The auto industry is currently experiencing its most significant transformation in a century, driven by government subsidies aimed at accelerating the adoption of electric vehicles (EVs). Over the past year, several surprising trends have emerged. One notable development is the substantial lead established by Chinese automakers, highlighting the challenges other companies face in competing with the lower cost and advanced technology of Chinese-made EVs. Additionally, China’s dominance of the EV supply chain has become more evident, further complicating the landscape for non-Chinese manufacturers.
As traditional automakers scramble to catch up, another unexpected factor has emerged: a slowdown in global demand for EVs. This combination of factors poses a significant risk to Western automakers, potentially resulting in substantial losses and jeopardizing ambitious emissions reduction goals associated with road transportation.
1. How big is China’s EV industry?
Chinese brands have made significant inroads in the global electric vehicle (EV) market, capturing approximately half of all EV sales worldwide. These companies have not only gained market share domestically but have also overtaken former leaders like Volkswagen AG. BYD Co., a prominent Chinese brand, emerged as the world’s largest EV maker in the fourth quarter of 2023, surpassing Tesla Inc. China’s consumers are increasingly opting for electric vehicles, with fully-electric models accounting for a quarter of all new passenger car sales in 2023, compared to 15.7% in Europe.
UBS analysts project that China’s global market share in EVs will nearly double to 33% by 2030, while traditional Western automakers are expected to see their share decline to 58% from 81%. Additionally, in 2023, BYD enjoyed a 25% cost advantage over North American and European brands, further solidifying its competitive position in the market.
2. What’s China’s advantage?
China’s dominance in the electric vehicle (EV) sector extends particularly to batteries, which constitute the most costly component of an EV. Over 80% of EV battery cells are supplied by Chinese producers, supported by a supply chain that increasingly controls the mining and processing of essential minerals like lithium, cobalt, manganese, and rare earth metals. This comprehensive control allows China to maintain a significant advantage in battery production.
The cost of EV batteries in China has notably declined to $126 per kilowatt-hour on a volume-weighted average basis, compared to prices 11% higher in the US and 20% higher in Europe, as reported by BloombergNEF. Additionally, Chinese manufacturers are already introducing a new generation of batteries that utilize sodium, which is more abundant than lithium and poses a lower risk of fire incidents. These advancements underscore China’s formidable position in the global EV market and its potential to further reshape the industry landscape.
3. What has this meant to other automakers?
In 2023, increased competition within China’s domestic auto market, combined with economic slowdown, prompted manufacturers to seek opportunities abroad. Consequently, China’s exports of electric vehicles (EVs) surged by 64% compared to the previous year, reaching 1.55 million units. These exports were primarily directed to other Asian countries and Europe, where subsidies for both domestically produced and imported vehicles are available to consumers.
Chinese brands, notably BYD and Nio Inc., expanded their market share in Europe significantly, growing from 1.1% in 2020 to 5.6% in the first half of 2023. This rise in market share has drawn attention from regulatory bodies, with the European Union launching an investigation into China’s state subsidies for EV manufacturers in September.
In the United States, subsidies are also available, but the expanded tax credits under President Joe Biden’s Inflation Reduction Act (IRA) are restricted to vehicles manufactured in North America using predominantly domestically made components. Additionally, the US imposes higher tariffs of 25% on Chinese car imports, compared to 10% in Europe. These trade dynamics underscore the complexities and challenges faced by Chinese EV manufacturers seeking to expand their presence in international markets.
4. What’s happened to EV demand?
Global sales of electric vehicles (EVs) continue to rise, albeit at a slower pace. In 2021, sales of all-electric vehicles and plug-in hybrids, which can also run on gasoline or diesel, more than doubled, followed by a 62% growth in 2022. However, the growth rate dropped to 31% in the following year. BloombergNEF projects that this trend of deceleration will persist, with the annual increase expected to further slow to 21% this year.
5. Why is EV sales growth slowing?
The economic challenges in China have impacted its status as a growth engine, with many manufacturers falling short of their sales targets in 2023. Sales are expected to slow for a second consecutive year in 2024. However, the more pressing concern lies in Europe and the US.
Initially, the growth of electric vehicle (EV) sales was driven by tech enthusiasts and government subsidies for corporate purchases. However, as the market transitions to the next phase, carmakers are encountering cost-conscious consumers who are skeptical of the technology. The average price of EVs is significantly higher than that of traditional fuel-burning vehicles, with a 30% premium in Europe and a 27% premium in the US.
Moreover, the subsidies and tax breaks that stimulated sales are diminishing in Europe, while those in the US are contingent on meeting local-production criteria, limiting consumer options. Rising borrowing costs, as central banks address inflation concerns, have further deterred potential buyers. Additionally, concerns persist regarding charging infrastructure and battery range, contributing to consumer hesitation.
6. How are carmakers reacting?
Carmakers, including Tesla, have been consistently reducing prices over the past year to attract more customers. Many have also scaled back production and workforce to maintain profitability. To appeal to cost-conscious consumers, manufacturers are swiftly introducing more affordable models. In Europe, notable examples include Stellantis’ e-C3, Renault 5, and Volvo EX30.
Moreover, carmakers are investing heavily in battery technology to address consumer concerns and win over skeptics. BYD and Tesla are at the forefront, championing lithium-iron-phosphate batteries known for their lower cost, extended lifespan, and perceived safety compared to nickel-cobalt-manganese batteries. Additionally, Volkswagen, Toyota, BYD, and Chinese battery company Contemporary Amperex Technology are actively pursuing the development of solid-state batteries, which hold the promise of making EVs more efficient and cost-effective.
7. What are other countries doing in response to Chinese exports?
Following the passage of the IRA in the US, significant investments were announced, totaling $55.1 billion for US battery manufacturing and $16.1 billion for EV factories. However, the immediate impact was limited due to many carmakers rushing to increase production relying on Chinese technology. In 2023, only 14 models in production qualified for IRA purchase subsidies. The requirements for battery component value and raw material sourcing are set to increase through 2030, posing challenges for carmakers like GM and Ford Motor Co., which are facing losses on their EV lineups and consumer resistance to high vehicle prices, exacerbated by their dependence on Chinese technology and materials.
In response to the IRA, Germany, France, and Spain announced their own tax credits and aid packages for EV investments. European automakers such as Volkswagen, Stellantis, and Renault SA are reconfiguring their factories for EV production and planning to introduce numerous new battery-powered models. Some industry leaders have suggested a broad partnership akin to an “Airbus for EVs” to achieve the scale necessary to compete with Chinese automakers.
South Korea, home to major competitors in the battery sector like Samsung SDI Co., LG Energy Solution Ltd., and SK On Co., is considered a potential solution. Its free trade agreement with the US makes it attractive for Western carmakers seeking battery chemicals such as nickel sulfate, cobalt sulfate, and lithium hydroxide. Despite lacking significant reserves of battery metals, Korea is rapidly developing into a major processing hub through substantial investments. Since the implementation of the IRA, Korean companies, including joint ventures with US carmakers, have committed nearly $48 billion to build new plants for chemicals, cathodes, and batteries, both domestically and in North America. However, Korea’s battery industry has historically relied on raw materials from China, prompting the country to expand subsidy programs amid slowing EV sales and economic challenges in 2023.