There is an EV export wave building in China.
Recently I read a Reuters article about an EV auto show in Shanghai. There,
China's leading domestic EV producer BYD showed off their Seagull hatchback.
It was priced at just $11,300 USD. It immediately caught my eye.
BYD later announced that they received
11,000 orders for the Seagull 24 hours after pre-sales opened.
According to self-reported UN COMTRADE data,
in 2022 Chinese electric vehicle exports grew 131% year over year to $20.9 billion in value.
Though there is a little caveat here that we will talk about later.
Anyway, I have been wanting to do this one for a while now. In this video,
just a few thoughts on the coming Chinese EV boom.
## Beginnings
Let us start with some history.
The development of China's EV industry - they say "New Energy Vehicles" in China
but I'll stick with EVs - is a story of an incredibly successful industrial catch-up.
The three critical systems inside an EV are the battery, drive motor,
and powertrain control systems. The battery stores energy. The drive motor converts that
energy into motion, and the powertrain oversees and manages that whole process.
In 2000, China's lithium ion batteries and
electric drive systems lagged about 10 years behind Japan. To catch up,
the Chinese government gave the EV high status as one of the "863 projects" (863计划).
Over the next ten years, the 863 policy offered about 2 billion
RMB ($242 million USD) of financial support to domestic firms. This was to help blunt the
financial burden of developing these pricey but critical EV technologies.
## National Policy
The Chinese government's first EV policies focused on improving
their domestic players' technical sophistication.
So in addition to financial subsidies, the government implemented technology
transfer requirements whenever foreign players wanted to tap the Chinese market.
For instance, Toyota could only enter China in 2005 after they
agreed to jointly produce the car with China FAW Auto Group.
But it was in 2009 that the People's Republic
really moved the EV into the heart of their automobile industrial policy:
the 2009 "Automotive Readjustment and Revitalization Plan" (汽车产业调整和振兴规划).
This is a big, multi-component plan encompassing all types of cars. But
specifically with regards to EVs, it sought to expand domestic EV production capacity.
Chinese firms were encouraged to offer new EVs by 2011 and manufacture their EV parts
locally. Furthermore, they were given a target EV market share of 5%, or about 500,000 units.
## Promotion
The central government passed new policies to kickstart demand.
First, they announced that they would subsidize 13 city governments to purchase
EVs for use in public services like post, taxis, and sanitation.
And then in 2010, they trialed consumer subsidies for EVs in
five cities. Individual buyers or leasing companies can get subsidies ranging from
50,000 RMB (8,070 USD) for a plug-in hybrid or 60,000 RMB (9,684) for a full EV.
Local governments can also provide grants of their own on top of that to essentially
place EVs at price parity with internal combustion engines.
According to Statista, Chinese electric vehicle sales grew from 480 to 1,090 from
2009 to 2010. Then grew again to 4,750 the year after - a 10x increase in two years.
The number of charging poles went from 134 to
6,200 to 13,300 over that same period. It has since gone to 159,000 in 2015.
New entrants flooded into the market. Just as importantly,
patent applications grew 44%, indicating increasing R&D intensity.
This policy's success and the industry's growing
technical proficiency convinced the Chinese government that they
had opened a window of opportunity to dominate a growing valuable industry.
In 2012, the EV consumer subsidies were rolled out to the rest of the
country. Despite the occasional fraud or two, the consumer subsidies have
been extremely successful - helping to subsidize some 3-6% of the EV's cost.
## An Industry
In 2022, those national subsidies were finally entirely removed.
Originally, they were to be gradually phased out starting
in 2017 - with a total removal in 2020 - but then were extended due to COVID.
According to one estimate from China Merchants Bank International,
the government had paid out some $15 billion in total from 2012 to 2021.
Another article by the excellent online magazine Sixth Tone said
that the government spent $22.5 billion in EV subsidies from 2010 to 2020 - citing
data from the Chinese Ministry of Industry and Information Technology.
Ten years and $15-22.5 billion have changed a whole lot. China’s EV market has grown
to become the world’s largest in 2022 with 6.5 million new energy
vehicles - EVs and plug-in hybrids - shipped with 5.67 million sold.
According to the China Association of Automobile Manufacturers,
there were nearly 26.86 million automobiles sold in China in 2022. So EVs made up 22%
of all automobile sales in China and nearly 60% of global EV sales volume.
## Intense Competition
This large market has also fostered intense competition.
Domestic EV makers have hit every metric the government has set out for them. According to
Counterpoint Research, there are over 94 brands with 300 models ranging from $5,000 to $90,000.
Local brands have over 80% of the market. At the very top you have BYD,
the market leader with nearly 30% of the market. But there are also traditional
players like Wuling, Chery, Changan plus EV startups like Xpeng and Nio.
With the exception of Tesla, China's most popular EV brands are made by domestic
manufacturers. Notable brands are the BYD Song, which is a crossover utility vehicle;
The Wuling Hongguang Mini EV, which is a small city car capable of seating four people. It
is quite cute, comes in multiple colors and doesn't cost much - something like $5-10,000.
The BYD Qin, which is a compact sedan. All of the BYD cars are named after Chinese dynasties.
So if it is anything like its namesake I expect this
one to collapse shortly after its first model.
And my award for EV with the best name - the Ora
Good Cat (好猫) or Funky Cat. It sort of looks like a Porsche.
This intense competition has cut margins in the Chinese EV ecosystem. BYD makes
something like a $1,000 USD of net profit for each EV sold. Xpeng, Neo,
and Li Auto all sold millions of dollars of EVs in 2022, but were not able to turn a profit.
The competition will only intensify in 2023. Tesla - a laggard in the Chinese market - kicked off the
year by cutting prices and going for volume. Over 40 other brands have followed in turn.
## Cost Advantages
The competition has cut a lot of fat out of the Chinese EV ecosystem.
China is the world's factory, but their EV manufacturing advantages are particularly
strong. This is due to lower R&D costs, better scale, less capital invested, and cheaper labor.
At the CES Convention in January 2023, the CEO of Forvia, an auto supplier,
said that Chinese EV makers can make a small EV for 10,000 euro less than the Europeans can.
The EV supply chain advantage is substantial. Internal Combustion engines have on average
30,000 components compared to the EV's 20,000. Many of these
electric car components are made inside China - further cutting down on cost.
One of the biggest cost drivers in an EV is the battery pack. BYD and especially CATL are some of
the world's biggest producers of battery packs, leveraging scale and an integrated supply chain.
They strike deals directly with the resource-holders to cut costs to the bone.
In 2022, CATL generated about $48 billion USD in revenue and $4.4 billion in profit.
They have about 32% market share of the EV battery pack industry,
a comfortable lead on Korea's LG Energy Solution.
They are also R&D leaders. A while back, I talked about their sodium ion batteries in
an earlier video. Commercializing such a thing would be a massive leap forward on
the materials front. I consider them one of China’s most formidable national champions.
## Exports
Anyway, the intense competition and cost advantages have incentivized the Chinese
EV makers to go abroad in search of new markets.
The American markets are somewhat difficult for Chinese EV makers to import into because
of higher duties but the European markets are for now pretty open.
The top countries importing these Chinese EVs in 2022 are Belgium,
United Kingdom, Spain, and Slovenia.
Now, here comes the caveat. If we break down what brands are being exported out of China to Europe,
49% of Chinese-made EV exports to Europe from January 2021 to March 2022 were Tesla cars.
After that we have Chinese-owned European brands with 35%. These are like Polestar,
a Sweden-based brand owned by Geely, and MG Motor, which is owned by SAIC Motor.
And then we have the European joint ventures with 14% share - like BMW and Renault Group.
BMW exports the iX3 electric SUV while Renault, the Dacia Spring EV hatchback.
Tesla's exports into Europe are yet another indication of the superior cost structures
of the Chinese EV manufacturing supply chain as opposed to that in Europe. Less
material shortages, cheaper labor, and more aggressive work practices.
But Tesla is also working on a Gigafactory in Germany,
which I presume will eventually cut into Chinese Tesla exports. You might
also add that Tesla should be a unique case because it is an American brand.
But I think it would be a mistake to underestimate these Chinese-owned brands.
## Chinese Brands
In 2006, the Chinese automaker Brilliance tried
to bring their low cost sedan the BS6 - unfortunate name - to Europe.
But then the car received a Euro NCAP rating of one out of five
stars. Deliveries were suspended and it created the impression that Chinese cars were unsafe.
But like I said, I don’t think you should underestimate these
companies’ prowess. I am reminded of the European smartphone industry.
Twenty years ago, the top mobile phone brand was Nokia, with 35% share. Siemens and Ericsson
had significant share as well. The Koreans were the only Asian vendors in the market.
Today, the European smartphone market has drastically changed. Apple and Samsung are
in the lead, but the next two vendors are Xiaomi and Huawei.
Likewise with the Chinese mobile phone brands, the Chinese EV brands are following a strategy of
flashy marketing, extensive investment dollars, and fully-featured offerings at good prices.
Great Wall Motor's ORA Funky Cat - a cousin to the aforementioned
Good Cat - is launching in the UK for about 32,000 pounds,
features like facial recognition, and of course a five star safety rating.
Over the past two years, BYD launched BYD-branded models in 16 countries
and ordered carrier ships so to ship their EVs over to Europe and Australia.
Xpeng also built "experience stores" and service centers in Denmark, the Netherlands,
and Norway. They also recently opened up Norwegian sales for their SUV and sedan cars this year.
## Responses
A significant portion of the European economy is based on
automobiles so any new entrant or development is worth tracking.
But what - if anything - should Europe do? Should they raise protective trade
barriers like what was done in the United States?
EU policymakers are probably talking about it. William Li - CEO and founder
of the Chinese EV maker Nio - said that he would not be surprised to
see some form of protectionist policies coming from importers.
But these policymakers will need to walk a fine line. Many European automakers have
joint ventures operations in China and heavily rely on Chinese sales of traditional cars.
Volkswagen chairman Oliver Blume has said that China is their most important market.
Any protectionism against EV imports will see trade retaliation of some form.
Furthermore, these EV cars are not just going to Europe. They are also
being exported to Southeast Asia, the Middle East, and Latin America too.
The United Arab Emirates is the fifth biggest EV importer. And a kind Asianometry viewer from Saudi
Arabia emailed me to note the large number of Chinese-branded cars he sees on the roads there.
Legacy automakers in Korea, Japan, Europe, Canada, and the United States will have to compete hard
for both their own markets and those overseas. They can’t just retreat into regional castles.
I reckon what is most likely to happen is that Europe gets the biggest Chinese
EV makers to build a factory on European soil. CATL already has
one in Germany. I don’t see a joint venture or technology transfer agreement happening
though - it would be strange for them to do something like that.
It echoes the entry of the Korean carmakers
Hyundai and Kia a few years back. Some tensions ameliorated by localization.
Meanwhile the traditional European automakers bring out their EVs to occupy the premium and
medium priced markets while the Chinese makers take a comfortable niche behind the home teams.
## Conclusion
I think it is hard to argue against the successes of China's EV consumer subsidy policies.
Yet at the same time, one has to consider the strange effects
that 9 years of subsidies might have had on the Chinese market.
By 2020, the average amount of subsidy per car was about 19,000 RMB ($2,755).
The Chinese government is unlikely to continue paying out these subsidies.
It is a lot of money to be doling out to an industry that is growing at very
high volume. Provinces are free to give their own subsidies too and some are.
But there will be a lot of pushback from members of the industry who will argue that
China's leading position in the new energy economy will be challenged and copied by other countries.
Like America's Inflation Reduction Act of 2022, which I might argue apes the
Chinese subsidy policies. If it works for them, could work for the Americans too.
Reuters reported last year that the Chinese government started talking with its automakers
about the issue. We also have another Nikkei Asia piece discussing tax exemption extensions as well.
It will be interesting to see how the central government responds. And doubly interesting
to see how the European economy responds to the coming EV onslaught from China.