In last week’s edition, we featured a piece that talked about how some electric car models will likely be priced at par or lower than their internal combustion engine (ICE) fueled peers this year. And earlier in the edition, we heard Charlie Munger say why BYD (the Chinese electric car maker and the world’s largest) is way better than Tesla. Whilst Tesla has indeed got a lot of mindshare on electric cars, it is China which has contributed to the economic viability and the consequent rapid mainstreaming of the technology (China sells 8 times the # of EVs as the US).
Here’s how they did it:
It began with a desire to dominate the global auto industry as early as the noughties. Realising it had no hope to catch up with the Americans, Germans and Japanese in ICE fueled cars, China chose to focus on EVs, something that the incumbents struggled thanks to the innovator’s dilemma.
So what exactly did the Chinese 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, fewer 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 had 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 ones in China were part of its vast public transportation system.
…In populous cities like Beijing, car license plates have been rationed for more than a decade, and it can still take years or 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 making it the first city in the world to completely electrify its public bus fleet.”
It wasn’t just the Chinese EV companies. Even Tesla benefited from Chinese policy:
“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 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 in everything 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.”
And finally, the all-important battery technology:
“Chinese companies really pushed battery technology forward on this front…over the past decade Chinese companies have championed lithium iron phosphate batteries, known as LFP technology, as opposed to the lithium nickel manganese cobalt (NMC) batteries that are much more popular in the West. LFP batteries are safer and cheaper…
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.””
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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. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
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