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The Rise of Chinese EVs

Ichiro Suzuki

It doesn’t seem likely that Chinese EVs are going to dominate the car market in the U.S., Europe or the rest of the developed world in the foreseeable future. With the age of hyper-globalization behind us, it is simply not politically tolerable to let China flood the North American and European markets with their EVs, however good and attractively priced they might be. China seems to have done many things right to make the country the leader in the next generation of mobility. After having failed to compete with their internal combustion engine cars, the Chinese car industry simply has leap-frogged as a non-incumbent. In developing the EV industry, the Chinese Communist Party displayed what a command economy can achieve when they get it right at times. It has been amply revealed since the years of the Soviet Union that this way of economic management does not work overall. However smart and far-sighted policy makers might be, a small group in power is never capable of foreseeing everything that lies ahead. It has been proven that the market forces deal with this issue far better. This time around, however, a small group of elites didn’t have to predict what might happen to the car industry. The advent of EVs has been widely talked about. The CCP single-mindedly believed in what’s been said and is making that future happen by flexing muscles. In the meantime, market-based economies in the West are going through a half-hearted transition period. As it is turning out, the car industry in the 2030s and beyond may not be dominated by EVs but coexisted with EVs, hybrids and potentially fuel cell- powered cars (FCVs). Nonetheless, EVs are still going to play a very significant role in the future car market. China does it better than anyone when it comes to making EVs. 

Massive subsidies that the CCP poured into the car industry are now paying off. Chinese people’s interest in EVs are not falling while enthusiasm is fading in the developed world. After early adopters bought Teslas with a fanfare, demand for EVs has slowed in the U.S. for all the reasons that have been long talked about. China’s strong push for EVs, however, are solving some of the problems, as charge stations are spreading in response to stronger EV demand. A fierce top-down drive to create the market appears to be working whereas the less committed approach in the developed world hasn’t produced results. EVs are taking off in the world’s largest car market. Production of greater number of EVs are bringing costs down further. China appears to have entered a virtuous circle of EV production.

Now Chinese car makers want to export EVs with their distinct cost advantages. Their ambitions have put liberal politicians in the U.S. and Europe in an awkward position. They have been promoting EVs out of environmental concerns. China today is capable of offering EVs that are more affordable to consumers than incumbent car makers. Consumers might like them but Chinese EVs take away many jobs. From the beginning EVs have been threat to existing jobs because of their simpler production process and fewer components than gas-powered cars require. The UAW is not welcoming the rise of EVs for this reason. Job losses to Chinese EVs are worse, unacceptable not only to the union but also to liberal politicians.

If unopposed, Chima has no hesitation of flooding the global car markets with their EVs, which have been the cornerstone of the CCP’s economic strategy. The U.S. and the EU saw this before. Aggressive offshoring of manufacturing by their multi-national corporations led to large scale job losses while lowering inflation, perhaps to the brink of mild deflation. Politicians would not like to repeat the same mistake. The second largest economy is supposed not to be engaged in aggressive mercantilism, but President Xi Jinping doesn’t seem to care. In order to lift the ailing Chinese economy, he should be making every effort to promote domestic private sector consumption that is only 37% of the economy as opposed to 70% in the U.S. While President Xi believes that the West is corrupt as shown by their profligate consumer behavior, he wants to thrive by selling goods to the decadent West. 

Through the middle of the 1990s, Japan went through decades long trade frictions with the U.S. on cars. Such frictions drove Japanese car makers to a strategic shift of producing cars on the soils of where they are sold. Suppliers followed car makers en masse, creating a number of manufacturing jobs. Today, the Japanese yen is trading at the lowest level since the currency went free-float in 1973 in terms of real effective exchange rate (REER). Car makers, however, don’t relocate their factories back to Japan. They have chosen the path of becoming multi-national corporations. At present Toyota is building its new factories in North Carolina, in addition to the one in Kentucky. In his recent visit to the U.S. Prime Minister Fumio Kishida proudly said that Japanese car makers are creating American jobs. Honda has announced a plan to expand their production facilities in Ontario. Compared to these developments, China’s fierce desire to drive exports is a grossly insensitive display of mercantilism. BYD showed interest in making cars in Mexico to take advantage of lower labor costs but such a plan has no appeal to politicians in the U.S.

 Foreign exchange rate is another tricky factor that complicates this issue. In responses to rising bilateral trade surpluses, Japan was forced to revalue the yen against the dollar in a rather spectacular fashion of the 1985 Plaza Accord, and the yen and European currencies soared in the latter half of the 1980s. For China, in contrast, the renminbi is likely to remain under downward pressure as the Chinese economy is going through a lengthy and difficult period of post-bubble adjustments, and vast amount of capital is trying to get out of China. EVs represent one of the few bright spots in the Chinese economy and the RMB has a chance of staying at favorable levels for exporters even if China’s current account remains relatively healthy. This could cause an additional wrath among politicians in the West, especially the U.S.

China  is moving up the EV ladder while facing difficulties to export their cars. This situation is creating a unique ‘decoupling’ of superior products being trapped in China, leaving consumers in the West with less good EVs. This sounds odd and is unlikely to last for a very long period of time. One day, these Chinese EVs might find their way into the western markets after significant frictions or a some kind of macro economic dislocation. On the other hand, top notch EVs might be over-engineered, offering features that are beyond capabilities of average consumers/ drivers at least at present. Technologies might have got ahead the time, ahead of what is wanted and tolerated by consumers and the society. For instance, no one knows yet when driverless cars would roam the roads and highways though ten years ago they were expected to be doing so in the mid-2020s. 

About the author: Mr. Suzuki is a retired investment banker based in Tokyo, Japan.


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