The rapid adoption of electric vehicles in China is both important and astonishing. Backed by strong government support, smart industrial policies, and a thriving domestic market, China is leading the global charge in the EV revolution. This year, EVs represented 28% of new vehicle sales, more than triple their 9% share only two years ago. China has more than half the world’s EVs, and it is expected that the country’s demand for gasoline will peak as early as 2024.1 China’s infrastructure has kept pace – there were 1.8 million publicly-available chargers last year, of which 760,000 were fast chargers.2
In contrast, the US is languishing despite aggressive government subsidies and enormous investments in vehicle and battery technologies by domestic and foreign automakers. EVs are 7% of the US market; more concerning, the US had only 28,000 public fast chargers in 2022, using two incompatible charging standards.
China’s example matters not just for the global EV transition, but for any global business. in the 1980s under Deng Xiaoping,3 China identified the automotive industry as strategically important for its overall economic development, for the following reasons:
The industry is an important pathway out of poverty.
It employs large numbers of people, not just directly but also through in suppliers and in supporting and complementary industries, and many of them are unskilled jobs perfect for the vast numbers of migrant workers moving from countryside to cities.
Automotive design and manufacturing create significant technological and other spillover effects.
The government believes that a strong domestic EV industry improves national security.
Beijing’s early efforts with internal combustion engine (ICE) vehicles focused on the transfer of technology and know-how from developed countries, through mandatory joint ventures with foreign multinationals such as Volkswagen and GM – but catching up with the West proved very difficult. Designing, engineering, manufacturing, selling, and servicing high-quality ICE cars is complicated and capital-intensive. It proved difficult to close the gap, particularly since much of the West’s knowledge was experience-based and undocumented. In addition, Western OEMs tried limit technology transfer to their Chinese partners, to safeguard their market position. Finally, there was little incentive for the Chinese partners to aggressively pursue knowledge transfer and independence, since the JVs were already successful and highly profitable.
The global focus on EVs was a game-changer. Instead of complex internal combustion engines and powertrains, EVs use new types of batteries, software and motors. China has been able to apply sustained industrial policy and its massive local resources to level the playing field. Initially, though, government interest was limited and speculative, driven by concerns over air pollution and a dependence on oil imports. EV research was included in China’s Five-Year Plan as far back as 1992, but did not become a “major national project” until 2002.4 By 2007, the government was providing massive support for EVs. Consumer subsidies at the national, provincial, and local levels reached as high as $20,000 per vehicle, with half coming from Beijing. The government supported battery research and encouraged vehicle manufacturers to source locally. State-owned enterprises (SOEs) invested in local and offshore sources of critical materials companies. And as early as 2012, there were heavy investments in charging infrastructure.
As with many Chinese policies, decisions were often made at the provincial or municipal level. Such initiatives included “green license plates” that enabled consumers to avoid vehicle registration fees or gave them the right to drive on any day, rather than only odd or even ones. A recent World Bank study5 assessed different forms of government support and found that central and local subsidies accounted for over half the price of electric vehicles sold from 2015-18 and that investment in charging infrastructure was much more cost-effective than consumer subsidies.
Chinese demand favored EVs, with a vast domestic market of young, tech-savvy buyers with no attachment to ICE vehicles. China also had many deep-pocketed high-tech firms looking for new opportunities (eg, Baidu, Alibaba, Tencent and Huawei). Although the government allowed Tesla to open a wholly-owned factory to provide world-class competition and help establish a vehicle export base, Tesla has only 10% of the domestic EV market. Local privately owned companies (not SOEs) dominate: BYD is the global volume leader in the budget segment, while Nio and Xpeng, Li Auto are rapidly becoming leaders in the premium segment.
The US has lagged behind China despite pioneering products from GM (EV1 and Volt). An important factor is the ICE legacy in manufacturing, infrastructure, and – not least – consumer expectations. Gasoline stations are everywhere, and drivers expect to refuel in five minutes. Creating an equivalent public infrastructure for EVs will be a long and challenging process. Public chargers, while necessary for long trips, are likely to be underused because most EV owners will recharge at home or work, which makes it very hard for any service provider to make a profit.6
The Biden administration has passed legislation to assist the roll-out of EVs, with consumer subsidies, North American content requirements, and subsidies for battery plants and chargers. Nevertheless, even these major steps are less supportive that Chinese policies have been over the last decade. Moreover, the hostility of many Republicans to these policies risks reversals at the federal level, particularly after he next election.
Conclusion
With the EV transition, China is poised to meet its long-term objective of domestic and global leadership in the automotive industry. US firms still hope to reverse that with the help of recent legislation. However, the Detroit Three and American EV startups are in a difficult spot, having to bet the farm on a technology in which they are at a competitive disadvantage. A big crunch is coming, with a likelihood of significant overcapacity in EVs, at least until the infrastructure builds out. Sustained industrial policies, similar to those seen in China, are unlikely in the US, at least on a national scale.
The Detroit Three also face enormous pressure from unions and dealers on EVs, which could significantly increase their costs when they are already losing money on EVs. Unless trade policy and geopolitics make it impossible, Chinese EV companies may very well become the dominant players in global, and even North American, automotive markets.
2 “The Role of Government in the Market for Electric Vehicles: Evidence from China”, Li et.al., World Bank Policy Research Working Paper, 2020.
3”The Circuitous Path to Electrification of China’s Automotive Industry,” Jullens et.al., Booz & Company, 2012.
4”Development Status and Trend of Electric Vehicles in China,” Cheng and Tong, Chinese Journal of Electrical Engineering, 2017.
5“The Role of Government in the Market for Electric Vehicles: Evidence from China”
6“The state of play in electric vehicle charging services – A review of infrastructure provision, players, and policies,” LaMonaca and Ryan, Renewable and Sustainable Energy Reviews, 2022.