Earlier this month, we featured a piece on how China is flooding the world with its cars. To construe this as yet another case of China dumping low quality products sold cheap thanks to the Chinese state’s subsidies would not be out of the ordinary. However, this follow up to that story suggests something different. Not only are Chinese cars, especially EVs competitive on quality terms, it makes the point about how legacy western carmakers have been caught napping, once again (after how they lost the small car boom to the Japanese).
Mark Rainford, a former communications executive at Mercedes Benz and now a China based auto journalist made a Youtube video showcasing Chinese progress in automobiles and the video has gone viral with viewers amazed at the cars they got to see.
“…some with navigation on autopilot (NOA) systems, a precursor to full-on autonomous driving; others with face-recognition cameras that monitor driver fatigue; more equipped with multiple high-res dashboard screens pimped with generative AI and streaming video—are not inferior, unsafe copycats, as mainstream Asian and Western automakers have often urged us to believe, they are standards-compliant, road-going smartphones.
This “iPhone on wheels” epithet has been used by Tesla for many years, with traditional auto brands—led, so the caricature goes, by sensible German men in suits on eye-watering remuneration packages—reportedly flailing in Elon Musk’s wake.
The description is an almost exact fit for Xiaomi, one of China’s leading smartphone brands. It has so far invested a billion dollars in becoming an EV manufacturer. Meanwhile, telecoms equipment giant Huawei has paired with state-owned Chery Automobile for the November launch of the upscale EV marque Luxeed. “It will be superior to Tesla’s Model S,” promised Richard Yu Chengdong, head of Huawei’s car unit.”
There are apparently about 300 EV makers in China competing intensely but one stands at the top of the pack:
“BYD is Tesla’s main competitor in China, and it is soon to be a serious competitor to many of the world’s auto brands. The 28-year-old company is a Warren Buffet-backed manufacturer that’s dominant in EV battery production for itself and, among others, Tesla. Indeed, BYD is second only to CATL in Chinese battery production, a sector in which China arguably leads the world.
…It’s the dominant automaker in China, accounting for 37 percent of the huge domestic market and heading for a full half by 2026. In 2022, BYD made four of the top 10 EVs sold worldwide. BYD currently ranks first in China for patented technologies, owning or filing nearly 30,000 of them. In 2020, it launched the long-range Blade lithium iron phosphate (LFP) battery, which is far less prone to spontaneous combustion than other EV batteries.
BYD sold more than 2 million battery-powered EVs and plug-in hybrids between January and September. September’s sales were up 43 percent year on year, and the company could sell 3.6 million battery EVs and plug-in hybrids for the full year, including electric buses and trucks.”
The article cites industry experts reckoning the end of the 100-year hegemony of western auto brands like GM, Ford, Volkswagen much like how Volvo and MG were gobbled up by China’s Geely and SAIC. Why couldn’t they see this coming?
“…this failure by the traditional car industry to see what was coming down the pike is a recurring self-harm. In the 1980s, legacy brands didn’t take seriously the threat from Toyota, Nissan, and other East Asian car brands until it was too late, Russo says. The same happened with Tesla, and now history repeats itself with China’s emergence as an EV powerhouse.
Legacy auto companies “tend not to take seriously an emerging threat,” Russo says, speaking from his office in Shanghai where he runs Automobility, a strategy and investment advisory firm. “They thought that because the math didn’t work for them, it can’t work for others. The idea of building profitable small cars was a problem they let others solve. Building profitable electric vehicles was a solvable problem that they left for Tesla. The car industry resists change.”
Whilst this might sound like the innovator’s dilemma, it has major ramifications for the western economies:
““Just in the UK alone, the auto industry sustains 800,000 jobs,” said Palmer (this rises to 4.3 million in the US). “Automotive engineering also casts a shadow on other parts of the economy. When you lose your automotive industry, you lose engineering expertise, specialist education, and science-based capability. Governments worldwide should support their auto industries because it’s fundamental to any country’s GDP and future wealth base.””
Where the western governments have failed, China has done quite the opposite:
“BYD is not state owned, but it’s operating in a planned economy that favors certain sectors, and among these has been the automotive industry. “China has a vast market, it has economies of scale, it has subsidies and encouragement from central government, and it has an international strategy that seeks dominance in overseas markets with a product—affordable electric vehicles—that Western manufacturers aren’t able to make,” says Palmer.
I saw how China carried out its series of five-year plans. Even back then, it was apparent that China had concluded that they couldn’t compete with the West with internal combustion engines. Their risky but innovative solution was that the way to leapfrog the West was through what they called ‘new energy vehicles.’
“The primary motivation for China to push for EVs was energy security,” says Russo. “Second was industrial competitiveness, and a far distant third was sustainability.””
If you want to read our other published material, please visit https://marcellus.in/blog/
Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.
Copyright © 2022 Marcellus Investment Managers Pvt Ltd, All rights reserved.
