chains have been severely disrupted by the relentless rise of China’s manufacturing prowess, with the country now accounting for a staggering 30% of manufacturing value-add in the global economy.

The Chinese economy has been able to shift in a single generation from a low- to a high-technology manufacturer with world-beating research and design capabilities. Challenging incumbent companies in key industries, China Inc is now beginning to monopolise the entire supply chain — from technology development to design to manufacture to export.

This is evident in the recent emergence of China-centred “marketplaces” dominated by the likes of Alibaba, Shein and Temu. We will see similar forces emerge in other sectors such as furniture and automotive.

The auto industry is a crucial growth driver of China’s economy, accounting for roughly 10% of the country’s GDP and 6.5% of exports in 2024 (amounting to $216bn), with over 7-million vehicles exported (2025), an increase of over 20% from the previous year.

In the past 10 years, China has doubled its automotive production capacity and will soon be in a position to cater for half of global demand. But while China has become the largest car market in the world, domestic sales have stagnated, leading to a supply glut and a fierce domestic price war that is now spilling out abroad.

China is undoubtedly an exporter of deflation through trade. The impact of this is nowhere more evident than in Germany’s auto industrial complex. A few short years ago Germany’s manufacturing capability was considered the bulwark of Europe’s industrial base and competitiveness.

With its economy now in recession, the auto industry faces major challenges that primarily emanate from its heavy reliance on the Chinese market for sales as well as the increasing competition from China’s rapidly internationalising original equipment manufacturers (OEMs).

But due to the integrated nature of global supply chains, about 40% of Chinese-built vehicles sold in Europe (roughly 330,000 units) are from Western auto OEMs manufacturing in China and exporting back to the EU. We see the same trend of India-made vehicle exports for European, Japanese and Korean OEM brands.

A challenge to South Africa’s incumbent automotive industry

The China-driven competitive onslaught is also upending South Africa’s automotive sector. Considering the local automotive sector accounts for 5.2% of GDP and 14.7% of total exports (22.6% of manufacturing output), there is no other industrial cluster with such high value-add and with such strategic importance to the South African economy.

The speed of market expansion of Chinese auto brands into the local market has been startling, as have their sales numbers. As price competition has intensified, it was this deflationary effect that drove new car sales to increase by over 20% in 2025 — a scarcely believable figure considering the no-growth domestic economy.

South Africa is a key strategic market for Chinese auto firms that seek a beachhead that can service the wider Africa region. While it has taken decades for Japanese and Korean firms to establish themselves in South Africa, Chinese firms are following the same playbook but doing it in less than three years.

The department of trade, industry & competition needs to balance the need for protection of incumbent manufacturers through tariff measures, encouraging market competition in the interests of the consumer, and attracting Chinese OEMs to establish local manufacturing plants.

Holding out the threat of protective tariffs while seeking to encourage relocation of “completely knocked down” (CKD) assembly and manufacturing by targeted Chinese OEMs may be a strategic option.

To contend with China’s competitive onslaught, countries are increasingly seeking protection for domestic industry by imposing import tariffs, mostly targeting China’s battery electric vehicles. To bypass these tariffs, Chinese OEMs are now shifting manufacturing abroad.

There are at least 19 Chinese auto manufacturing plants outside China, with most established in the last three years. It is expected that by 2027 Chinese automakers will have an overseas production capacity of between 1.5 to 2-million vehicles by 2027.

But as mentioned, the complexity of automotive value chains needs to be well considered by governments considering trade actions against Asia-made products. In South Africa, like European countries, trade remedies will be more shaped by trade unions than the automotive OEMs themselves.

Since it joined the World Trade Organisation in December 2001, arguably no country has benefited more from trade liberalisation and globalisation than China. But its mercantilist model is now being challenged. Last month the IMF called on China to cut by half its industrial subsidies, which it calculates at 4% of the country’s GDP.

Beijing has disputed the IMF findings, arguing that its export growth is driven by innovation and market-based competitiveness. It appears that the current global trade system is no longer willing to accommodate differing economic models.

Industrial policy is once again at the forefront of governments’ economic policy, reinforced by increasingly unequal societies that demand a more interventionist approach. South Africa’s statist approach has not worked for industry in recent decades.

It is imperative that the government proactively respond to China’s hyper-competitive challenge through pragmatic and responsive policy, address structural input costs, and crucially collaborate closely with OEMs and industry organisations to defend and promote the local automotive manufacturing sector — the economy’s last industrial cluster.

• Dr Davies, a former member of the World Economic Forum’s Global Agenda Council on China, chairs the Mining Indaba downstream & industrial committee.