Introduction
Forget low-quality cars. China is now a major electric vehicle (EV) producer, threatening German dominance. But how did they achieve this in just a few years? Dive in to discover China’s surprising strategy.
China’s Rising Dominance
Five years ago, Chinese companies were known for their low-quality cars. Fast forward to today, and China has surpassed Germany’s formidable car industry, becoming the world’s second-largest car exporter last year. Journalists quickly connected this to China’s electric vehicle (EV) miracle. Headlines in the Financial Times claimed that China, already the world’s biggest market for electric vehicles, is set to knock Japan from the top spot for global car export volume this year after overtaking Germany in 2022. But how exactly did this happen?
Is China Really Beating Germany?
To answer whether China is truly beating the German car industry due to the EV revolution, we need to examine two big problems with this narrative.
Revenue vs. Number of Cars Sold
The first issue is that headlines about China becoming the world’s second-biggest car exporter focus on the number of cars sold. However, what car companies care about is revenue, which is the number of cars sold times the price of these cars. While China sells more cars, Germany charges higher prices. Therefore, in terms of export revenue, Germany still holds the top spot, with China only ranking twelfth.
Electric Vehicle Export Numbers
The second issue is connecting China’s export numbers to its dominance in the EV sector. Almost half of China’s EV exports are Teslas produced in China. Only two percent of exports are from innovative Chinese brands like BYD and Nio. The rest are from European brands like Polestar, MG, and Volvo, which are either owned or co-owned by the Chinese and therefore produce cars in China. Electric cars accounted for about sixteen percent of Chinese export figures. Most Chinese car exports were from established brands like SAIC and Cherry, exporting cheap internal combustion engine cars to emerging markets, a segment abandoned by German manufacturers due to low profitability.
China’s Strategy in the Luxury Car Market
While China exports more cars, it doesn’t have much to do with innovative electric cars. Instead, they export low-cost fuel cars that German manufacturers aren’t interested in. However, China has beaten Germany in the luxury car market, where it really counts.
Chinese Cars Became Kings of EVs
A few years ago, the Chinese car market was dominated by German brands such as Volkswagen, BMW, and Mercedes. In 2020, foreign brands controlled roughly sixty-four percent of the Chinese car market, with Volkswagen holding a third of that share. However, the Chinese car market electrified at an unseen pace, going from five percent of the market in 2018 to twenty-six percent today. In the EV market, German carmakers combined only have a two-point-seven percent market share.
BYD’s Rise
As a result, BYD recently surpassed Volkswagen as China’s best-selling car brand. Looking at the top ten EVs sold in China in 2022, Tesla is the only foreign carmaker that is competitive in China. This shift is already reflected in market valuations. Five years ago, German car companies and Japan’s Toyota dominated the market. Today, Chinese car manufacturer BYD is valued higher than many prominent German companies.
The Challenges of Competing with Germany
To understand how China beat the German car industry, we need to understand why it was considered almost impossible. In ideal competitive markets, a country skilled at car production, like China, would inevitably break into the car market. However, two major market imperfections shield the global car market from newcomers.
Learning by Doing
The first imperfection is learning by doing. German carmakers had perfected the internal combustion engine through years of experience, making it hard for new companies to catch up.
Economies of Scale
The second imperfection is economies of scale. High fixed costs, such as research and development, mean that established companies can spread these costs over a larger number of cars, making it difficult for newcomers to compete on price.
China’s Industrial Policy
While Tesla CEO Elon Musk overcame these obstacles through clever marketing and attracting massive investments, the Chinese government took a proactive approach. China turned to industrial policy, defined as political action meant to shift the industrial structures of an economy, to supercharge its entry into the imperfect global car market.
Initial Steps
China began by opening its car industry to German car companies, requiring them to produce cars locally and in collaboration with local Chinese entrepreneurs. The country also forced these companies to transfer some technology to China. However, Chinese companies couldn’t achieve sufficient economies of scale to compete globally in the internal combustion engine market.
The Made in China 2025 Initiative
This is where the Made in China 2025 policy initiative comes in. The initiative focused on sectors where China could leapfrog the competition. Battery-powered electric vehicles were identified as a once-in-a-lifetime opportunity for Chinese companies to leapfrog the competition and start learning by doing and building scale to get ahead.
Encouraging Local Demand and Supply
China encouraged local demand and supply by providing massive loans, investments, and subsidies to local EV manufacturing companies. It also subsidized buyers, developed local charging infrastructure, and forced local governments to buy electric vehicles. This allowed Chinese producers to gain experience and scale quickly.
Germany’s Response
Germany also tried to encourage the transition to electric vehicles but did so on a far smaller scale. Worse, the German government focused much of its industrial policy on protecting its fuel carmakers from change. This included helping them pretend diesel cars were efficient and blocking the EU’s efforts to ban CO2-emitting cars.
Conclusion
Although China may not have outperformed Germany’s car industry in revenue, it has beaten German carmakers in the electric vehicle segment in China. This allowed Chinese carmakers to leapfrog their German competition, gaining an advantage in learning by doing and economies of scale in the new EV era. This advantage now enables Chinese carmakers to pose a threat to German carmakers in Europe. However, the Germans are now firmly on board the EV train, and other barriers to entry in the European car market, like brand power and distribution networks, still exist.
While the Made in China 2025 initiative was successful for cars, it didn’t achieve similar success in sectors like AI, aerospace, and microchips. Nevertheless, countries like the USA and Germany are increasingly using industrial policy to stay competitive.
References:
https://en.m.wikipedia.org/wiki/Made_in_China_2025#
https://www.dw.com/en/electric-cars-chinese-carmakers-outpace-german-giants/a-66444153
Link to my other case study:
https://geocrit.com/Japan’s-lost-decade