Chinese EVs charged up to threaten U.S., European automakers on home turfs

Washington — Chinese electric car companies are growing, and they’re preparing to challenge legacy automakers in the United States and Europe on their home turfs. 

The growth bid by such Chinese EV players as BYD Co. Ltd. is shaping conversations among policymakers in each market as they balance two interests: advancing electric vehicle adoption at a breakneck speed to combat climate change and building an EV supply chain that's independent of China — considered by both blocs to be an economic and geopolitical threat.

The escalating rivalry creates a challenge for officials like Treasury Secretary Janet Yellen, who is making her first visit to Beijing beginning Thursday to build goodwill — and economic stability — between the two countries amid ongoing tensions.

The global auto industry’s transition to electric vehicles has left China in a position of power. Both European and American car companies that only began investing in electric vehicles recently are at a disadvantage to Chinese EV companies that have benefitted from sustained focus and government support since the mid-2000s. 

However, the governments in each market are forging different paths in response to China’s upper hand. In the European Union, EV-related subsidies that apply to foreign companies, climate policies and lower tariff rates have fostered Chinese firms' rapid expansion in the market. 

In the United States, protectionist policies put in place under both former President Donald Trump and President Joe Biden have put up barriers to Chinese companies — though experts say there's still pressure for expansion that could challenge the domestic auto industry.

“Chinese car exports are seeing explosive growth globally. Driving that are two forces: China's domestic car market is rife with overcapacity and margins at home have become razor thin,” said Michael Dunne, CEO of consulting firm ZoZo Go, which specializes in Asian car markets. “Any global market looks better than staying at home, including the United States with its lofty import duties on Chinese cars.”

Differing approaches to China

The United States and Europe are in the middle of a pivot away from the relatively open trade relationships they’ve shared with China since the late 1970s, which helped turn China into an economic powerhouse. 

In both western markets, trade liberalization with China pushed down prices for consumers and expanded opportunities for businesses. But it also contributed to significant job losses in the United States’ manufacturing sector as low-cost Chinese imports increased and companies pushed factories to cheaper markets such as Mexico in order to compete.

National security concerns also have intensified in recent years: United States officials say the Chinese government has used business relationships to steal American intellectual property, and policymakers worry that China’s control over key supply chains will put the U.S. at a strategic disadvantage. 

In Europe, trade with China also increased rapidly over the same period and has been raising similar security concerns. However, compared with the United States, their trade relationship also prompted fewer job losses and greater interdependency with China.

“So when we get to the more recent years, American policy has flipped more drastically than European policy,” said Scott Kennedy, a specialist in Chinese economic policy at the Center for Strategic and International Studies.

Chinese automakers only pay a 10% tariff to send their vehicles to European customers — the same rate that American manufacturers pay — and can benefit from European subsidies for EV purchases.

“The EU has put up more barriers (than in the past), but for them, the environmental emissions issues are really, really of greater salience,” said Susan Shirk, founding chair of the 21st Century China Center at the University of California-San Diego.

The European Union agreed earlier this year to ban the sale of gas-powered cars after 2035, with the exception of synthetic fuels to get car-centric Germany on board. 

John Bozzella, CEO of the main U.S. auto lobbying group the Alliance for Automotive Innovation, wrote last month that Chinese EV companies used the coming ban to jump into the market. He said they grabbed 5% of Europe’s EV market share in the first nine months of 2022 and are now projected to reach 20% by 2025 — numbers that automotive consulting firm AlixPartners LLP confirmed are similar to their analyses. 

Bozzella argued Europe’s path is a cautionary tale for U.S. regulators considering aggressive emissions standards that will push the domestic industry toward electric vehicles: Move too fast, and China gets its chance to expand in the United States. 

But Shirk and Kennedy said U.S. policies would significantly slow down Chinese competitors seeking to enter the market. Trump came into office in 2017 on a wave of discontent emanating from hollowed-out manufacturing towns, particularly in the industrial Midwest. He restructured U.S. policy to be more protectionist, including implementing a 27.5% tariff on imports of Chinese-made cars that remains in place. 

Biden doubled down on that stance, pushing through the Inflation Reduction Act, which created new electric vehicle tax credits that incentivize domestic production but bars Chinese companies from benefitting.

It's emblematic of the Biden administration's goals of accelerating EV adoption, pushing companies to build them (and their components) in the United States, and separating supply chains from China — a strategy experts say is rife with inherent conflict.

“The core question I think Washington and the United States need to grapple with is: Is it important that American transportation is electrified?” asked Kennedy of CSIS.

“If it is, then the industry needs to recognize it as an economic opportunity; they need to make cars affordable for American consumers. And if they’re going to do those things, then at least in the short-term, they will need to expand cooperation with China’s battery makers and raw materials providers.”

A 'backwater market' no more

Chinese companies' domination of global supply chains isn't their only advantage. They are also well prepared to compete in foreign markets because they have been tested by intense competition on their home turf. 

As early as 2009, the Chinese government began investing heavily in electric vehicles as it aimed to carve out a niche in a market dominated by American, German and Japanese automakers. It poured more than $29 billion in subsidies into EV production between 2009 and 2022.

Now, China is the only market in the world that is already at a mass-adoption stage for EVs. A quarter of all new vehicle sales in China last year were electric, up from just 5% in 2019, driven by Chinese brands that are slated to outsell foreign brands in their home market for the first time this year. Chinese consumers accounted for 60% of global EV sales in 2022, according to the International Energy Agency.

“People think of it almost as a backwater market, but it’s really not," said Mark Wakefield, co-lead of the Global Automotive Practice at AlixPartners.

China is home to more automakers that are further along in electrification than any other market, he said, so American and European car companies should look to them as a "lab" of what's coming next "in terms of how to win as an automaker."

“It’s an all-out battle in China for market share, so this is a real trial-by-fire area for a lot of them,” Wakefield said. “They just can’t have the limitations of ways of working that aren’t correlated to” serving digital consumers and offering fully equipped electric vehicles. 

Chinese automakers have had to focus on style, consumer electronics, affordability and production speed over demanding perfection in ride and handling, Wakefield said, and it's worked. American and European carmakers would be smart to adjust their business models to compete, rather than banking on constantly fluctuating public policy to protect them from Chinese competitors.

"If there is a recipe for success, even if it's kind of a painful transition," he asked, "why not do that?"

Dunne of ZoZo Go agreed U.S. automakers have no choice but to "confront the reality" that they are the underdog in the EV space and move quickly to compete: “Forget about some Goldilocks formula as an elegant solution. That’s just wishful thinking.”

rbeggin@detroitnews.com

Twitter: @rbeggin