China’s electric vehicle dominance presents a challenge to the west
Companies such as BYD and Nio are targeting overseas markets, leaving governments torn between encouraging greater take-up and protecting domestic manufacturers
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China’s electric vehicle dominance presents a challenge to the west
Companies such as BYD and Nio are targeting overseas markets, leaving governments torn between encouraging greater take-up and protecting domestic manufacturers
Tesla, Toyota and other manufacturers face a race for market share against BYD, makers of the Atto 3 © FT montage
Edward White in Shanghai and Peter Campbell in London
YESTERDAY
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For close to a century, Toyota prided itself on its ability to constantly trim the costs of making its complex, highly engineered vehicles.
But when Takero Kato, the head of the Toyota division tasked with building electric vehicles, travelled through China in 2018 he was shocked by what he found.
“For the first time, I came face to face with the competitiveness of Chinese components,” he told the company’s internal newspaper, Toyota Times, in November.
“Laying eyes on equipment that I had never seen in Japan and their state of the art manufacturing, I was struck by a sense of crisis,” he recalled. “We’re in trouble!”
Kato was right to worry. Last year China overtook Japan as the world’s biggest auto exporter, with data from Shanghai-based advisory firm Automobility showing Chinese auto exports have nearly quintupled since 2020 to approach 5mn last year.
In the final quarter of 2023 BYD, the Shenzhen-based company backed by Warren Buffett’s Berkshire Hathaway group, outsold Tesla for the first time, sending a powerful warning signal to the global auto industry.
BYD’s sales come mostly from the domestic market, which it dominates. But the group is one of several Chinese EV makers turning their sights to foreign shores.
China’s entrants — from publicly listed BYD to state-owned Chery — plan to use new regional operations in places like Hungary and Mexico to enter western markets with cheaper electric models, securing their global dominance and challenging storied incumbents such as General Motors, Ford and Volkswagen.
“No one can match BYD on price. Period,” says Michael Dunne, chief executive of Asia-focused car consultancy Dunne Insights. “Boardrooms in America, Europe, Korea and Japan are in a state of shock.”
While the US government has responded with numerous subsidies to encourage domestic manufacturing, the prospect of millions of low-cost, high-tech cars made by Chinese companies hitting European shores poses a dilemma for lawmakers there.
A flood of cheap Chinese car imports could be disastrous for Europe’s incumbent carmakers, with the EU already considering import tariffs to limit the damage.
But restricting lower-cost imports could stymie the development of the electric vehicle market at a time when Europe is trying to limit fossil fuel emissions and working towards outlawing combustion-engined vehicles altogether by 2035.
Three-quarters of Chinese cars exported today have petrol or diesel engines, notes Bill Russo, former head of Chrysler in north-east Asia and founder of Automobility. But it is the rise of affordable Chinese EVs that is making carmakers nervous around the world and “prompting protectionist governments to consider trade restrictions”.
In her State of the Union address in September, European Commission President Ursula von der Leyen complained that China was flooding the global market with cheap EVs and that Beijing was making prices “artificially low” via huge state subsidies. The EU has launched a probe into China’s industry, a move that could result in hiked tariffs on Chinese imports.
In the US, where EVs account for a much lower proportion of car sales than Europe, lobby groups like the Alliance for American Manufacturing have urged the Biden administration to stand vigilant against the Chinese auto groups.
“A flood of Chinese imports has devastated several of America’s domestic industries in the past, notably undercutting American solar and steel manufacturers,” a spokesperson for the alliance warned last year. “It’s the same formula for disaster that we’re seeing play out with EV batteries”.
However, experts warn that even if China’s automakers were confined to their home turf behind a wall of tariff protections, they would still be able to compete with US and European manufacturers on price.
A key cost advantage for BYD, the company which industry leaders acknowledge poses the biggest threat, comes from its expertise in producing lithium-based batteries, the most expensive single part of an EV. The group, which evolved from a cell phone battery maker in the 1990s and 2000s, has become a world leader in the field.
According to Bernstein research, BYD batteries are among the lowest cost in the world while also boasting close to the highest energy density, which results in better performance in the cars. Tesla and Toyota are customers of BYD’s battery division.
That has helped it undercut its western rivals. BYD’s Atto 3, the company’s cheapest model, sells for €38,000 in Europe, while the Tesla Model 3 is priced at around €43,000 in major markets such as Germany and France. The brand, which already sells in more than 50 countries, has five models on the market in China that sell for less than the equivalent models from Elon Musk’s group.
Chinese automakers have sufficient unused capacity in their domestic factories to make significant inroads into major overseas markets before they break ground on a single regional hub.
BYD exported nearly 250,000 cars last year and — even without the US or European markets — management have told investors they believe they can increase that by more than tenfold over the coming years.
“China still builds and buys more EVs than the rest of the world combined,” says Dunne. “Chinese EV makers are sitting on enough capacity to supply 75 per cent of global EV demand. That should keep western automakers awake at night.”
As Ford prepared to close its ageing factory in Saarlouis, Germany last year, a thought occurred to executives: Why not find another carmaker to take over the site?
At its door were several Chinese carmakers, including BYD, that were looking for an easy toehold in Europe’s competitive auto market.
The talks faltered. A potential buyer walked away. Last month, BYD instead announced it will erect a gleaming new factory in Hungary, “the heart of Europe”, to cater to its growing ambitions.
Yet while Chinese automakers are already encroaching on European territory, gaining a foothold in the $1.5tn US auto sector is the grand prize, especially given the surplus of manufacturing capacity over demand in China itself.
“It isn’t just ‘the mighty Chinese making great profits at home, and now they’re stepping into the US market’,” says Dunne, the consultant. “They understand that sitting back in China is not an option. They have to come to North America. They have to find a way in. One of the ways in is to establish a base on America’s southern flank.”
BYD and several other Chinese carmakers are currently scoping the Mexican market to find new manufacturing sites to better target American consumers, as well as other countries in the region.
Chinese groups already stand at a distinct disadvantage in entering the US — especially in the nascent EV sector — compared to rival carmakers from South Korea, Japan and Europe.
Joe Biden’s Inflation Reduction Act aims to dole out billions in subsidies for EV development to non-Chinese groups in a bid to reduce US exposure to Chinese technology in key supply chains. There is also a trend, difficult to quantify but likely to be significant, of consumer wariness about buying China-made products.
Yet experts think companies like BYD could still one day crack the US car market, even accounting for trade barriers and the rise of anti-Chinese sentiment in the US.
The competitive factor, as in Europe, is cost. The lower-price segment of the auto market has largely been abandoned by the “Detroit Three” of General Motors, Ford and Chrysler-owner Stellantis, who have concentrated instead on pick-ups and sports utility vehicles.
Dunne notes that the average price of a new car in the US this year is about $48,000. “Imagine [Chinese automakers] come in with a $20,000 product. The current tariff of 25 per cent knocks it up to $25,000 or $26,000. They are still in a very good position.”
But others point out that cost advantage is not set in stone. Once groups like BYD start manufacturing outside China, they will not enjoy the same levels of state support as they do inside the country, says Jorge Guajardo, a former Mexican ambassador to China and now a partner at Dentons Global Advisors.
“The subsidies cannot easily be exported; they are energy, state and local taxes,” he says. “There are not that many examples of Chinese manufacturing abroad. In countries which are competitive in their auto sectors, as is the case in Mexico, the Chinese will have to face a type of competition that they’d be hard pressed to face without the subsidies.”
Western governments are increasingly on guard against China’s incursion into their markets.
The Biden administration has privately cautioned Mexico about the imminent wave of Chinese investment. Congressional representatives wrote in a recent letter they were worried Chinese companies would use Mexico as a “back door” into their market.
The EU anti-dumping and subsidy investigation, meanwhile, will set out its conclusions by November this year.
At the same time, officials in both the US and Europe are also sharpening their focus on the perceived security risks of having China-made components in critical infrastructure such as energy and telecoms. Such concerns will now be applied to Chinese vehicles as well as batteries and other clean technologies, experts say.
For their part, Chinese auto executives are pushing back at what they regard as western protectionism. They have called for fair treatment, arguing that foreign automakers have long profited from selling into China’s huge consumer market.
They are also trying to position themselves as “global” companies to counter western consumers’ misgivings around Chinese groups. William Li, founder and chief executive of Shanghai-headquartered EV group Nio, told the FT late last year that investors from outside China hold more than 80 per cent of the company’s shares. The company has maintained a Silicon Valley office since its founding in 2015.
“We’ve hoped to become a global start-up since our inception,” Li told the FT last year. “The problem we’re solving is also something the whole world is faced with together.”
Western policymakers considering blocking China from their clean tech supply chains will need to consider the impact on their net zero ambitions, says Cory Combs, associate director at the Beijing-based Trivium China consultancy.
He adds that while governments are justified in seeking to diversify supply chains, western countries risk “pushing themselves into a corner” by inhibiting their own climate transitions without sufficient mitigation strategies in place.
“We’re quickly approaching a make-or-break moment . . . I wonder if that trade-off is being thoroughly considered in a lot of capitals.”
