China’s world-dominant electric vehicle sector achieved two major milestones last year. First, China has overtaken Japan to become the world’s largest auto exporter, thanks in part to affordable Chinese electric vehicles. Second, electric vehicle giant BYD briefly overtook Tesla as the world’s largest seller of battery electric cars in the final quarter of 2023 (Tesla has since regained the top spot).
But the threat of a wave of low-cost electric vehicles is spooking foreign governments. The European Union launched an anti-subsidy investigation against Chinese electric vehicle companies last year, which could result in higher tariffs for Chinese electric vehicles. The United States, which considers Chinese cars a threat to national security, warns that “excess capacity” in China could overwhelm world markets.
But at the Fortune Innovation Forum in Hong Kong last week, Roger Atkins, founder of Electric Vehicles Outlook, an electric vehicle consultancy, noted that former auto exporters have found a way to manage the protectionist backlash.
“We’ve been here before,” Atkins said. “Japan had a strong export push to the United States and Europe in the 1970s and 1980s. The Europeans and Americans imposed tariffs, and then the way the Japanese got around that was to incorporate manufacturing facilities in those locations.
Atkins then pointed to BYD’s new factory in Hungary as an example of how the Chinese automaker is now expanding its global manufacturing footprint. (BYD is also building factories in Thailand and Brazil and is considering new manufacturing facilities in Indonesia and Mexico.)
Christopher Beddor, deputy director of China research at Gavekal, saw parallels with previous Beijing-led campaigns to encourage the solar and wind energy industries. “China is essentially doubling down on industrial policy,” he said.
“The central leadership will say: we want to target a certain sector. Everyone focuses on this, it’s conducted in a campaign style,” she explained later.
Beijing is now starting to worry about overcapacity in the system, with one official vowing in early January to take “vigorous measures” to tackle new electric vehicle projects that have not been supported by demand.
This push-and-pull is part of China’s industrial agenda, Beddor said. “[Officials] go ahead, [then] at some point there is recognition [they’ve] gone too far. They pull it back,” she said.
Beijing began offering tax and infrastructure incentives in the early 2010s, helping to boost up to 500 electric vehicle companies. That number has since dropped to about 100 companies.
China is now withdrawing its support for the sector, which could lead to further industry consolidation as electric vehicle companies, many of which have yet to turn a profit, exit the market.
Yet Paul Gong, executive director of automotive research at UBS, told the Forum last week that the “fierce competition” in the sector – between startups, legacy automakers and even tech giants – was good for the industry.
Thanks to competition in the market, Chinese automakers have really brought the costs of electric vehicles down to par [internal combustion engines],” he said. “It is this market force that has driven innovation [and] efficiency game.”
BYD and Tesla
Gong, at the Forum last week, also discussed the differences between BYD and Tesla, both vying for the position as the world’s largest EV seller.
After dismantling the Tesla Model 3 five years ago, Gong said the UBS team was “shocked by how far ahead Tesla was in terms of technological leadership.” However, a similar teardown of a BYD car just a few years later revealed that the company’s level of technological sophistication was approaching that of Tesla.
“There is little gap [in] technology, but just different priorities,” he said. Tesla has prioritized top speed and autonomous driving, while BYD has focused on space and 5G connectivity.
Yet Gong noticed a key difference: A BYD car, comparable to the Model 3, cost 15% less than to produce at Tesla’s Gigafactory in Shanghai.
Unlike Tesla, BYD makes its own proprietary battery, the Blade Battery, and therefore does not have to rely on an outside supplier like CATL or LG Energy Solutions. (The battery can account for up to 40% of the cost of an electric vehicle.)
“We were shocked at how quickly BYD recovered,” Gong said.