How did China come to dominate the world of electric cars?
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Before most people could realize the extent of what was happening, China became a world leader in making and buying EVs. And the momentum hasn’t slowed: In just the past two years, the number of EVs sold annually in the country grew from 1.3 million to a whopping 6.8 million, making 2022 the eighth consecutive year in which China was the world’s largest market for EVs. For comparison, the US only sold about 800,000 EVs in 2022.
The industry is growing at a speed that has surprised even the most experienced observers: “The forecasts are always too low,” says Tu Le, managing director of Sino Auto Insights, a business consulting firm that specializes in transportation. This dominance in the EV sector has not only given China’s auto industry sustained growth during the pandemic, but it has also boosted China in its quest to become one of the world’s climate policy leaders.
How exactly did China manage to pull this off? Several experts tell MIT Technology Review that the government has long played an important role—propping up both the supply of and the demand for EVs. As a result of generous government subsidies, tax breaks, procurement contracts, and other policy incentives, a slew of homegrown EV brands have emerged and continued to optimize new technologies so they can meet the real-life needs of Chinese consumers. This in turn has cultivated a large group of young car buyers who apparently love to buy EVs as their next or first-ever vehicle.
But the story of how the sector got here is about more than just Chinese state policy; it also includes Tesla, Chinese battery tech researchers, and consumers across the rest of Asia.
When did China start investing in EVs and why?
In the early 2000s, before it fully ventured into the field of EVs, China’s traditional internal combustion engine car industry was in an awkward position: It was developed enough to have become an auto-manufacturing powerhouse, but it wasn’t developed enough to have domestic brands that could one day rival the foreign makers that dominate this market.
“They realized … that they would never overtake the US, German, and Japanese legacy automakers on internal combustion engine innovation,” says Tu. And research on hybrid vehicles, whose batteries in the early years only served a secondary role compared to the gas engine, was already being led by countries like Japan, meaning China also couldn’t really compete there.
This pushed the Chinese government to break away from the established technology and invest in completely new territory instead: cars that are entirely powered by batteries.
The risks were extremely high; at this point, EVs were only niche experiments made by brands like General Motors or Toyota, which would usually be discontinued after just a few years. But the potential reward—giving China an edge in what could be a significant slice of the auto industry—was worth it.
On the flip side, countries that excelled in gas or hybrid car production were less incentivized to pursue new types of vehicles. With hybrids, for instance, “[Japan] was already standing at the peak, so it failed to see why it needed to electrify [the auto industry]: I can already produce cars that are 40% more energy efficient than yours. It will take a long time for you to even catch up with me,” says He Hui, senior policy analyst and China regional co-lead at the International Council on Clean Transportation (ICCT), a nonprofit thinktank.
Plus, for China, EVs also had the potential to solve several other major problems, like curbing its severe air pollution, reducing its reliance on imported oil, and helping to rebuild the economy after the 2008 financial crisis. It seemed like a win-win for Beijing.
China already had some structural advantages in place. While building EVs needs a different technology, it still requires the cooperation of the auto supply chain, and China had a relatively good one. The manufacturing capabilities and cheap commodities that sustained its gas car factories could also be shifted to support a nascent EV industry.
So the Chinese government took steps to invest in related technologies as early as 2001; that year, EV technology was introduced as a priority science research project in China’s Five-Year-Plan, the country’s highest-level economic blueprint.
Then, in 2007, the industry got a significant boost when Wan Gang, an auto engineer who worked for Audi in Germany for a decade, became China’s minister of science and technology. Wan had been a big fan of EVs and tested Tesla’s first EV model Roadstar in 2008, the year it was released. People now credit Wan for making the national decision to go all-in on electric vehicles. Since then, EV development has been consistently prioritized in China’s national economic planning.
So what exactly did the government do?
It’s ingrained in the nature of the country’s economic system: the Chinese government is very good at focusing resources on the industries it wants to grow. It has been doing the same for semiconductors recently.
Starting in 2009, the country began handing out financial subsidies to EV companies for producing buses, taxis, or cars for individual consumers. That year, less than 500 EVs were sold in China. But more money meant companies could keep spending to improve their models. It also meant consumers could spend less to get an EV of their own.
From 2009 to 2022, the government poured over 200 billion RMB ($29 billion) into relevant subsidies and tax breaks. While the subsidy policy officially ended at the end of last year and was replaced by a more market-oriented system called “dual credits,” it already had its intended effect: the more than 6 million EVs sold in China in 2022 accounted for over half of global EV sales.
The government also helped domestic EV companies stay afloat in their early years by handing out procurement contracts. Around 2010, before the consumer market accepted EVs, the first EVs in China were part of its vast public transportation system.
“China has millions of public transits, buses, taxis, etc. They provided reliable contracts for lots of vehicles, so that kind of provided a revenue stream,” says Ilaria Mazzocco, a senior fellow with the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies. “In addition to the financial element, it also provided a lot of [road test] data for these companies.”
But subsidies and tax breaks are still not the whole picture; there were yet other state policies that encouraged individuals to purchase EVs. In populous cities like Beijing, car license plates have been rationed for more than a decade, and it can still take years or cost thousands of dollars to get one for a gas car. But the process was basically waived for people who decided to purchase an EV.
Finally, local governments have also sometimes worked closely with EV companies to customize policies that can help the latter grow. For example, BYD, the Chinese company currently challenging Tesla’s dominance in EVs, rose up by keeping a close relationship with the southern city of Shenzhen and by making it the first city in the world to completely electrify its public bus fleet.
Ok, so China is the global EV leader. But how does Tesla, the most popular individual producer of EVs, fit in?
The development of China’s EV industry has actually been deeply intertwined with Tesla’s rise as the biggest EV company.
When the Chinese government handed out subsidies, it didn’t limit them to domestic companies. “In my opinion, this was very smart,” says Alicia García-Herrero, chief economist for Asia Pacific at Natixis, an investment management firm. “Rather than pissing off the foreigners by not offering the subsidies that everybody else [gets], if you want to create the ecosystem, give these subsidies to everybody, because then they are stuck. They are already part of that ecosystem, and they cannot leave it anymore.”
Beyond financial incentives, local Chinese governments have also been actively courting Tesla to build production facilities in the country. Its Gigafactory in Shanghai was built extremely quickly in 2019 thanks to the favorable local policies. “To go from effectively a dirt field to job one in about a year is unprecedented,” says Tu. “It points to the central government and particularly the Shanghai government breaking down any barriers or roadblocks to get Tesla to that point.”
Today, China is an indispensable part of Tesla’s supply chain. The Shanghai Gigafactory is currently Tesla’s most productive manufacturing hub and accounts for over half of Tesla cars delivered in 2022.
But the benefits have been mutual; China has gained a lot from Tesla as well. The company has been responsible for imposing the “catfish effect” on the Chinese EV industry—meaning it’s forced Chinese brands to innovate and try to catch up with Tesla, from technology advancement to affordability. And now, even Tesla needs to figure out how to continue being competitive in China because domestic brands are coming at it hard.
What role did battery technology play?
The most important part of an electric vehicle is the battery cells, which can make up about 40% of the cost of a vehicle. And the most important factor in making an EV that’s commercially viable is a battery that’s powerful and reliable, yet still affordable.
Chinese companies really pushed forward battery technology on this front, says Max Reid, senior research analyst in EVs and battery supply chain services at Wood Mackenzie, a global research firm.
More specifically, over the past decade, Chinese companies have championed lithium iron phosphate batteries (LFP), which are distinct from lithium nickel manganese cobalt batteries (NMC) that are much more popular in the West.
LFP batteries are safer and cheaper, but initially they weren’t the top choice in cars because they used to have a much lower energy density and perform poorly in low temperatures. But while others were ditching LFP technologies, a few Chinese battery companies like Contemporary Amperex Technology Co. Limited (CATL) spent a decade researching them and managed to narrow the energy density gap.
Today, the EV industry is again recognizing the benefits of LFP batteries, which made up one third of total EV batteries as of September 2022. “That shows you how far LFP has come, and that’s purely down to the innovation within Chinese cell makers. And that has brought Chinese EV battery [companies] to the front line, the tier-one companies,” says Reid.
China has also had one key advantage in battery manufacturing: it controls a lot of the necessary materials. While the country doesn’t necessarily have the most natural resources for battery materials, it has the majority of the refinery capacity in the world when it comes to critical components like cobalt, nickel sulfate, lithium hydroxide, and graphite. García-Herrero sees China’s control of the chemical materials as “the ultimate control of the sector, which China has clearly pursued for years well before others even figured that this was something important.”
By now, other countries have indeed realized the importance of battery materials and are signing deals with Chile and Australia to gain control of mines for rare earth metals. But China’s head start has given domestic companies a longstanding stable supply chain.
“Chinese-made EV batteries … not only come at a discount but also are available in much higher quantities because the manufacturing capacity has been built out in China and continues to be built out,” says Reid.
What does China’s EV market look like now?
As a result of all this, China now has an outsize domestic demand for EVs: According to a survey from the US consulting company AlixPartners, over 50% of Chinese respondents were considering battery-electric vehicles as their next car in 2021, the highest in the world and two times the global average.
There are a slew of Chinese-built options for these customers—including BYD, SAIC-GM-Wuling, Geely, Nio, Xpeng, and LiAuto. While the first three are examples of gas car companies that successfully made the switch to EVs early on, the last three are pure-EV startups that grew from nothing to household names in less than a decade.
And since the rise of these companies (and other Chinese tech behemoths) coincided with the rise of a new generation of car buyers, roughly the millennials and gen-zers, there’s no longer a stigma that Chinese brands are less prestigious or worse in quality than foreign brands. “Because they’ve grown up with Alibaba, because they’ve grown up with Tencent, they effectively were born into a digital environment and they’re much more comfortable with Chinese brands versus their parents, who would still rather likely buy a German brand or a Japanese brand,” says Tu. The fact that these Chinese brands have sprinkled a little bit of nationalism into their marketing strategy also helps, Tu says.
Can other countries replicate China’s success?
Many countries are almost certainly now looking at China’s EV experience and feeling jealous. But it may not be that easy for them to achieve the same success, even if they copy China’s playbook.
While the US and some countries in Europe meet the objective requirements to supercharge their own EV industries, like technological capability and established supply chains, ICCT’s He notes that they also have different political systems. “Is this country willing to invest in this sector? Is it willing to give special protection to this industry and let it enjoy an extremely high level of policy priority for a long time?” she asks. “That’s hard to say.”
“I think the interesting question is, would a country like India or Brazil be able to replicate this?” Mazzocco asks. These countries don’t have a traditional auto industry as strong as China’s, and they also don’t have the Chinese government’s sophisticated background in handling massive industrial policies through a diverse set of policy tools, including credits, subsidies, land use agreements, tax breaks, and public procurements. But China’s experience suggests that EVs can be an opportunity for developing countries to leapfrog developed countries.
“It’s not that you can’t replicate it, but China has had decades of experience in leveraging these [systems],” says Mazzocco.
Chinese brands are now looking to other markets. What challenges are they facing?
For the first time ever, Chinese EV companies feel they have a chance to expand outside of China and become global brands. Some of them are already entering the European market and even considering coming to the US, despite its saturated market and the sensitive political situation. Chinese gas cars could never have dreamed of the same.
Nevertheless, their marketing language and strategies may have to change for other markets. They will need to adapt to the different technical standards, as well as preferred software services. And they will have to learn to accommodate the different consumption habits and customer service requests.
“I think we take for granted that a company like Toyota or Honda is comfortable navigating different markets, but that’s taken decades of experience to build up for these companies, and it didn’t always look pretty for them,” Mazzocco says.
In the current geopolitical environment, these companies are also making themselves vulnerable by entering more countries that aren’t exactly in good relations with China. Some of them may want to protect their own homegrown auto industry, and others may even see the entrance of Chinese brands as a national security risk.
For these and other reasons, the most growth potential will likely come from “emerging Asia,” García-Herrero notes, which will continue to need more EVs for its energy transition even after China’s domestic market becomes saturated.
This is why the benefits from China’s focus on EV supply are two-fold: it both reduces China’s need for car imports from Western countries and creates another long-lasting export industry. Some countries, like Indonesia, are already courting Chinese investment to build EV factories there.
In 2022, China exported 679,000 EVs, a 120% increase from the year before. There’s little reason to doubt the numbers will only grow from here.