How China Won the EV Race
For years Western media has told us that China is a copycat nation. We’ve been trained to believe the Chinese don’t know how to innovate and can only compete by stealing IP from Western companies. But something remarkable has happened in recent months that proves this theory false. Chinese companies are quickly becoming the most innovative in the world and Western companies are now investing in China to gain access to superior technology.
The best example of this can be found in the EV industry. 20 years ago, China knew it could never compete with Western automakers by building traditional gas engines. But, EVs were brand new, no country had a dominant position, so China went all in and today’s controls the entire future of the industry. Don’t believe me? Let’s examine two recent transactions that sent shockwaves through the auto industry.
The first is the world's biggest automaker, Volkswagen who recently invested 700 million dollars for a 5% stake in the Chinese EV maker Xpeng. With this investment, VW will gain access to Xpeng's cutting edge assisted driving technology, and Xpeng will help the German carmaker develop two new EVs in China which will be branded as VWs.
The second is auto conglomerate Stellantis, the maker of 14 western car brands, including Chrysler, Dodge, Jeep, and Maserati, who paid an even bigger sum of $1.6 billion dollars for a 21% stake in Chinese EV startup Zhejiang Leapmotor, along with 2 seats on their board. The deal gives Stellantis access to Leapmotor's advanced technology, including its own semi-autonomous driving system, and full suite of in-house R&D and manufacturing capabilities.
Now if you’re still skeptical about these transactions or think China's EV industry is simply overhyped, just listen to what the industry's top executives are saying. Bill Russo, CEO of advisory firm Automobility and former senior executive at Daimler Chrysler, bluntly stated these transactions are "a sign of how far behind global automakers have fallen in the EV race".
Stellantis CEO Carlos Tavares said of their deal with Leapmotor:
"The Chinese offensive is visible everywhere. With this deal we can benefit from it rather than being the victims of it."
This candid assessment was echoed by Ford CEO Jim Farley, who earlier this year said:
"We see the Chinese as the main competitor, not GM or Toyota. The Chinese are going to be the powerhouse."
Even industry veteran Andy Palmer, sometimes described as the grandfather of the electric car, recently said:
"I've been warning about China for 15 years. I warned the Japanese, UK, and US governments that there was a real risk that China might get this right. And ultimately, that has proven to be the case...China has an international strategy that seeks dominance in overseas markets with a product - affordable EVs - that western manufacturers aren't able to make."
Across the world, Chinese EV brands now represent around half of all EVs sold. On top of that, global EV sales continue to surge year after year with over 50% of these global sales coming from within China. But Chinese EV makers are now aggressively expanding overseas and set to challenge the west's biggest automakers on their own turf.
This international offensive is being spearheaded by China's biggest, most successful EV company, BYD. BYD's recent figures will absolutely shock you. In 2022, BYD sold 1.86 million vehicles, more than the previous 4 years combined.
This means in just a few months, BYD was selling an average of 9,259 cars every single day! These numbers are simply incomprehensible to anyone in the West, but this is China speed and Chinese innovation.
One of the main reasons BYD is breaking such records is a strong workforce of over 600,000 employees, including a team of a team of 90,000 engineers, which is 5 times greater than Tesla’s.
The rise of BYD is incredible but what’s even more fascinating is looking at how EV king Elon Musk has been forced to change his opinion on BYD over the years. In a 2011 Bloomberg interview, Elon mocked the carmaker and laughed at the notion that they could be a competitor for Tesla, saying: "Have you seen their car? I think their focus should be making sure they don't die in China".
Now he's not laughing anymore and recently admitted "That was many years ago. Their cars are highly competitive these days." Let’s also listen to the late Charlie Munger, Warren Buffet's right-hand man and who sadly just passed away last month. He led the decision for Buffet's holding company Berkshire Hathaway to invest in BYD. Earlier this year he said:
"I have never helped do anything at Berkshire that was as good as BYD. BYD is so much ahead of Tesla in China. It's almost ridiculous."
And once again, here's Ford CEO Jim Farley:
"There is one huge company that is so impressive, BYD. They're in a totally different world than Tesla. They're totally vertically integrated, completely, all the way to batteries. No one is doing that on the globe."
If you're still skeptical about China's dominance, don't forget that China controls the supply chains and critical minerals need to produce lithium batteries. This is in fact China’s main competitive advantage; the entire EV supply chain is located domestically within the country.
UBS recently tore down a BYD vehicle and found that 75% of the components were manufactured in-house, which is double the global average. It’s these robust local supply chains that makes China the cheapest place in the world to manufacture an EV vehicle.
But China’s EV dominance is quickly carrying over to the rest of the global car industry. Here is a fascinating article from Wired titled “How China’s EV Boom Caught Western Car Companies Asleep at the Wheel”. The sub headline is the perfect summary of the shift we are seeing in the industry. Auto execs in the US, Europe, and Japan never thought Chinese EVs were a threat. Now they’re coming to wipe the floor with their Western counterparts.
From January to August of 2023, China dethroned Japan to become the world's biggest automobile exporter, hitting 3.22 million cumulative vehicle exports. In fact, since 2020, China's total auto exports have steadily increased by a staggering 75%. What's more, UBS analysts recently projected Chinese carmakers will almost double their share of the auto market to 33% by the end of the decade.
Meanwhile western carmakers will lose a fifth of their global market share to Chinese rivals. But here's what's truly astounding: These predictions assume that Chinese carmakers won't ne operating or have any success in the US, Japan, South Korea, and India. The reason is that the US will likely block China under the guise of national security, just like it's already done with Huawei and with its current attacks against TikTok.
China is in a similar position to that of Japan in the 1970s. 50 years ago Japanese automakers Toyota and Honda swooped into the American market with affordable and fuel-efficient vehicles and knocked US carmakers on their heels. And history may be repeating itself: During the 1970s and 80s, Japan was seen as the greatest threat to the future of America, and there was a plethora of anti-Japanese sentiment in America, very similar to the anti-Chinese sentiment we are seeing today.
But despite the anti-China sentiment in America, US consumers long for affordable products and there is a chance Chinese EVs could be entering the US market though the Southern border. Last month Bloomberg reported that Chinese EV makers have cracked the North American market by going to Mexico. And once again the stats are truly remarkable:
"Chinese cars accounted for almost 20% of all car sales in Mexico through October, and they're selling faster than those manufactured in any other country, including Mexico. Chinese car sales rose 51% in the first 10 months of this year. Every other foreign country is selling less than half that to Mexican consumers."
But I can’t write an newsletter about EVs and not address the company whom many consider to be the King of the industry and that of course is Tesla. While Tesla is certainly an amazing company and a dominate player in the EV space, many people don't realize the development of China's EV industry has been deeply intertwined with Tesla's rise. And here is where China's genius strategy comes out in full force. When China’s government decided to become the world leader in EVs, it grew the industry by handing out subsidies to companies in the EV space.
But China’s government was extremely smart, they decided to not limit the subsidies to domestic companies but also extend the same benefits to foreign companies willing to come to China. Elon Musk jumped on the opportunity and with local government support, Tesla was able to build its flagship Shanghai Gigafactory in less than 12 months.
Last year the Gigafactory produced 711,000 cars accounting for 52% of Tesla’s worldwide output. So, while American brand Tesla continues to be an industry leader, one should never forget: None of its accomplishments would've been possible without its close relationship with China, and since Tesla’s main operations are in China, local Chinese EV makers have become better and more innovative because of it.
Everyone, we're currently experiencing a massive economic and geopolitical shift of power in our world, and China's complete dominance of the EV industry exemplifies this change. Western companies are paying premiums to Chinese firms to gain access to their superior technology.
Until recently, this notion would've been utterly inconceivable, but it is in fact the reality of the situation. Some Western countries remain skeptical of China and are erecting barriers to stop Chinese EV expansion abroad, but the future of the EV industry remains tightly secured in China’s hand.
Andy Xie, a famous economist from Shanghai who served as the former chief economist for Morgan Stanley, says it best:
"China's lead in EVs is unable to be attacked, questioned, or defeated. With cheaper supply chains, better tech, and cheaper costs, the Global North simply can't compete with China."
The reality is that China has won the EV race and controls the entire future of the industry, the real questions will is: How long before we see Chinese EVs dominate the US market?
The way forward is that China must rely on itself for innovation. China must be self-sufficient in technology and innovation.
Whoa, Mr. Jannsen...
While I'm hugely impressed with China's technology; ( Nobody ' wins a race to Nowhere'.)
I believe that EV's are a Dead End, and essentially a Fraud.
EV's are just one more step in the progression to a 'car-less' (sedentary) population. (15 min cities etc.)
The Electric Vehicle makes no sense at all unless humanity embraces Nuclear Energy! Burning Hydrocarbons to fuel EV's is ridiculous, and please don't suggest 'wind and solar'!