Prospects for the Chinese EV Sector
Introduction:
As the world reckons with the changes needed to slow climate change, states are pushing for a green energy transition in every industry. Much needs to be done to transition the highest carbon emitting industry, transportation, and China is taking the lead. The Chinese electric vehicle (EV) industry is beginning to take the economies of scale it created to serve its domestic audience to the rest of the world. Chinese companies are at a great advantage with indigenous Li-ion battery production, low input costs, and support from the Chinese government. China’s biggest EV producers have already started to export to Europe, and they are now eying the US as another high-income market they could penetrate. What are the prospects for the Chinese EV industry and will it dominate the EV market globally? Will it be able to export to the United States? The increased securitization of economic relations between China and the US threaten cooperation on transnational issues like climate change, but the fundamentals are in China’s favor to move up the value chain and dominate the EV industry.
Literature Review:
Since China’s admittance into the World Trade Organization, economists and policy makers have spent decades analyzing the effects of the “China Shock,” as it came to be called, after David Autor’s groundbreaking paper “The China Shock: Learning From Labor Market Adjustments to Changes in Trade” (Autor). This paper led to a general rethinkinking of the neoliberal consensus in the US on the overwhelming benefits of free trade in the field of economics. This section is meant to provide a look at existing literature on the effects of past trade with China in the US and Europe as well as the conversations the policy community has had in order to analyze what may be the prospects for trade in the EV sector.
Autor et al. conclude based on the Stolper-Samuelson Model of international trade, that the supply shock of China’s entrance into the WTO with its increased production and low trade costs outcompeted US manufacturing and led to a “contraction in US industries subject to greater import exposure” (Autor). US factories in trade exposed industries were much more likely to close and the ones that did not close were much more likely to downsize and lay off workers. But manufacturing was not the only sector affected by “the China Shock.” Because of the concentration of these industries mostly in the Midwest and Southeast of the US, the effects were largely concentrated as well. In these regions, layoffs led to spillovers of reduced local demand and an even higher increase in non-college unemployment because of the increased competition of newly unemployed workers from the manufacturing sector (Autor).
From 1999 to 2011, the US manufacturing industry lost 5.8 million workers. During this time period, the North American Free Trade Agreement (NAFTA) and increased automation led to increased manufacturing unemployment in addition to the China Shock, but 560 thousand jobs, about 10% of the decline in manufacturing, is expected to have been a result of increased trade with China. When adding the indirect effects of trade with China due to declines in complementary industries, the effects would swell up to a total of 2 million workers unemployed (Autor).
Recently, China has come to dominate solar photovoltaic technology production, more commonly known as solar panels. Unni Pillai in his paper “Drivers of cost reduction in solar photovoltaics,” outlines China’s increased production of solar technology as a major reason for the drop in prices in addition to a decrease in the cost of inputs, technological innovation, and increased investment in the industry. Production of solar panels in China went from 32% in 2005 all the way up to 82% in 2012. China’s competitive edge became too strong for other countries to compete with production costs in China 22.4% lower than non-Chinese firms (Pillai).
In her paper, “Anti-Dumping and Feed-In Tariffs as Good Buddies? Modeling the EU-China Solar Dispute,” Patrice Bougette analyzed the European Union’s response to this influx of cheap Chinese solar photovoltaic panels. The European Commission charged China for dumping, selling at a falsely low price due to government subsidies of the industry, pitting the largest solar panel market, the EU, against the largest solar panel manufacturer, China. The European Commission ended up setting a minimum import price for China to sell in Europe because it claimed that China’s corporate tax rebates for the solar panel industry indicated that this was a strategic economic policy since 90% of China’s solar panels were exported. The US also enacted tariffs, but the EU was the first site of solar panel exportation which led to a decline in the EU’s domestic industry (Bougette).
The Chinese EV Industry:
Within the past few years, China has proven itself to be a force to be reckoned with in the EV industry. China is now the world’s largest automobile market with 23 million vehicles sold in 2023, almost double that of the second largest market, the United States (Pisano). On the production side, in 2023, China almost surpassed Japan to become the world’s largest automobile exporter (Moritsugu). This is all to say that the Chinese EV industry is here to stay and will have ripple effects in the EV industry across the world.
Government Support
The Chinese government recognized the EV sector to be a strategically important industry early on, and in 2001, for China’s 10th five year plan, the government invested $136 million in creating a network of research and development to create an EV industry. Money from the program went towards research at universities and the creation of manufacturing plants, much needed capital to kick off the risky industry (Yang 13).
The government has also been crucial in building the much needed EV charging infrastructure around the country. EVs would be infeasible without this infrastructure, and China is now leading the world in their capacity. Not only does China have the most charging stations in the world by far but also one of the highest EV to charging station ratios and EV to kw ratios in the world; only South Korea and the Netherlands have more expansive charging infrastructure on a per capita basis (Yang 45). China has also created requirements that all new residences must provide charging stations to ensure broad access to EV charging (Yang 46).
In 2009, a pilot program was launched called “Ten Cities and Thousand Vehicles” to test China’s EV subsidies across a select number of cities (Zheng). China’s 13th five year plan would unveil $59.2 billion in EV subsidies to consumers. In 2017, the average subsidy was $5,300 (Zhu) which was 17.9% of the EV’s price (Zhang). In addition, several other incentives were laid out to make EVs more appealing; certain taxes were exempted and bridge and road tolls were waived (Zhang). The subsidies proved to be quite effective and using a difference-in-difference approach, Xuemei Zheng was able to calculate that the subsidies accounted for about 25% of the increase in EV sales between 2009 and 2018 (Zheng).
Problems arose ironically because the subsidies were too effective. EV sales skyrocketed, so the amount spent on subsidies had to keep up with the demand. The subsidies would slowly be cut from year to year in order to phase them out. They were supposed to be phased out by 2020, but the Covid-19 pandemic complicated these plans, so they were extended up until 2022 (Zhang). China has moved past its subsidizing stage to develop their domestic EV industry. They are now moving to liberalize the EV market to increase competition and efficiency, and China is confident that Chinese companies will be the ones to push this industry forward.
Industry Leaders
Besides BYD, no other Chinese automobile company has come to much international prominence, but there are several Chinese EV companies that are vying for the immense Chinese domestic market and some that are breaking into the international market as well.
BYD currently leads by a good margin compared to both Chinese and non-Chinese firms holding 30% of the domestic market. SAIC-GM, a joint venture, is the second largest at 9%. Tesla also has about 9% of the market share, and Geely, another Chinese company comes in at 4% (Pisano).
These companies are taking advantage of an increasingly larger section of the automotive market. In 2021, China surpassed Europe as the leader in EV sales. In 2022, EVs were a quarter of all cars sold in China (Yang 11) and it is projected that by 2025, 13% of all vehicles in China will be electric (Pisano).
Since the development of the Chinese automobile industry in the 1990s, Chinese cars were notoriously known for their poor quality. Most Chinese preferred to drive foreign cars or the product of a joint-venture (Yang 13), but now over half of cars in China are made domestically (Pisano). Chinese consumers are no longer willing to pay a premium on foreign cars.
BYD started out as a battery company, giving it an advantage in producing the most crucial component of an EV. With a fully independent R&D and production capacity BYD is the world’s highest selling EV company (Yang 22).
NIO is a trailblazing Chinese startup that differentiates itself significantly from its competition with a battery swap model. No other major consumer facing company that produces EVs follows this model of battery replacement technology. The Chinese SOE, BAIC, uses battery replacement technology, but it does not sell directly to customers. It has a business-to-business (B2B) business model, producing cars for taxi companies. Other companies, including Tesla, have announced their intentions to bring battery replacement technology to market, but it has been years and none have announced any updates (Pisano).
NIO cars can have their batteries replaced in 5 minutes, a major reduction in time compared to the average of 30 minutes needed to bring an EV to full charge. There are additionally different battery capacities for different needs whether it be long distance or urban travel. NIO had built 1,200 stations around China and projected 2,300 to be built by the end of 2023 (Pisano).
China is now confident in its posture and position in the world economically. Foreign companies no longer need to form a joint venture with a Chinese company to open up shop in China. A month after these rules were changed, Tesla opened a plant in Shanghai, but they should be ready for some steep domestic competition (Yang 16).
EV Battery Supply Chain:
One major contribution to China’s competitive edge is that China practically owns the EV battery industry. The five key metals to develop a battery are lithium, cobalt, nickel, manganese, and graphite. Upstream in the battery industry, these metals first must be mined. China dominates graphite production with over 80% of the world’s graphite. Lithium is sourced mostly from South America. Nickel is mostly found in Russia, Australia, and Canada. Seventy percent of the world’s known cobalt deposits are found in the Dominican Republic of Congo, but most of that cobalt is mined by Chinese State Owned Enterprises (SOE). Manganese is widely spread throughout the globe and China has a significant sum (IEA).
Downstream in the battery industry, China completely dominates. China produces 75% of the world’s lithium-ion batteries which are used for EVs, 70% of the world’s cathode capacity, 75% of the world’s battery cell manufacturing capacity, and 90% of anode and electrolyte production: all crucial components for battery manufacturing. China is also responsible for refining more than half of the world’s supply of lithium, cobalt, and graphite (Slanger). It gets even more concentrated with the top six anode production companies all being Chinese and amounting to ⅔ of global production. It’s a similar case with separator production. Only five companies produce more than half of global capacity (IEA).
CATL is an incredibly important company in the EV battery industry. It produces a third of the world’s EV batteries and half of China’s EV batteries. CATL has a lot of sway in the market and is expanding out of China to build a plant in Germany (Yang 31). Chinese companies are turning their attention to increasing the range of their batteries, since that is the number one customer concern with buying an EV, and CATL is at the forefront of battery range innovation. CATL’s new Qilin battery currently has 13% more power than Tesla’s newest battery (Yang 49).
Because of the rarity of several metals that are needed for battery production, recycling of old batteries has become an important way to increase production, and China is leading the battery recycling industry as well. Recycling EV Li-ion batteries is an extremely complex operation. The recycling process requires a network of specialized companies that work together in what is known as a network community. China is home to three of the largest network communities for recycling Li-ion batteries with the top three consisting of 83, 27, and 16 firms respectively. Below is a visual representation of the complexity of a network community (Mu).
China’s dominance of EV battery production was not accidental, but strategically built up and aided by the Chinese government. China has been investing in the industry and specifically CATL for more than a decade and their success has not only paid off in the battery sector (IEA). Their success in battery production has led to even greater success in the EV sector.
EV Exports:
Chinese car manufacturers are rivaling Japan as the number one car exporter. The largest destination for car exports from China this past year was Russia, but these have mostly been gasoline powered vehicles. Russia has been all but cut off from Western and Japanese vehicles after the invasion of Ukraine in 2022, bringing the country much more economically intertwined and dependent on China which has been able to greatly capitalize on Russia’s more secluded position on the world stage (Moritsugu). The second biggest destination for Chinese car exports last year was Mexico, but again these were mostly gasoline powered cars. A majority of Chinese car exports, 70%, are gasoline powered cars, but that still leaves almost a third of car exports to be EVs (Cheng).
BYD and NIO have been the most prominent Chinese exporters of EVs, exporting more than 1.5 million vehicles in 2023. The biggest market is Europe, but China is now exporting EVs to the Middle East, Australia, Canada, and other parts of Asia as well. Competition with Japan for exports in Thailand has been contentious, and just another example of China’s ascendancy against Japan’s famously efficient and competitive car industry (Bloomberg News).
In 2022, NIO began exporting to Northern Europe, selling to Germany, the Netherlands, Denmark, and Sweden. NIO has also had to create battery replacement infrastructure in the countries they are selling to in order to make NIO feasible. Currently, NIO is planning on developing luxury cars that it plans to brand for a mainly international audience (Pisano).
BYD began exporting to Norway and Japan, and has now expanded to selling all over the EU and Britain. European car companies are struggling to sell at similarly low prices. European car companies like Peugeot, Fiat, and Citroen are cutting their EV prices, but China still largely has the price advantage (French). The EU has opened up a commission on the Chinese government’s support for the EV industry similar to the one they opened on solar panels, and are now debating whether to levy any tariffs or restrictions on EV imports (Moritsugu).
The US, which currently does not import any Chinese cars, is even more reluctant to allow China to enter the US car market. Energy Secretary Jennifer Granholm has expressed the government’s concern in allowing Chinese EV imports clearly, saying that this risks becoming a similar situation as what happened with the photovoltaic panels industry. The US initially developed the technology, but cheaper production and strategic economic support by the government set China up to dominate the industry (Reuters).
Despite China's competitive prices compared to non-Chinese EV manufacturers, their exports have incredibly high markups. BYD often marks up exports by double or triple their domestic price. The BYD Atto 3 sells for $19,283 in China, but in Germany sells for $42,789, still a competitive price and below the average EV price in Germany. BYD’s model the Dolphin sells for $37,439 in Germany and $16,524 in China; the Seal sells for $48,139 in Germany and $30,317 in China. Tesla comparatively sells their models for around 37% more in Germany than they sell in China. BYD’s strategy appears not to be flooding foreign markets with cheap EVs as the US and EU has been worrying about, but rather, trying to maximize the amount of profit per vehicle sold abroad (Carey). Even with this strategy however, they are cheaper than the competition and pose a serious threat to non-Chinese EV manufacturers.
Prospects For Future Exports—EU and the US:
Prospects for Chinese EV export expansion are muddled. The economic fundamentals are strongly in favor of the Chinese EV industry. Their domination of the Li-ion battery industry and battery recycling industry, cheap labor costs, and government support set up China to lead the EV industry and expand their exports. China has been able to utilize export oriented growth to bring prosperity to its citizens and take manufacturing jobs from other countries because of their cheap inputs and labor costs. Now China is moving up the value chain and is able to use a similar model for more complex goods like photovoltaic panels and now electric vehicles.
The European Union and especially the United States, are much more skeptical of Chinese goods now, however. The European Commission has already ruled that China cannot sell solar panels at the low prices that they flooded the European market with and that it amounted to dumping. The EC could very well make a similar case with BYD and NIO, but the companies’ already extensive markups for the European market make this a less convincing argument.
The United States has been securitizing its economic relationship with China across many sectors. The trade war that the Trump administration started continued but with less vitriol under Biden, and both are currently campaigning to increase tariffs if either of them gets a second term. The House of Representatives recently passed legislation that requires ByteDance to sell TikTok or face a ban in the United States. The US also put tariffs on solar panels as the European Commission was bringing their dumping charges against China.
The situation looks grim for Chinese EV companies looking to export to the United States. Chinese companies, however, seem to be optimistic. NIO is making plans to start selling in the US by 2025 (Zhou). BYD is scoping out places to build a manufacturing plant in Mexico to act as an export base to the United States (Solomon). As the Chinese continue to dominate the EV industry and bring down prices, it may be too much for the US to deny.
Work Cited:
Autor, David, et al. The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade, Jan. 2016, https://doi.org/10.3386/w21906.
Bloomberg News. “China’s EV and Solar Exports Are Powering Ahead as Prices Slide.” Bloomberg.Com, Bloomberg, 30 Apr. 2024, www.bloomberg.com/news/articles/2024-04-30/china-s-ev-and-solar-exports-are-powering-ahead-as-prices-slide?embedded-checkout=true.
Bougette, Patrice, and Christophe Charlier. “Antidumping and feed-in tariffs as good buddies? modeling the EU-china solar panel dispute.” SSRN Electronic Journal, 2017, https://doi.org/10.2139/ssrn.2968960.
Carey, Nick, and Ben Klaymen. “Insight: Why BYD’s EV Exports Sell for Twice the China Price | Reuters.” Reuters.Com, Reuters, 26 Apr. 2024, www.reuters.com/business/autos-transportation/why-byds-ev-exports-sell-twice-china-price-2024-04-26/.
Cheng, Evelyn. “China Comes Just Shy of Japan as the World’s Largest Car Exporter.” CNBC, CNBC, 1 Feb. 2024, www.cnbc.com/2024/01/31/china-comes-just-shy-of-japan-as-the-worlds-largest-car-exporter.html#:~:text=%22In%20the%20first%20eleven%20months,were%20mostly%20new%20energy%20vehicles.
“China’s Ability to Flood EV Market Concerning to Us, Energy Secretary Says.” Reuters.Com, Reuters, 6 Mar. 2024, www.reuters.com/business/autos-transportation/chinas-ability-flood-ev-market-concerning-us-energy-secretary-says-2024-03-06/.
French, Howard W. “China’s Global EV Domination Is Just Beginning.” Foreign Policy, Foreign Policy, 8 Mar. 2024, foreignpolicy.com/2024/03/07/china-ev-byd-cars-auto-industry-price-war/.
“Global Supply Chains of EV Batteries – Analysis.” IEA, IEA, www.iea.org/reports/global-supply-chains-of-ev-batteries. Accessed 3 May 2024.
Moritsugu, Ken. “Chinese Auto Exports Rose 64% in 2023, with Strong Push by EVS, as Makers Expanded Overseas.” AP News, AP News, 12 Jan. 2024, apnews.com/article/china-auto-exports-ev-hybrid-7d553c31597125d6702b6691a8542cb1#.
Mu, Dong, et al. “Structural characteristics of EV Li-Ion Batteries Recycling Supply Chain Network.” Journal of Physics: Conference Series, vol. 2160, no. 1, 1 Jan. 2022, p. 012042, https://doi.org/10.1088/1742-6596/2160/1/012042.
Pillai, Unni. “Drivers of cost reduction in solar photovoltaics.” Energy Economics, vol. 50, July 2015, pp. 286–293, https://doi.org/10.1016/j.eneco.2015.05.015.
Pisano, Alessandro, et al. “A Critical Review of NIO’s Business Model.” World Electric Vehicle Journal, vol. 14, no. 9, 2023, pp. 251-, https://doi.org/10.3390/wevj14090251.
Slanger, Dan. “The EV Battery Supply Chain Explained.” RMI, 8 June 2023, rmi.org/the-ev-battery-supply-chain-explained/.
Solomon, Daina Beth. “Chinese Automaker BYD Looking for Mexico Plant Location, Executive Says | Reuters.” Reuters, Reuters, 28 Feb. 2024, www.reuters.com/business/autos-transportation/chinese-carmaker-byd-launches-low-cost-dolphin-mini-ev-mexico-2024-02-28/.
Van Wyk, Barry. “China’s Top 15 Electric Vehicle Companies.” The China Project, The China Project, 22 May 2023, thechinaproject.com/2023/05/18/chinas-top-15-electric-vehicle-companies/.
Yang, Jan. Chinese Electric Vehicle Trailblazers: Navigating the Future of Car Manufacturing. SPRINGER INTERNATIONAL PU, 2024.
Zhang, Tong, et al. “Effectiveness of electric vehicle subsidies in China: A three-dimensional panel study.” Resource and Energy Economics, vol. 76, Feb. 2024, p. 101424, https://doi.org/10.1016/j.reseneeco.2023.101424.
Zheng, Xuemei, et al. “An empirical assessment of the impact of subsidies on EV adoption in China: A difference-in-differences approach.” Transportation Research Part A: Policy and Practice, vol. 162, Aug. 2022, pp. 121–136, https://doi.org/10.1016/j.tra.2022.05.020.
Zhou, Marrian. “NIO Aims to Enter U.S. Market by 2025 with China-Made Premium Evs.” Nikkei Asia, Nikkei Asia, 3 Nov. 2023, asia.nikkei.com/Business/Automobiles/Nio-aims-to-enter-U.S.-market-by-2025-with-China-made-premium-EVs.
Zhu, Lijing, et al. “Indirect network effects in China’s electric vehicle diffusion under phasing out subsidies.” Applied Energy, vol. 251, Oct. 2019, p. 113350, https://doi.org/10.1016/j.apenergy.2019.113350.
