China's EV Juggernaut Is Threat to the West

 

"China rocked the auto world twice this year. First, its electric vehicles stunned Western rivals at the Shanghai auto show with their quality, features and price. Then came reports that in the first quarter, it dethroned Japan as the world's largest auto exporter.

How is China in contention to lead the world's most lucrative and prestigious consumer goods market? The answer is a unique combination of industrial policy, protectionism and homegrown competitive dynamism.Western policy makers and business leaders are better prepared for the first two than the third.

Start with industrial policy -- government resources to help favored sectors. China has practiced industrial policy for decades. While it's finding increased favor even in the U.S., the concept remains controversial. Governments have a poor record of identifying winning technologies and often end up subsidizing inferior and wasteful capacity, including in China.

But with EVs, Chinese industrial policy had a couple of things going for it. First, governments around the world saw climate change as an enduring threat that would require decadelong interventions to transition away from fossil fuels. China bet correctly that in transportation, the transition would favor electric vehicles.

In 2009, China started handing out generous subsidies to buyers of EVs. Public procurement of taxis and buses was targeted to electric vehicles, rechargers were subsidized, and provincial governments stumped up capital for lithium mining and refining for EV batteries. In 2020 NIO, at the time an aspiring challenger to Tesla, avoided bankruptcy thanks to a government-led bailout.

While industrial policy guaranteed a demand for EVs, protectionism ensured they would be made in China, by Chinese companies. To get subsidies, cars had to be domestically made, with batteries made by Chinese companies, giving national champions like Contemporary Amperex Technology and BYD an advantage over then-market leaders from Japan and South Korea.

State-owned Guangzhou Automobile Group developed the manufacturing know-how necessary to become a player in EVs thanks to joint ventures with Toyota and Honda, said Gregor Sebastian, an analyst at Germany's Mercator Institute for China Studies.

Despite all that government support, sales of EVs remained weak until 2019, when China let Tesla open a wholly owned factory in Shanghai. "It took this catalyst . . . to boost interest and increase the level of competitiveness of the local Chinese makers," said Tu Le, managing director of Sino Auto Insights, a research service.

In 2011, Pony Ma, the founder of Tencent, explained what set Chinese capitalism apart. "In America, when you bring an idea to market you usually have several months before competition pops up, allowing you to capture significant market share," he said, according to Fast Company, a tech magazine. "In China, you can have hundreds of competitors within the first hours of going live. Ideas are not important in China -- execution is."

Thanks to that competition and focus on execution, the EV industry went from a niche industrial policy project to a sprawling ecosystem of predominantly private companies. Much of this happened while China was cut off from the world because of Covid-19 restrictions.

When Western auto executives flew in for April's Shanghai auto show, "they saw a sea of green plates, a sea of Chinese brands," said Le, referring to the green license plates assigned to clean-energy vehicles in China. "They hear the sounds of the door closing, sit inside and look at the quality of the materials, the fabric or the plastic on the console, that's the other holy s -- moment -- they've caught up to us."

Manufacturers of gasoline cars are product-oriented, while EV makers, like tech companies, are user-oriented, Le said. Chinese EVs feature at least two, often three, display screens, one suitable for watching movies from the back seat, multiple lidars (laser-based sensors) for driver assistance, and even a microphone for karaoke. Chinese suppliers like CATL have gone from laggard to leader.

Chinese dominance of EVs isn't preordained. The low barriers open the door to future non-Chinese competitors. Nor does China's success in EVs necessarily translate to other sectors where industrial policy matters less and creativity, privacy and technological capability matter more.

Still, the threat is one for which Western policy makers have no obvious answer. "You can shut off your own market and to a certain extent that will shield production," said Sebastian. "The question really is, what are you going to do for the global south, countries that are still very happily trading with China?"

Western companies are likely to deepen their presence in China -- not to sell cars, but for proximity to the most sophisticated customers and suppliers. Jorg Wuttke, the past president of the European Union Chamber of Commerce in China, calls China a "fitness center." Even as conditions there become steadily more difficult, Western multinationals "have to be there. It keeps you fit."" [1]

The West has adopted a World War I-era approach to dealing with its new rivals, China and Russia. The West decided to start arms race again [2]. Since the use of nuclear weapons results in the annihilation of all, Western arming is now an unnecessary act of theater. A world war is a stupid idea these days. You need to get off your beanbag and get to work.

1. U.S. News -- Capital Account: China's EV Juggernaut Is Threat to the West. Ip, Greg. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 08 June 2023: A.2.

 2. World News: NATO Gears Up for Military Drills. Pancevski, Bojan.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 08 June 2023: A.8.