China’s Electric Vehicle Market: A Success Story with Challenges
The recent wave of deep discounts in China’s electric vehicle (EV) market has sparked an interesting question: Can an industry be too successful? The answer depends on how one defines success.
More than half of the new cars sold in China this year are electric, and the country’s share of the global EV market is approaching 70%. Chinese EV manufacturers lead the world in costs and technology, which seems like a success story. However, the domestic EV industry is beginning to resemble the property sector’s disaster that has weighed down China’s economy for over four years.
Over the weekend, BYD, the world’s largest EV maker, slashed prices by 10-34%. Other major Chinese manufacturers quickly followed suit. Two main reasons drive this latest flare-up in discounting: overproduction and weak consumer demand, exacerbated by the property sector’s implosion.
The number of Chinese EV manufacturers has dwindled from around 500 five years ago to about 60 today. However, with only three – BYD, Li Auto, and Seres – being profitable, the industry still faces significant challenges. Beijing’s incentives for car trade-ins and mandates for institutions to buy EVs have had a modest impact, but consumption remains weak due to Xi Jinping’s resistance to stimulating consumption and the ongoing trade war with the US.
BYD’s attempt to boost demand came after its sales fell short of ambitious targets. The company had hoped its new “God’s Eye” autonomous driving system would drive sales, but it hasn’t materialized. Most major Chinese EV makers are budgeting for significant growth, resulting in substantial oversupply and increasing dealers’ inventories. As of last month, there were about 3.5 million unsold cars, the most in two and a half years.
The EV sector needs further consolidation and more sustainable earnings for remaining players. China’s authorities must address the misallocation of capital and resources, including distortions caused by state incentives and mandates. Despite these challenges, the oversupply has driven continuous innovation, making China’s electric cars leaders in EV technology.
Profitable companies are succeeding in offshore markets, where margins are higher than in China. BYD is now more profitable than Tesla, whose profitability has slumped. However, the over-production and cost advantage of Chinese EVs have generated backlash in other markets. Governments fear that China’s oversupply will be dumped into their markets, wiping out local auto industries.
The US has effectively closed its market to Chinese EVs with 100% tariffs. The EU, which was previously attractive due to its commitment to phasing out internal combustion vehicles, slapped tariffs of up to 35% on Chinese imports. Despite these tariffs, margins in the EU remain higher than in China, and some Chinese EV companies are offsetting domestic losses with European profits.
BYD and its peers are building factories in the EU to circumvent tariffs and capitalize on their cost and technology advantages. However, the EU’s decision to relax emissions standards may slightly blunt Chinese EV makers’ potential in Europe. Rising protectionism and a potential global growth slowdown due to Trump’s trade wars may weaken international demand for EVs, pressuring loss-making manufacturers to exit or consolidate.
A more consolidated EV industry would be a positive development for China and the world, preventing a potential dump of Chinese cars that could undermine other nations’ auto industries.
