China’s next export is an electric-vehicle fight

It’s a big milestone. In the last two months of 2022, Chinese buyers bought more local brands than multinational marques for the first time since the country opened up to automakers following China’s accession to the World Trade Organization at the turn of the century, according to Bill Russo, founder of Automobility, a Shanghai-based consultancy. Electric vehicles drove that change. They account for around a third of China’s total sales.

Yet generous official subsidies have dried up, a price war is raging and consumer sentiment in the $18 trillion economy is weak. Overall, the International Energy Agency expects registrations of battery-powered cars in China will rise 30% this year. Last year, sales of new energy vehicles in the country nearly doubled, per Refinitiv. The deceleration is happening before many local automakers are on a sure financial footing.

Take Nio: the $16 billion company sold a fifth more cars in the quarter ending March against the same period in 2022, but vehicle revenue was flat. Its net loss more than doubled to roughly $700 million and its cash of $5.5 billion was down by around a third. Nio and peers tapped equity markets from Hong Kong to New York but plunging valuations makes that a tough route to keep following for funding. Finding customers elsewhere is an obvious fix.

China already sells lots of automobiles overseas: surging global interest in electric vehicles has made it the world’s largest exporter ahead of Japan, according to the Global Times. Although vehicles from Tesla’s sprawling Shanghai Gigafactory accounted for almost a tenth of the roughly three million cars exported last year, the rest of the top ten marques were Chinese.

Some wins abroad have been easy. Sales to emerging markets, including those in the Belt and Road initiative through which Beijing has loaned hundreds of billions of dollars, made up nearly half of the figure in the first four months of this year according to state media. Chinese marques also stepped up where Western peers retreated. In the first quarter of 2023, Russians purchased more Chinese cars than Lada, the beloved Soviet-era marque. Geely continues to sell its brands there, as do Great Wall Motor and Chery. But motoring to richer destinations like Europe is the real prize.

Escape hatch

On paper, Chinese companies are competitive enough to win wherever they want to go. One reason is vast economies of scale in the supply chain. Battery makers Contemporary Amperex Technology (CATL) and BYD, which makes power cells both for its own-brand vehicles as well as for third parties, account for around half of global battery production.

That helps Chinese manufacturers churn out an electric vehicle for around 10,000 euros less than European competitors, according to Grant Thornton. A BYD car priced at 38,000 euros in Europe is “a value for money” offering according to Bernstein, although that top line covers a 10% import tax, up to 25% sales tax, plus advertising and distribution costs. BYD can sometimes charge twice as much in Europe than at home for the Atto 3, a small sport utility vehicle, Bernstein notes. Whereas prices on the continent have risen, the average electric model in the People’s Republic cost half as much in 2022 as it did in 2015, according to JATO, a research company based in London.

New brands such as Great Wall Motor’s Funky Cat and Geely’s Zeekr are also overcoming concerns over the quality of “Made-in-China” products. These days Chinese automakers regularly achieve five-star reviews in the European New Car Assessment Programme which requires cars have safety features beyond legal requirements. They often boast advanced software and elaborate infotainment systems too. Yet politicians want to prioritise locally made models.

Among the growing list of unwelcoming policies, the European Commission’s trade defence unit is considering ways to stem the tide of Chinese electric vehicle imports, according to Politico. In the United States, the Inflation Reduction Act grants tax credits for cars whose battery components are manufactured or assembled in North America. In France, where about 40% of electric-car purchase incentives were paid out for made-in-China vehicles in the first quarter, President Emmanuel Macron plans to reward buyers of European-made models.

It’s possible the Chinese could advance by setting up factories where they want to sell and by striking strategic partnerships. Chinese battery makers invested more than 12 billion euros to expand in Europe last year, for example. Many of their suppliers are joining them. In the United States, Ford Motor clearly sees the benefits of allowing China in and wants to partner with CATL to set up a plant. Western countries may, like Thailand, accept that Chinese investment could positively improve their own clean car industries. In Europe, local operations could also level the playing field to a degree as Chinese companies would lose some of their home advantages, such as the lower cost of labour.

But overcoming rising protectionism will be harder than in the past. When globe-trotting Japanese carmakers like Toyota Motor and Nissan Motor gained popularity in the West in the 1980s and 1990s, the United States and Europeans introduced schemes to restrict imports. The Japanese responded by building their own production plants in the region and today they are household names all around the world.

Now a new crop of Asian carmakers are looking to claim their place on the global stage as geopolitical tensions rise. How far China’s carmakers can make inroads further West will be decided by much more than assessments of their competency.

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