California Management Review
California Management Review is a premier academic management journal published at UC Berkeley
by Annika Steiber and David J. Teece
Image Credit | Koshiro K
The critical question facing incumbent automobile manufacturers from Japan, Germany, and the United States is how effectively they will respond to the competitive pressures posed by Chinese and Korean companies such as BYD and Hyundai in Asia. BYD has notably displaced Tesla as the global sales leader in all-electric vehicle sales. BYD has (ironically) benefited significantly from Tesla’s entry into the Chinese market, which spurred intense competition, accelerated innovation, and led to aggressive price reductions. This competitive environment enabled domestic firms like BYD to outperform Tesla in global sales.1
Marcelo Cano-Kollman, Snehal Awate, T. J. Hannigan, and Ram Mudambi, “Burying the Hatchet for Catch-Up: Open Innovation Among Industry Laggards in the Automotive Industry,” California management review, 60/2 (2018): 17-42.
Sandra Rothenberg and John E. Ettlie, “Strategies to Cope with Regulatory Uncertainty in the Auto Industry,” California Management Review, 54/1 (2011): 126–144.
Strong dynamic capabilities result in businesses offering the right products at the right time, in appropriate volumes, at the right price and in the right markets. In electric vehicles, American automakers have trailed behind their Japanese and European counterparts. For instance, Nissan initially led the electric vehicle market with its Leaf model but subsequently fell behind due to strategic mismanagement linked to a self-inflicted corporate governance debacle, resulting in significant loss of managerial talent critical for sustaining dynamic capabilities. José Muñoz’s transition from Nissan to Hyundai, where he now serves as CEO, exemplifies this talent migration, slowing Nissan’s momentum while significantly accelerating Hyundai’s rise to becoming a top-three automaker globally.
Today, American, European, and Japanese carmakers must critically evaluate whether they possess the necessary technologies and products—covering hybrids, all-electric vehicles, hydrogen-powered options, and internal combustion engines—and whether their business models and management teams allow for the astute deployment of these technologies. The impact of geopolitical factors, such as tariffs, underscores the importance of production and sourcing decisions, prior and present. Success in the current competitive landscape hinges more so than usual on strategic choices regarding product mix and geographic placement rather than purely operational efficiency.
Doing things right, of course, pertains to ordinary capabilities; doing the right things is about dynamic capabilities.2
Over the past two decades, China emerged as a dominant global automotive power through proactive industrial policies (embedded in successive five-year plans) and targeted subsidies that have substantially accelerated EV adoption.3 The rise of firms such as BYD, Geely, and Xiaomi is not solely due to technological advancements but also China’s unique mindset and operational philosophy, many of which were highlighted by Ford CEO Jim Farley.4
Further, unlike Western incumbents, saddled with fixed assets associated with ICE autos, Chinese companies were new entrants and could more easily embrace new technological paradigms. Being smaller and nimbler and with an entrepreneurial mindset, Chinese entrants reimagined the industry and seized the opportunity to lead the future of mobility.5
Chinese automakers are differentiated from Western rivals in critical ways:6
Western automakers have established supply chains and dealer networks built around internal combustion engine infrastructure. This legacy model, combined with lengthy product development cycles have burdened their adaptation to disruptive technologies like electrical vehicles.7
In contrast, Chinese automotive firms are the new entrants and have therefor not been burdened with supply chain commitments.8 This has made it easier for them to be agile and customer centric, directly addressing affordability, range anxiety, and ease of ownership. By doing so, they accelerated EV market penetration.9
Additionally, the Chinese government’s aggressive policies and local-level interprovincial competition fostered rapid industry consolidation and intense competition, shrinking EV manufacturers from 500 enterprises in 2019 to about 100 by 2023, retaining only the most innovative and customer-centric firms. 10, 11
The core principles behind their success include an entrepreneurial mindset and bold risk-taking, e.g., instead of playing it safe, companies like BYD and Geely aggressively pursues strategic technology and brand driven acquisitions, accessing capital (often from local authorities) to expand globally and gain technological leadership. By embracing these principles, China’s automakers have leapfrogged many Western competitors, positioning themselves as the global leaders in EV production and connected transportation.
Chinese automotive firms share many operational principles pioneered by Haier’s RenDanHeYi 2.0 model, particularly: 12, 13
Chinese automakers, through accelerated innovation, develop and launch new models approximately 30% faster than Western competitors, which experience longer R&D cycles. Chinese firms also show a higher tolerance for risk, rapidly embracing and commercializing new technologies, significantly outpacing Western firms.15 Understanding these operational parallels offers valuable insights into why China is excelling in the race toward EV dominance and smart mobility leadership. Some key operational differences between the Western and Chinese model are contained in Table 1.
| Aspect | Western Model | Chinese Model |
|---|---|---|
| Innovation | Incremental, long R&D cycles | Iterative, rapid adaptation16, 17 |
| Organizational Hierarchy | Centralized decision-making | Decentralized, team autonomy |
| Supply Chain | Significant reliance on third-party suppliers | Vertically and Ecosystem integrated |
| Risk Tolerance | Cautious, slow adoption of new technologies | High-risk, entrepreneurial strategies |
| Market Expansion | Gradual international expansion | Rapid global acquisitions and partnerships |
The global expansion of Chinese automakers, through aggressive acquisitions like Geely’s purchase of Volvo, and joint ventures globally, signifies an entrepreneurial approach to rapid market entry and technological leadership.18 In response, some governments are now resorting in some cases to tariffs and subsidies for domestic production to counter China’s coordinated government supported competitive push.
China’s investment in associated improvement of lithium-ion battery technology has accelerated the global decline of internal combustion engine vehicles, creating a tipping point favoring electric mobility.19 With battery technology as the new competitive frontier, China’s heavy investments in R&D, and in large scale battery manufacturing and associated mining has positioned it as the major competitive force in EVs.
China’s automotive industry success strongly aligns with the dynamic capabilities framework, emphasizing the importance of the capacity to sense, seize, and transform swiftly. This approach, exemplified by Chinese automakers’ rapid adaptability and proactive market sensing, and swift decision making, has enabled them to capitalize on emerging trends faster than traditional automakers.
China’s automotive leadership stems not just from cost advantages and government support but from a fundamentally different management philosophy emphasizing decentralization, bold innovation strategies, and strong dynamic capabilities.
As the global automotive landscape shifts toward software-defined vehicles, AI-driven mobility, and autonomous transportation, Western manufacturers must rethink their traditional approaches to supply chains, innovation strategies, and organizational structures. The industry is no longer about merely building cars—it is about orchestrating ecosystems of hardware, software, and services. By understanding and adopting elements of China’s operational philosophy- such as vertical and ecosystem integrated supply chains, agile organizational structures, and government-supported ecosystems-Western automotive companies can better navigate and potentially succeed in the rapidly evolving global automotive landscape.
