Will China’s EV Leadership Bring Global Automotive Dominance?
This piece was first published in Forbes on February 27, 2019. It is reprinted with their permission.
In the first half of 2018 Chinese automakers built 400,000 electric cars, over half the global total and twice as many EVs as the year before. So quickly has China grown to become the world’s dominant EV manufacturer that it appears destined to become a leading player in the global car market overall, particularly as EVs expand beyond their niche status to the mainstream.
A recent article in MIT Energy Review laid out a solid argument for the emergence of a globally competitive Chinese auto industry, while noting that Chinese have faced a huge challenge in overcoming the technology advantage enjoyed by established Western, Japanese and Korean automakers, particularly in complex systems such as engines.
“For the Chinese government, it has been really disappointing that domestic car manufacturers have not become export giants,” says John Paul MacDuffie, Director of the Program on Vehicle and Mobility Innovation, a global automotive research consortium headquartered at the University of Pennsylvania’s Wharton Business School.
EVs, the theory goes, could change all of that. Electric cars are reliant upon technologies where China bears no handicap. The technologies it already produces in abundance, notably those that underpin iPhones and other complex electronics, are related to the systems that make EVs work. China, which grants certain EV subsidies only to cars with batteries produced domestically, is the world’s largest manufacturer of automotive lithium-ion batteries and home to seven of the 13 biggest battery makers.
To boot, China’s leading carmakers, including BAIC and Geely (Volvo’s owner), aim to go almost wholly electric by the middle of the coming decade. It’s easy to imagine Chinese marques pushing their EV capacity onto the global market, and their automobiles flooding the highways of Europe and North America.
Yet a Chinese automotive juggernaut may not be foreordained.
Any future Chinese EV hegemony assumes that global auto incumbents have been asleep at the wheel. They most decidedly haven’t. One notable example is Volkswagen, which has both stated its intention to essentially abandon efforts to further develop automotive gasoline and diesel engines after 2026, and to turn its focus to electrics. Other German brands are thinking the same. And Volkswagen, as part of its Diesel Gate settlement, will invest $2 billion in the development of EV charging infrastructure in the US.
In the US, GM and Ford are abandoning the market for fuel efficient sedans, and using the money they save (and profits from SUV sales) to develop electrics. Chevy’s Bolt plug-in EV, which has been widely praised, offers proof that the incumbents can get EVs right.
Which brings up a major barrier for the Chinese carmakers looking abroad: the brand equity of the established global competition.
“We already know that Chinese consumers often prefer the foreign brand to the domestic brand,” says MacDuffie. “Many people thought that certainly by now, and maybe even by five years ago, the world would be flooded with inexpensive Chinese exports because that’s how the Japanese and Koreans entered the market in the past. It hasn’t happened.”
Even China’s dominance in electric vehicle batteries comes with a caveat. While domestic Chinese battery makers are aggressively growing capacity, established automotive marques from Japan and Korea aren’t necessarily buying. Toyota sells cars in the Chinese market with Panasonic batteries, while the Koreans use batteries from LG Chem and Samsung SDI, made in China to comply with local content requirements.
The introduction of solid state lithium-ion batteries, with much improved energy density, could within a decade create new opportunity for technology leaders to differentiate themselves at the high end, leaving production of commodity Li-Ion cells to China’s mega manufacturers. And China’s lock on natural reserves of rare earth metals, normally a key ingredient in EV motors, loses relevance when a company like BMW announces that future designs will be rare-earths free.
None of this means that China’s impact on the global car industry won’t be substantial. Quite the opposite, China’s EV presence could upend the hierarchies of the automotive industry. As the focus of value in a given car shifts from gasoline engines to batteries, some of that value will migrate away from the OEMs, who make engines themselves, to third-party battery producers. In July, 2018 the United Auto Workers union testified to the U.S. Commerce Department that by 2021 56% of Li-Ion batteries used in electric cars would be made in China. And a study funded by German automakers says 75,000 Germans could lose their jobs as a result of falling ICE demand.
Whether these predictions will play out depends in part on the spread elsewhere of policies to support EV market growth, and the scale economies that would follow. What looks more certain is that China will be a major player in a future global car market dominated by EVs, regardless of the success of its automotive brands.