Western firms are quaking as China’s electric-car industry……

In 2023, Chinese industry groups claim, China overtook Japan to become the world’s biggest exporter of cars, in part because of surging sales of EVs.In the final quarter of 2023, BYD, a Chinese firm, surpassed Tesla as the world’s biggest manufacturer of purely battery-powered vehicles, selling 526,000 of them to the American firm’s 484,000. As the shift away from the internal-combustion engine (ice) gathers pace, established carmakers are beginning to worry that Chinese upstarts might run them off the road. 

The anxiety is well-founded.

Western firms’ expertise making ices counts for little in the electrical age.What is more, the Chinese government has hugely subsidised the ev industry.And China’s vast domestic market allows local firms to benefit from economies of scale.

A tech firm that once specialised in batteries, it began making cars in 2003—at first with limited success.Although it managed to become the world’s biggest manufacturer of electric buses, as recently as 2017 it sold only 420,000, mostly ICE, cars.Sales were falling.Last year, however, it sold 3m pure electric or plug-in hybrid vehicles—at a profit.It exports to over 70 countries and on December 22nd announced that it would build an ev factory in Hungary, to serve the European market from within.

Firms like byd are frightening to foreign carmakers because China has the world’s most developed market for EVs, and local brands dominate it.That is not because foreign carmakers have no presence in the country—far from it.Until recently, firms like Volkswagen and BMW were thriving in China.Since the 1990s they have made and sold lots of cars there through joint ventures with local firms.As these joint ventures grew, China became the world’s biggest producer of cars in 2009. It also became the world’s biggest market and the biggest source of profits for many Western brands.Volkswagen Group, for instance, sold 3.2m cars in China in 2023, around a third of its global sales.In 2017 the government allowed Tesla to make cars in China without a local partner.It opened a factory in Shanghai in 2019. This was part of a concerted effort to promote the adoption of EVs, which have quickly become the fastest-growing element of China’s car industry (see chart 1).

In November some 42% of car sales in China were either pure battery or hybrids.That is well ahead of both the EU, at 25% or so, and America, at just 10%.What is more, although the pace is slowing, Chinese EV sales are still growing fast: by 28% in the third quarter of 2023 compared with a year earlier, according to the China Association of Automobile Manufacturers.Most forecasters reckon that by 2030 some 80-90% of cars sold in China will be EVs.The Chinese market as a whole remains roughly evenly split between foreign and domestic brands (see chart 2).

But for EVs, the ratio is more like 80:20, according to UBS, a Swiss bank.As a result, Volkswagen’s market share in China has slumped, from nearly 20% in 2020 to 14% in 2023. Its share of EV sales is a puny 3%.Chinese firms’ advantage stems partly from subsidies for local firms.Government handouts for electric and hybrid vehicles added up to $57bn in 2016-22, says AlixPartners, a consultancy.Rhodium Group, a research firm, estimates that between 2015 and 2020 BYD alone received $4.3bn via cheap loans and equity.Perhaps just as important was $2.5bn in similar support for CATL, which in 2017 became the world’s biggest manufacturer of the lithium-ion batteries used in most EVs.

All told, China now makes 70% of the world’s lithium-ion batteries.

Purchase subsidies, which will be worth more than $4,000 a car this year, have also helped the EV industry.Protectionism has played a part, too: only cars with domestically made batteries are eligible for the purchase subsidies, a rule which in effect shut out Japanese and South Korean competition.All this has helped build a vast local supply chain, which now benefits from economies of scale.VW reckons it cuts manufacturing costs by at least 30% by sourcing locally.Chinese-made “infotainment” systems for its cars, for example, are 34% cheaper than older versions bought abroad, even though they have 70% more computing power, says Ludger Lührmann, chief technology officer at VW's new innovation centre in the city of Hefei.Low costs mean low prices, which are also kept in check through furious competition.There are around 150 carmakers in China, including foreign brands, big state-owned companies and EV startups, all vying with one another for market share.Tesla recently initiated a price war, in an effort to sustain sales.But Chinese EVs are not just cheap, they also enjoy superior technology in some respects.Analysts believe that one of the main ways that brands of EVs will differentiate themselves is by their software and styling.Here China has an edge, because its drivers are so much younger than Western buyers.They value sophisticated infotainment systems with first-rate sound and images.Research from Langston, a consultancy, suggests that they rank BYD and NIO higher on these measures than Western carmakers, even though they do not consider Chinese EVs safer, more reliable or more comfortable.As Pedro Pacheco of Gartner, another consultancy, points out, Chinese firms are also managed differently.They are less risk averse and move faster than foreign firms, quickly updating tech and introducing new models to keep customers interested.Treating new cars like consumer-tech products, such as smartphones, extends to ditching duds quickly.Li Auto now ceases production of new models in a matter of months if they do not sell well.EV startups such as Li Auto, NIO and Xpeng were all founded by tech billionaires who, like Tesla’s Elon Musk, regard their firms as tech companies that happen to make cars.

Whereas Apple has mulled such a venture long and indecisively, Xiaomi, a big Chinese smartphone-maker, unveiled its first vehicle in December (a fancy and expensive saloon).It plans to make cheaper models in future with the immodest goal of becoming one of the world’s top five carmakers in 15-20 years.Huawei, a telecoms firm, and Baidu, a search engine, have also teamed up with car firms to make vehicles.Foreign carmakers, in contrast, are struggling to transform into Tesla-like software firms.They are used to the slower cycles of the ICE age.But firms that launch a new model every six or seven years cannot keep pace with buccaneering Chinese rivals, which move almost twice as fast.Foreign firms’ habit of “localising” global models with small adaptations for specific markets also results in cars that are far behind Chinese customers’ expectations.