The Rise of Chinese EVs

By Ichiro Suzuki

One of the developments to be remembered in the 2020 equity markets is the rise of electric vehicle makers. Tesla took off early in the year, to begin with. In response to the explosion of Tesla’s share price, Chinese EV makers soared in summer after months of lackluster performances in the U.S. market. NIO, the largest one among them is valued at $90 billion in equity market capitalization, as of January 8. It is only a little over 10% of Tesla but is almost the size of GM and Ford combined. Whether the market is correctly valuing NIO and others is far from certain. Nonetheless, having already been in the market for ten years, Tesla may have proved all the skeptics wrong. The market appears to have decided that the future belongs to EVs, while assigning little or no value to the business of internal combustion engine cars, which may or may not be right. 

According to the Nikkei, Japan’s business daily, China is already the market leader in both EVs as well as internal combustion engine passenger cars, with 38.4% and 30.3% of the global markets in terms of the numbers of units for the first half of 2020. The U.S. is the runner-up in EVs with a 23.1% share and ranks third in internal combustion engine cars with 11.1%. Japan is the second largest in internal combustion engine cars but has a paltry 2.3% share in EVs. The numbers represent vehicles made on a country’s soil regardless of the car makers’ nationality. Foreign car makers are vastly contributing to the numbers for China.

China already controls a leading position in the EV market, at a time when governments around the world are announcing their plan to phase out internal combustion engine cars in the coming decades. China has declared to reduce carbon intensity by 65% from 2005 levels before 2030. Prime Minister Suga wants Japan to be carbon neutral in 2050. Most recently Governor Yuriko Koike wishes only EVs or hybrid new cars be sold in Tokyo in 2030. As is always the case with a paradigm shift, a radical change inflicts heavy blows to the champions that have ruled the existing regime. So the future looks bright for Chinese EV markers. It will most likely be positive for China, but it still remains to be seen how positive the new paradigm will be. 

Chinese makers will definitely shine in terms of the number of units, on which almost all the industry statistics are based. On the other hand, there can be different picture if the statistics are based on the value of sales. Smartphones offer some perspective on this. Smartphones are an entirely new product category that sprang up in the 21st century, dramatically changing the shape of the electronics industry. Japanese makers that almost ruled the gadgets industry in the late 20th century suffered a massive blow. South Korea, essentially Samsung, made a big leap on smartphones and China has made a spectacular advance despite being late comers. Apple’s iPhones, once the only smartphones in the retail market, have already retreated into No.3 or No.4 spot in terms of units sold. Despite the setback Apple continues to dominate the market in terms of profits generated, holding onto its control of almost two-thirds of the profits in the smartphone industry. Samsung captures much of the remainder of the profits in the market. Three Chinese makers, Huawei, Oppo and Xiaome share what’s left after Apple and Samsung, selling competitively-priced, shiny and very well-functioning phones. 

There is a reasonable chance that EVs follow the pattern of smartphones. Chinese makers are in the segment of subcompact economy cars, with much of its eyes on the developing countries, as well as the developed world market. In contrast, Tesla is solely  focused on the luxury segment with a solid market share in this space, trying to compete EV versions of the Mercedes Benz or the Toyota Lexus. Driving a Tesla already became a trendy thing to do in Silicon Valley several years ago. Due to EVs’ considerably simpler structure than conventional cars, EVs have a relatively low barrier to entry. EV technologies have been in the market already for a long time. EVs are not the invention of China or not even of Elon Musk. Competition in the economy segment could be fierce, allowing only thin margins for vehicle makers. A seemingly aggressive wish of Governor Koike eyes ten years from now, leaving a plenty of time for the existing car makers to work on EVs. They have already been doing it for some time anyway, and only production capability needs to be tested. One argues that no American has followed the path of Elon Musk as an entrepreneur in passenger EVs, as opposed to a variety of Chinese competing in the market. However, this may not be a proof of a lack of entrepreneurship among Americans but it rather proves their understanding of the market structure. 

Then there is a question of whether people in the developed world buy EVs based on price as a dominant factor of their purchasing decision, as they might on refrigerators, washing machines or TV sets. They might be willing to pay somewhat more on cars, for which quality and safety of the product matters more than they do on white goods. At present, NIO vehicles are not known for their quality, though it can improve over the years. While price could be still a significant factor in the subcompact segment of the market, it could be different in the middle market segment and above. To the majority of EV buyers, service would matter as much as it does to internal combustion engine cars even though EVs have a lot simpler structure. Affluent Japanese are not yet inclined to drive Tesla in part due to the company’s lack of service network. Americans and Europeans might not be as obsessive on service as Japanese, but it should still matter more than on a purchase of white goods or smartphones. It takes time and financial resources to build a network. Way back in the 1980s, Japanese automakers’ retail and service networks were singled out as a non-tariff trade barrier as American car makers struggled to expand market share in Japan. Elon Musk has recently expressed his interest in acquiring an existing car maker, quite possibly because of their well established service networks. Chinese EV makers might want to buy an American car maker but such a bid to buy a network would most likely be denied in this age of Sino - American tech cold war by the CFIUS (The Committee for Foreign Investment in the United States). 

Finally, EVs are moving onto something beyond a box on wheels powered by electricity. Software matters a great deal more than a box and wheels as EVs evolve. Tesla already offers over-the-air software update. Conventional car makers’ failure to write effective software would have their value shifted to more capable software writers, such as Google or Apple. Would Chinese EVs’ software, written by themselves or Huawei, be trusted by the public at a time like this? The road to Chinese EVs’ dominance is not as simply as one might think at this juncture.

Mr. Suzuki is a retired banking executive based in Tokyo, Japan.