The emergence of Chinese electric car brands has taken Western countries by surprise, like the appearance of a comet, even though its approach could (should) have been seen with a space telescope a long time ago. Will they also disappear as quickly as a comet? Or are they more like red giant stars that are still in their growth stages and will have a longer-term impact on their environment? Currently 6 out of 10 electric cars are produced in China and their mass exports to the EU, including Hungary, are imminent. We explain why, contrary to popular belief, the Chinese electric car industry did not take off thanks to Tesla and that the state subsidy was partly a necessity. We also look at whether it is during global crises that China strengthens its positions spectacularly.
Tesla’s role in igniting the electric car revolution in China
If we try to grasp the process in the astronomical terms used in the title, Tesla is like a supernova and BYD is like a red giant. Elon Musk’s company, despite being almost the sole dominant player in its home market, has been performing particularly poorly in recent times. Since the Inflation Reduction Act (IRA), announced by Joe Biden’s administration in August 2022, Tesla shares have fallen by 45%, while the market as a whole has managed to grow by around 55% over the same period. In the meantime, BYD’s capitalisation has risen by 162% even as Western investors have withdrawn their money from the Chinese company. [1] In the first quarter of 2024, despite price cuts, Tesla sold just 385,000 cars, a fifth fewer than a year earlier, and its profits fell by 55%. In April, it announced that it would not launch a low-cost electric car after all, priced at around $25,000. [2]
The figure can be referenced here: https://public.flourish.studio/visualisation/18258466/
The other American car brands do not excel in the electric car arena either. The electric division of Ford, the long-iconic US carmaker, is operating at such a loss that it is eroding the company’s decent profitability from conventional and hybrid cars. A loss of US$5.5 billion is expected this year, to which Ford is responding with radical cost-cutting measures such as delaying the launch of new models and postponing the construction of new battery factories. In the first quarter of this year, the company was losing USD 100,000 on each electric car, even though its most expensive model costs USD 85,000. Ford is still promising that it will launch an electric car for under USD 25,000, expected at the end of 2026. [3]
Many believe that the current successes of Chinese car manufacturers are due in large part to Tesla, just as behind just about every successful Chinese industry there has been a practice of Chinese companies copying and improving on the expertise of Westerners. However, the Chinese electric car industry’s efforts were already ahead of those of the US and Europe before Tesla. Recall the news that all 16,000 buses in Shenzhen, the emblematic city of the Chinese miracle, had been replaced by electric buses by the end of 2018 and, most importantly, in parallel with this, the 22,000-strong taxi fleet was converted to electric cars within a few months, with 40,000 charging points installed. [4] Furthermore, by the end of the previous decade, it was almost impossible to see a non-electric scooter in a major city. Thus, the EV revolution was already well underway in China when Tesla built its Gigafactory in Shanghai.
The Model 3 cost Tesla a lot of money to develop, and in 2018 there was a serious possibility that the company could go bankrupt, so they outsourced production to China to cut costs. As the sector was a particularly high priority for the Chinese leadership, Musk was able to negotiate very favourable terms. At the same time, it is hard not to notice that the choice and volume of vehicles for private transport of passengers only shot up exponentially after Tesla had been present for a year or two. The Tesla factory has helped Chinese suppliers to become stronger and to develop and adopt new technologies, since it allowed them to get access to a wealth of information, know-how and technical knowledge. It should be noted, however, that this was much more limited, as Tesla was one of the rare exceptions that could be set up in China as a wholly foreign owned company, not as a joint venture obliged to technology transfer. Because of lower manufacturing costs, the US brand has since been building more than half of its cars here, and what’s more, it buys batteries for its cars from both BYD and CATL. Essentially, it is through such cost reductions that Tesla has been able to drive down the end-user prices of its cars and achieve growth in recent years. The Gigafactory produced 948,000 cars in 2023, of which 604,000 were sold locally, representing 11% of the total electric car market in China.
The low and increasingly declining market share is also an indication that much has changed in the vibrant Chinese economy since the factory was established. Gone are the days when Tesla had no serious competitors. Today China has a highly competitive and innovative development environment with many internationally competitive players. As a result, the initial competitive advantage of Tesla – but also of Volkswagen – has been completely eroded. It is thanks to the Chinese companies that competition has started to emerge, from the entry level, with prices that are comparable to those of conventional cars, to the luxury segment. Tesla faces a number of challengers, some with a technology level that exceeds its own, and has therefore slipped from the top to the mid-range in China. In all other segments, there is cutthroat competition between Chinese brands whose names have never been heard of in Europe. [5] Moreover, Tesla can no longer do what Apple did a few years ago. The Cupertino-based company deliberately raised the price of iPhones in order to continue to position itself as an elite brand, but today a Tesla is not a status symbol in China. Then at one time Apple introduced its more affordable phone, but by then other phone manufacturers had filled the mid-range with excellent options, just as the local car brands had done in China. [6]
Elon Musk visited Beijing in April. The visit of the American businessman coincided with the Beijing Auto Show, but Elon Musk did not go there. More than a hundred new models and concepts were on display, but Tesla was not represented with a single stand. Musk also met with Premier Li Qiang, with whom he managed to strike a deal to delay Tesla’s loss of competitiveness in China. Teslas sold in China will now have access to the navigation and data systems of Baidu, also known as the Chinese Google, but the camera footage captured by US cars on Chinese streets will not be allowed to leave China and will have to be processed by local partners. [7] But this will not solve Tesla’s competitiveness challenges. China has many more BYDs to come, while the US has only one Tesla, meaning that BYD will not be the only challenge for Western companies in the medium term. [8]
The Chinese car industry has moved ahead unnoticed
Overall global car production reached its pre-Covid level last year. In 2019, a total of 91.79 million cars were produced, and in 2023, 93.55 million. The low point was 2020, with 77.62 million cars.
The figure can be referenced here: https://public.flourish.studio/visualisation/18830269/
Because the quality of Chinese cars was below Western standards for a long time, Europe and the US was essentially unaware of the growth of the Chinese car industry; in addition, until the 2008 crisis, the automotive base on both sides of the Atlantic was strong despite Japanese competition. The recession marked a milestone in changing global market positions. In 2009, for example, Detroit collapsed, with the US producing only 5.71 million vehicles, half of its usual volume. China, meanwhile, saw a huge boost: in 2006, it produced only 7.19 million transport vehicles, while in 2009, it produced 13.79 million. At that time, China alone produced 1.5 million more passenger cars than Japan and the US combined. This momentum was followed by even more dynamic expansion, with total vehicle production reaching 30.16 million by 2023. Although the country, which is considered the world’s workshop, already produced a similar volume to today’s output with 29.02 million vehicles in 2017, last year was a record year. [9]
Competitive advantage out of necessity
However, the widespread motorisation has led to enormous pollution, which has significantly worsened the living conditions of the population. In cities, smog from cars, motorbikes and buses has become commonplace, leading to serious health indicators. This was long tolerated by the population due to robust economic growth. However, today there is a much greater demand for cleaner air in Chinese society and this is becoming an increasing focus of state party policy, so replacing transport vehicles with more environmentally friendly ones has long been a goal of the leadership. This took place in regard to scooters in the 2010s, but in terms of cars, Western brands have not offered electric solutions at a price level that would be affordable for the vast majority of the Chinese population. So when the Chinese state is accused by Western leaders who religiously preach and demand green transition of subsidies to local car manufacturers, this aspect should also be taken into account. What has happened is simply that an advanced domestic manufacturing base has had to be created quickly in order to make electromobility a reality at home. This is why the growing Chinese output has been realised for a very long time on the domestic market and is still primarily aimed at it, as it still has huge potential. In 2020, 223 out of 1000 people in China had a car, compared to 483 in Hungary and 627 in Germany. [10] However, there is every incentive for households that do not yet have a car to go electric. In 2023, 60% of all electric cars sold in the world were sold in China, 25% in Europe and 10% in the US. The massive spread of more environmentally friendly vehicles is also noticeable in the noise level and air quality of Chinese cities. [11]
Chinese automotive exports in figures
Thus, with the support of Chinese economic governance, the Chinese automotive industry has replaced extensive (quantitative) growth with intensive (qualitative) growth, reaching a level from which it can export to developed markets. By then, the country had the largest industrial capacity in the world, so there was no order that Chinese exporters could not fulfil. However, the huge surge in demand for good value for money electric cars is due to another crisis. One might ask: if the green transition in China had been going on quietly for years with good quality electric vehicles, why have exports to the West only just started? It is precisely thanks to the Covid pandemic that most Chinese car manufacturers have been able to increase their competitive advantage over Western ones. For example, BYD’s production structure is vertically integrated, meaning most steps are handled in-house, from mining to chip production. When the pandemic hit supply chains, these companies were less vulnerable, while production in Western companies that relied on supplier circles collapsed.
Chinese car exports overtook those of South Korea in 2021, Germany in 2022 and Japan, the leader until then, in 2023. This was a sudden development, as in 2016 only 1.95% of passenger cars produced in China were exported, while in 2023 this share exceeded 16.28%. [12] To illustrate the exponential surge in Chinese exports even more vividly, we will make another comparison. It took 55 years between exports of one unit and 1 million.
The figure can be referenced here: https://public.flourish.studio/visualisation/18830427/
In 2023, 4.91 million cars were exported by the East Asian giant, of which 1.2 million were electric, representing an annual growth of 77.6% year-on-year. [13] Interestingly, of the 4.91 million cars, 841,000 – almost all of them with internal combustion engines – were shipped to Russia, as the war in Ukraine has caused Western brands to start pulling out of the country and be replaced by Chinese ones. [14] However, despite the upsurge in exports, Chinese cars are not flooding Europe just yet. In the first quarter of 2024, 1.32 million cars were exported from China, an increase of 23% compared to the same period last year. Of this, local brands were responsible for 470,000 units, although this is 40% more than a year earlier. Less than half of this total came to Europe, around 216,000. This is still a fraction of the number of cars sold in the EU, EFTA countries and the UK, which amounted to roughly 3.4 million. BYD, for example, sold only 47,000 cars outside China in those three months; XPeng, which is often in the news for its lightning-fast charging cars, sold 1,432; Chery, which is about to open a factory in Europe, sold 1,052; and NIO, dubbed the Tesla killer, exported just 388 cars to foreign markets. The question is, of course, the further pace of growth, the potential of which Chinese companies are not willing to exploit, at least for the time being. They are operating at prices that are easily competitive compared with those offered by European manufacturers, but not at dumping prices. As a result, no orders in the hundreds of thousands are coming in from European consumers just yet. [15]
Summary
China’s automotive output got a big boost during the 2008 crisis, and today one in three vehicles is produced there. China’s share of electric vehicles has grown even more since the Covid outbreak, with 6 out of 10 such vehicles in the world now produced in the country. However, the Chinese electromobility revolution was already well underway when Tesla brought production to China. In the meantime, Chinese car manufacturers have become so strong in the meantime that Elon Musk’s company has lost its competitive edge. The car industry has become a sector in which the Chinese are no longer copying and producing a cheaper alternative of inferior quality to Western products, but are now at the forefront of technological development. In addition, China has many more BYDs to come, while the US has only one Tesla, so already in the medium term, BYD will not be the only challenge for Western companies. The switch to electric transport has also been encouraged by the top leadership, as the level of pollution is causing serious social tensions. Since it would have been too slow to implement electromobility from external sources, domestic manufacturing capacity has been supported. This has worked so well that many companies have become globally competitive and are now looking to expand abroad.
Source of opening image: https://restofworld.org/2024/chinese-ev-loophole/
East Asia analyst, International Relations expert. He completed his bachelor and master studies at Pázmány Péter Catholic University and Corvinus University of Budapest, and did a part-time study at Hangzhou Normal University in China. His main areas of analysis are geopolitics of East and Southeast Asia, technology trends, semiconductor industry, Chinese digital economy. His areas of expertise include geopolitics, East Asia, Southeast Asia, China, technology.
