China in pole position  

What happens when economic and climate policy collide? That’s the dilemma for Western governments as they face up to China’s increasing dominance of the Electric Vehicle (EV) market. 

Generous state subsidies, vast economies of scale and dominance of the lithium-ion battery supply chain means Chinese EVs are abundant and cheap. And they can compete on more than just price. Vehicles are high-tech with better infotainment systems than foreign rivals. 

So is China the answer to global policymakers’ phase out of the Internal Combustion Engine (ICE)? Or will countries protect their own automotive industries and fight back with restrictive tariffs? 

China has been a world leader in this industry for some time. But the Covid years perhaps obscured the extraordinary progress being made. David Rennie, the Economist’s Beijing bureau chief, talks of returning foreigners asking why all the cars suddenly have green licence plates. These signal the car is an electric or hybrid. It’s been a sea change in just 4 years. 


Domestic brands are dominant in this market. They account for 80% of EVs sold. BYD is the chief flag-carrier. Shenzhen headquartered and Warren Buffett backed, it outsold Tesla for the first time in the last quarter of 2023. Asia automotive expert Michael Dunne says, “No one can match BYD on price. Boardrooms in America, Europe, Korea and Japan are in a state of shock.” 


China is a huge market for foreign automakers. They were thriving until recently. Last year VW Group sold 3.2m cars in China, around a third of its global sales. Yet its market share shrank in the face of rapid consumer uptake of domestic EVs.      

Dunne believes the situation is so bleak for international manufacturers that they could all leave in the next 5 years. They face a CCP industrial policy which prioritises EVs as a strategic initiative. It has granted over $60bn in subsidies to the industry since 2016. An extremely astute PR game complements the cash. It invited Tesla in without a local partner in 2017, sparking a buzz around EVs. Domestic competitors then fed this demand. Today 42 percent of car sales are battery or hybrid, compared to 25 and 10 percent in the EU and US respectively


Rupert Mitchell, former Chief Strategy Officer at WM Motor, tells me “there was an inevitability about China bringing its EV revolution to the rest of the world. China was early to understand the future necessity of vehicle electrification and was not weighed down by a century of nostalgia and spent investment into fossil engines. China saw the trend as an ideal opportunity to execute a technological leapfrog to the all-electric powertrain of the future. In poker parlance, they went ‘all in’. We are seeing the fruits of that investment today.”  


Chinese EV firms are now exporting this revolution. The country has overtaken Japan as the world’s biggest auto exporter. Dunne notes that they have the “capacity to supply 75 percent of global EV demand.” And their price point guarantees willing buyers. Dunne adds that the average price of a new car in the US is about $48,000. Chinese automakers can offer a comparable $25,000 product, even after accounting for the 27 percent tariff. 


The US market is more hostile ground for now. The Inflation Reduction Act (IRA) offers generous subsidies to EV manufacturers eschewing Chinese parts or ownership. Domestic demand for EVs is also lower and waning. 19 percent fewer consumers are open to buying one versus 2 years ago.

That has not stopped Chinese companies establishing a base on its southern border. Last year only Russia imported more Chinese vehicles than Mexico. Most of these were ICEs unwanted at home. But it establishes brand recognition and trust. The next stage is building factories. If they use enough local parts, they could export into America tariff free under NAFTA. 


However Europe is the more likely focus of an initial export strategy. Tariffs are only 10 per cent and China already has a foothold. BYD is opening its first European manufacturing plant in Hungary. Its recent sponsorship of the continent’s flagship football tournament, the Euros, also signals its intent. 


So is China’s monopolisation of the EV market inevitable? Not necessarily. Many of the country’s new EV startups are not yet profitable, despite extensive government support. As exports increase, is the CCP willing to subsidise Western consumers too? Price will be a huge factor in new markets where Chinese brands are less trusted. It may prove a long slog if they cannot meaningfully undercut rivals. 

More abstractly, Bloomberg’s Chris Anstey asks whether the success of China’s EV strategy could give way to longer-term economic malaise. He argues it reinforces a government knows best, top-down system that squeezes the private sector and creativity. State guidance penalises innovation. Can China maintain its dominance if there are material changes in the industry? 


In the near term, tariffs are the biggest threat to Chinese EV exports. BYD, Geely and SYD are all the subject of an EU probe. Opening the investigation in September, European Commission President Ursula von der Leyen said, “Global markets are now flooded with cheaper Chinese electric cars. And their price is kept artificially low by huge state subsidies.”             


European governments face contrasting policy pressures. Economically, local automotive players are lobbying to restrict Chinese imports. And the EU will want to take a strong stance on protecting fair competition. But the EU is also vocal about its climate goals. Chinese EVs present a route to meet these far more rapidly. Restricting consumer access opens the bloc up to allegations of hypocrisy. China will no doubt accuse it of prioritising economic self-interest above the collective need for climate action.

Can the EU maintain a united front anyway? It lacks the power to implement anything similar to the IRA across all member states. And while France, Germany and Spain have automotive industries to protect, other EU nations will create jobs through new Chinese EV factories.  


Investors will worry about the repercussions of all but the biggest European EV companies. VW Group is the world’s third largest EV manufacturer and likely has the scale to compete with an influx of cheaper vehicles. Smaller players may be the subject of mergers as the industry consolidates. 

US firms are more insulated for now. The country has strong domestic brands in Tesla and GM and prohibitive policies towards Chinese EVs which carry bipartisan support. A second Trump presidency will also de-emphasise climate policy. 

Elsewhere, China will quickly find receptive buyers. It’s a win-win-win for most nations. Consumers get cheap EVs, new factories create jobs and governments meet climate goals.  

Analysts will question whether current production is sustainable, particularly as some of it moves abroad. And can SOEs match private companies like Tesla for innovation? Putting aside these future uncertainties, it’s clear that China has captured a key strategic industry of the future. Expect to see a lot more Chinese EVs on roads near you soon.    



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