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IF Insights: China’s EV boom & Beijing’s economic aspirations

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China has surpassed Japan as the world’s largest automobile exporter, as of the first quarter of 2023

The IAA mobility show in Munich witnessed an ‘Electric Age Battle’, where European carmakers faced stiff competition from their Asian counterparts.

Talking about the 2023 chapter of the Munich car show, saw Chinese companies like BYD, CATL and XPeng grabbing headlines.

While Mercedes-Benz and Volkswagen launched their new vehicle line-ups during the event, the pressure upon them was clearly evident as the German car industry faced a ‘steep challenge’ from China.

China’s recipe for success

BYD, the largest China-based EV maker by market capitalization, reported a first-half profit of USD 1.50 billion, up from the same period in 2022. The company also achieved a new high when it came to vehicle deliveries. The venture now sets its sights on markets like Europe, Singapore and Australia.

XPeng will spend over USD 740 million to acquire the EV division of ride-hailing service Didi and launch a new brand of vehicles. AVATR Technology, backed by state-run automaker Chongqing Automobile and EV battery giant CATL, has secured funding of 3 billion yuan (USD 411.5 million).

Hozon New Energy Automobile, one of China’s top five electric vehicle start-ups, has now secured 7 billion yuan (USD 961.6 million) funding from the market, as it eyes overseas expansion.

Volkswagen is now partnering with Xpeng and joint venture partner SAIC to build new models. These two new vehicle models, to be rolled out in 2026, will carry the VW logo but feature Xpeng’s expertise in software and autonomous driving.

We also have Italian carmaker Stellantis, which is considering a partnership with a Chinese electric vehicle (EV) manufacturer.

Fearing an ‘invasion’ of cheap Chinese EVs into the region, Renault is now looking to slash production costs for its electric models by 40%, apart from spinning off its EV activities into a unit called Ampere, with Nissan investment, as Chinese ventures are redefining the rulebook by using lower labour costs and local battery suppliers.

In 2022, Chinese automakers had a 9% share of Europe’s EV market, nearly double the 2021 tally, as per the forecasts by automobile consultancy Inovev.

Stellantis CEO Carlos Tavares recently remarked that the competition with Chinese manufacturers would be “extremely brutal”, while advising his Western peers to use “the same weapons” as their Chinese rivals, by sourcing parts in lower-cost countries and striking partnerships with battery suppliers that offer the best combination of energy, cost and weight.

The year 2023 has seen BYD entering the Middle-East markets, as China’s EV players expanded in Thailand, Germany, and Japan. Between 2019 and 2022, China’s auto exports jumped from approximately 1 million to more than 3 million, of which nearly 22% were new energy vehicles.

China also has surpassed Japan as the world’s largest automobile exporter, as of the first quarter of 2023. According to Bill Russo, founder and CEO of the Shanghai-based research firm Automobility, many Chinese carmakers are seeking to sell their excess capacity abroad, after overall car sales peaked in 2017 and as growth in the domestic EV market slowed.

Its Destination Europe

From 2020-22, the number of EVs sold annually in China grew from 1.3 million to a whopping 6.8 million, therefore becoming the world’s largest market for EVs. For comparison, the US only sold about 800,000 EVs in 2022.

The country has been offering generous subsidies, tax breaks, procurement contracts, and other policy incentives for the sector. And yes, the nation has a huge supply chain, along with the necessary manufacturing capabilities.

In 2001, EV technology was introduced as a priority science research project in China’s Five-Year Economic Plan. In 2009, the country began handing out financial subsidies to EV companies.

From 2009 to 2022, the government poured over 200 billion RMB (USD 29 billion) into relevant subsidies and tax breaks. The subsidy policy has now been replaced by a more market-oriented system called “dual credits”.

In cities, car license plate fees have been waived for people purchasing EVs. Local governments are also working closely with the domestic EV players to customize policies.

Also, Chinese companies are perfecting the lithium iron phosphate (LFP) batteries, as opposed to the lithium nickel manganese cobalt (NMC) batteries that are much more popular in the West.

However, with Tesla and the Chinese EV players currently being involved in a ‘Price Cut War’, where apart from launching new models, bringing down prices has been seen as a step to stem slowing growth in the world’s biggest auto market. The competition is eating into car makers’ margins, as the market shrinks due to a slumping domestic economy.

So overseas expansion has emerged as a viable option for automobile ventures.

Europe The New Expansion Ground

According to the global technology intelligence firm ABI Research, in 2030, 1.2 million Chinese-made Battery Electric Vehicles (BEVs) will be imported by the European Union (EU), making up 12% of the bloc’s BEV sales.

While Chinese companies currently hold a significant market share (56%) in battery manufacturing, Dylan Khoo, an Industry Analyst at ABI Research, told that Chinese BEVs will continue to gain traction in Europe due to the experience and focus of Chinese manufacturers on EVs. These vehicles also come with competitive pricing, making them appealing to budget-conscious European customers.

Since 2018, exports of European cars to China have slightly decreased, while imports of Chinese cars into the European Union have grown nearly fourfold. With 28%, China has become the largest importer of cars into the EU.

Also, as per Bloomberg, production costs for a new battery plant in China will likely come down from USD 60 million/GWh currently to USD 50 million/GWh by 2030, with huge impacts on the prices of battery packs.

In Europe, production costs in Europe will stay around USD 100-120 million/GWh or above partly due to high industrial electricity prices. So expect Chinese EVs to get cheaper as time flows.

Chinese carmakers are expected to capture around 15% of Europe’s EV market by 2025, according to the KPMG.

Renault Chairman Jean-Dominique Senard predicts a ‘Chinese storm’ over Europe’s electric vehicle industry. And numbers too suggest the same.

China is now attracting funds, foreign partners and the brightest engineers in its territory, as the EV industry becomes the new flag-bearer of Beijing’s lofty economic aspirations. While China sees electric vehicles as a means to meet its climate goals, it has also emerged as one of the rare bright spots amid its gloomy economic environment.

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