(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Katrina Hamlin

HONG KONG, Sept 19 (Reuters Breakingviews) - Autos are taking the driver’s seat in China’s new economy, and that is making Beijing protective. The commerce ministry is urging the country's carmakers to use so-called knock-down factories that merely assemble vehicles overseas, rather than building entire production lines outside of the country, Reuters reported last week, citing unnamed sources. It's a sign that slower growth could upend Chinese companies' global expansion plans.

While old economic engines are stuttering, carmaking is revving up. China became the world’s largest vehicle exporter last year, despite waning domestic demand. That helped the industry’s value output hold steady at around 10% of GDP; meanwhile real estate, which used to represent close to 30%, may have fallen below 20% now, estimates Tommy Wu, a senior economist at Commerzbank. Recruitment in the autos sector in 2023 increased 5% from a year earlier, per the China Labour Bulletin.

China is right to worry that its lead will erode as pioneers like BYD and Nio venture into the world. Furious innovation and extensive supply chains mean China wields a particular edge in electric cars. It is home to industry leaders and key suppliers like cell maker Contemporary Amperex Technology and rivals, which together account for more than half of global battery output.

China learnt quickly from outsiders. After opening its own car market to foreign investment in the 1980s, Chinese marques' product malfunction rate fell by more than 75% between 2001 and 2014, according to a recent U.S. National Bureau of Economic Research paper. It helped that international brands' market entry was contingent on forming joint ventures with local partners, but shared supply chains and the movement of workers between production lines also played a role. Much later, when Elon Musk’s Tesla opened a gigafactory in Shanghai in 2019, localised procurement spurred the development of specialised supply chains and ultimately Chinese electric car manufacturers.

No wonder the government is encouraging its domestic champions to build knock-down factories offshore. That way, car parts could still be made in China, and the People's Republic would benefit from retaining expertise and keeping jobs within the country. Chinese carmakers will be under pressure from foreign governments to invest more in the markets where they want to sell. The risk is that the weaker China's economy becomes, the more tightly Beijing controls how its domestic champions speed overseas.

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CONTEXT NEWS

China's commerce ministry warned the country's carmakers of the risks of making auto-related investments overseas at a recent meeting, Reuters reported on Sept. 12, citing two people briefed about the matter.

At a meeting held in early July, the ministry encouraged carmakers to use overseas factories for final vehicle assembly with knock-down components exported from China to mitigate potential risks stemming from geopolitical issues, one of the people said.

It also told carmakers not to invest in India, citing a directive from the central government, "strongly advised" against investing in Russia and Turkey, and used a more gentle tone to highlight risks in building factories in Europe and Thailand.

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(Editing by Una Galani and Ujjaini Dutta)

((For previous columns by the author, Reuters customers can click on katrina.hamlin@thomsonreuters.com; Reuters Messaging: katrina.hamlin.thomsonreuters.com@reuters.net))