China’s EV industry boom: a threat to Western carmakers?

Introduction

In a charged upheaval, China's electric vehicle industry is becoming more and more prominent in the worldwide automotive landscape, challenging the status quo of the industry, and raising questions about global market dominance and unsettling established players. The country has already become the largest car exporter worldwide, surpassing Germany in 2022 and Japan in 2023 thanks to EV-led growth. Furthermore, BYD, China's largest EV manufacturer, surpassed Tesla in terms of global market share during the last quarter of 2023 to become the world's biggest manufacturer of battery-powered vehicles.

Overview: A Powerhouse Driven by Electric Vehicles

China's electric vehicle (EV) sector exemplifies a remarkable transformation within the global automotive industry, establishing the nation as a dominant force in this rapidly evolving market. With a commanding 60% share of worldwide EV sales as of 2022, China's influence stretches far beyond its borders, reshaping global automotive strategies and supply chains. This dominance is supported by robust domestic production capabilities, underscored by an impressive 82% surge in EV sales in 2022, bringing the total number of electric vehicles on Chinese roads to over 10 million.

Leading this charge are Chinese companies like BYD, NIO, XPeng, and Geely. These firms have not only captured significant market share within China but are also expanding their influence globally, challenging established automotive giants with innovative technologies and strategic market entries. Furthermore, Tesla's establishment of a Gigafactory in Shanghai marks a significant foreign investment in China, enhancing its production capabilities and integrating deeply into the Chinese EV ecosystem.

The government's role in this explosive growth cannot be overstated. Initially, a series of aggressive subsidies and strict emission standards fueled the proliferation of EVs. However, as these subsidies begin to wane, the industry faces new challenges and opportunities for maturation. Despite this, the foundational infrastructure, including a vast network of charging stations and supportive policies for technology innovation, remains a pivotal backbone for the industry.

Moreover, the Chinese EV market is beginning to show signs of normalization after years of rapid expansion, with growth rates expected to stabilize. The projected growth rate for 2023 is set at 35%, a notable decrease from the previous year's 90%. This slowdown is accompanied by an intensifying global expansion as Chinese manufacturers look to capture emerging markets and establish a presence in more competitive regions like Europe and North America.

China’s competitive advantage

Several factors have given China the competitive advantage needed to upend the industry in such a drastic and swift manner. First of all, the strength of the domestic market with regards to EVs: despite total domestic vehicle sales being currently lower than their peak in 2018, some 42% of car sales are currently either pure battery or hybrids. Of those, only a little fraction is made by Western carmakers, while the biggest players are local firms such as MG, NIO, BYD and Geely.

Advantages in the supply chain also play a key role: the country manufactures about 70% of the world's lithium-ion batteries, allowing the most expensive component of an electric car to be sourced locally. Also, shortages in crucial materials appear to be less of a problem compared to other countries. China controls about two thirds of the world's lithium processing capacity, 75% of cobalt capacity, 95% of manganese supply and almost all of graphite's. This, along with sensibly leaner environmental restrictions compared to Western countries, drastically reduces manufacturing costs, as reflected by retail prices: BYD's cheapest EV model is sold for around $12,000, compared with $39,000 for the cheapest Tesla in America. Prices are kept low also by the intense competition (currently, more than 160 carmakers exist in the country) and by subsidies for local firms. According to consultancy firm AlixPartners, government handouts for electric and hybrid vehicles added up to $57bn between 2016-22. Last but not least, it is important not to understate the role played by Chinese firms’ software-side technological advantage. Inspired by Tesla's philosophy of being "a tech company which happens to make cars," they have understood the importance of valuing software and styling, as well as the ability of moving faster with product development and shortening model cycles.

Expansion abroad

Europe is the highest importer of Electric Vehicles: this can be attributed to subsidies, enhanced green awareness in recent years, as well as good infrastructure availability, considering, for instance, widespread presence of fast-charging facilities. In 2022, 549,000 Chinese vehicles were sold in Europe, with the SAIC MG4 model having surpassed Tesla Model 3 and Volkswagen ID.3 in number of sales in the UK. EV exports account for 32% of export volume and 42.5% of export value within the automotive sector. However, sales growth in Europe has decreased starting from 2022: it peaked at 142% in 2020 and hit the bottom at 14% in 2022.

The South-Eastern Market saw an increase in sales, due to lack of local competitors, and a very low presence of Japanese and American operations in the region. In Thailand, representing the biggest segment in the Area, BYD and NIO are market leaders. This internationalization strategy is grounded on maximizing the economies of scale which are crucial in the industry, to grow the customer base, as well as to increase customer demand and to accommodate Government requests to switch to a green transition.

Breaking into the US car market has proven to be much tougher both due to government hostility and consumers' distrust towards Chinese manufacturing. The United States currently impose a 27.5% import tariff on EVs and narrows purchase subsidies to vehicles that are made in America. However, Chinese firms are trying to bypass such restrictions by seeking to build factories in Mexico. Cars produced there would both be exempt from customs duties and eligible for US government's hefty tax breaks.

The sales network in China is very wide and is based on online sales, dealerships, and physical stores, depending on the various companies, while in Europe it needs to be built from scratch. NIO and other players are negotiating some dealership agreements, while BYD already has retail stores, and an agreement with ATL for distribution and after-sale services in the Caribbean Region. Chinese companies have decided to invest in local areas by building factories, transporting know-how and expertise. BYD owns a factory in Hungary and is planning to open a second one, while Chery is about to purchase an old Nissan factory in Barcelona, the Great Wall Company is negotiating to open a Plant in Czech Republic, and other companies such as Geely are already present through their subsidiaries. Carmakers made this choice in order to have a more globalized supply chain and not to be totally dependent on China.

Alarms from the West

The magnitude and rapidness of China's expansion into Western markets, coming at a pivotal moment where traditional manufacturers are challenged to deeply rethink the way they do business, has drawn significant alarms among manufacturers and governments alike. In the United States, the Inflation Reduction Act signed by President Biden specifies that, starting in 2024, no EV can be sold that contains battery components produced by a "foreign entity of concern", a definition which includes China.

Europe’s market is substantially more open to foreign competitors, and European stakeholders tend to be the most alarmed about the situation. The President of the European

Commission, Ursula von der Leyen, directly addressed the issue to the European Parliament and opened an

investigation on China's trade practices, specifically on the heavy government subsidies which are said to be aimed at undercutting foreign competitors. The European auto industry, which employs around 4 million people and accounts for 3% of the continent's GDP, is suffering not only from the threat of potential new entrants from the Far East, but also from the reduction of its market share in China (Volkswagen, for example, saw a decline from 20% in 2020 to 14% in 2023).

Conclusion: threat or opportunity?

Having gathered sufficient evidence that the recent surge in low-priced and subsidised imports of electric vehicles from China into the EU poses an economic threat to the local EV industry, we might witness the imposition of new trade restrictions to protect European carmakers. Nonetheless, there is a sensible tradeoff to be considered between this policy and the ambitious aim of a full EV transition and the intention to ban all new internal combustion vehicles by 2035.

On the other hand, a large market share for Chinese carmakers might have more positive than negative effects to the Western automotive industry. It could easily invigorate wider competition as well as accelerate the energy transition process. The benefits can easily spill all over the industry, and thus should not be feared by European stakeholders. In the end, embracing China's use of taxpayer funds to subsidize global consumers and accelerate the switch to EV seems to be the most constructive approach.

References

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ITA - Italian Trade Agency. (2023). China Auto Market Report. Rome.

The Economist. (2024, 1 12). Western firms are quaking as China’s electric-car industry speeds up. https://www.economist.com/briefing/2024/01/11/western-firms-are-quaking-as-chinas-electric-car- industry-speeds-up

UBS. (2020, 12 11). Is China in the driver’s seat for the EV revolution? https://www.ubs.com/global/en/investment-bank/in-focus/2021/driver-seat.html

Ward-Glenton, H. (2023, 9 6). Chinese EVs are now seen posing a ‘real threat’ to Europe’s auto industry. CNBC: https://www.cnbc.com/2023/09/06/chinese-evs-are-now-seen-posing-a-real-threat-to-europes-auto- industry.htm

CNEVPOST P.Z, Automakers' NEV market share in China in 2023: BYD 35%, Tesla 7.8%, Nio 2.1%, https://cnevpost.com/2024/01/10/automakers-nev-market-share-in-china-in-

2023/#:~:text=BYD%20released%20figures%20earlier%20this,from%20439%2C770%20units%20in%20 2022.

World Economic Forum, China is leading a surge in electric vehicle sales, https://www.weforum.org/agenda/2018/05/china-surge-electric-vehicle-sales/

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