The global car industry is facing upheaval and China is using it as an opportunity to position itself as a leader. Sun Tzu famously said: “In the midst of chaos there is also opportunity”.

The mass market auto industry has long been dominated by brands like Toyota, VW and Ford but this could change. The rapid adoption of electrified powertrains is challenging legacy businesses and opening the door to a new breed of auto manufacturer. One that looks and feels more like a tech company than a traditional automaker. Some of these companies, like Tesla, are quite familiar to western consumers but there are a host of Chinese auto manufacturers, like BYD and Geely, vying for a foothold in western auto markets.

China has been the largest manufacturer of passenger cars since around 2009[1]. Most of the cars made in China are sold in China but exports are rising fast. In 2018 domestic car sales in China fell for the first time in more than 20 years[2]. This galvanised Chinese companies to focus on exports.

Since 2020, China has tripled the number of cars they export, to more than 2.5mn[3]. They are now the third largest exporter of passenger cars (by volume) behind only Japan and Germany. If they keep growing at this rate it won’t be long before they overtake Germany and eventually even Japan.

It’s important to note that not all cars exported from China are made by Chinese auto companies. Many international car companies have set up manufacturing hubs in China to tap into extensive supply chains and local demand. For example, Tesla recently built a massive factory in Shanghai that has a production capacity of over 1mn cars per year.

China leads the world in EV sales. Close to 60% of all EV’s sold globally are sold in China[4]. This is thanks in part to the Chinese government that saw an opportunity and fostered growth through government purchasing requirements, subsidies, and investments in charging infrastructure. Another reason is the relative simplicity of an electric vehicle. They’re easier to make. The drivetrain of a traditional internal combustion engined car has more than 2000 moving parts. An electric car has around 20.[5].

A key competitive advantage for Chinese manufacturers is low manufacturing costs. Chinese automakers can make small EV’s for £8,000 less than European automakers[6]. This is thanks to lower levels of research and development spending, lower capital expenditures and lower labour costs.

The average cost of an electric vehicle in Europe is almost £49,000[7]. In China it is just below £28,000. Rapidly increasing the adoption of electric vehicles is seen by some experts as important in the fight against climate change[8]. Making them more affordable will speed things up. China clearly has an important role to play in efforts to decarbonise the global economy.

So Chinese-made electric vehicles are cheaper because they spend less on research. What does this mean for passenger safety? In 2007 a Chinese car, the Brilliance BS-6, failed a German crash test in rather dramatic fashion[9]. The car got one star (out of 5) and the crash test was described as ‘catastrophic’. But the quality of Chinese car manufacturers has come a long way since then.

Increasing automation and standardisation in Chinese manufacturing processes have led to big improvements in quality. In recent months numerous Chinese electric vehicles have achieved 5 star NCAP ratings, the highest possible[10]. This is an achievement that goes well beyond legal safety requirements[11].

Volvo typically has a good reputation[12] for passenger safety. What some consumers might not know is that Volvo is owned by Geely, a Chinese company. A lot of Volvos driving around Europe are made in China[13].

The Sidekick Investment Team View

Heightened geopolitical tensions means Europe and the US does not want to be overly reliant on Chinese supply chains. We have seen drastic steps from the US to limit technology transfer to China, especially in areas like chipmaking.

The US and Europe want to build out their own electric vehicle supply chains but a big portion of the battery supply chain is already in China. They can try and compete to gain / increase market share in electric vehicles and supply chains but Chinese manufacturing cost advantages will make it very difficult. This puts governments and regulators in the US and Europe between a rock and a hard place.

To foster the development of a domestic electric vehicle supply chain, western governments would likely need to restrict the import of cheaper, high quality Chinese alternatives. But, limiting Chinese imports through trade restrictions could raise prices for local consumers.

This will slow down the adoption of electric vehicles and progress towards net-zero[14]. They could provide subsidies to lower prices for consumers but China will most likely complain to the World Trade Organisation. Governments are faced with some difficult choices. A thriving local electric vehicle industry or faster progress towards decarbonisation.

While the geopolitical situation certainly muddies the waters we believe that Chinese electric vehicle exports will continue to grow at a rapid clip. Especially in the mass market segment where price is more important. Don’t be too surprised when your neighbour buys a Chinese made Polestar 2!

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