China in cars: Consider yourself warned

Editor’s picture: We started studying the Chinese electricity market because of its semis importance, but became more fascinated (some would say fascinated) the more we learned. Automobiles are an important industry for any developed economy and China’s EV market has many signs of an industry that could one day become a major player in the world. If current trends continue, China’s EV makers will become important not only to the semis market, but to the global economy.

A combination of factors makes it interesting. First is its growth rate. From 500,000 units in 2017 to an estimated 6.5 million units in 2022, the industry is clocking a 63% CAGR, and looks set to continue growing at healthy double digits for at least in the next few years.

China’s policy makers have sent all the signals that they favor the industry for many reasons, so even if they withhold clear subsidies as they are doing now, there are still many ways to provide the government will give favorable treatment to the sector.

Editor’s note:
Guest author Jonathan Goldberg is the founder of D2D Advisory, a multi-functional consulting firm. Jonathan develops growth strategies and alliances for companies in the mobile, networking, gaming, and software industries.

Another important factor is the diversity of suppliers. This report from Technode lists 30 EV makers, which is probably the same number of EV makers from all other countries combined. China’s development model seems to work well with this kind of almost anarchic market fragmentation. We see similar patterns out there in many other industries. For example, China used to have 1,000 handset makers and now probably has 2,000 semiconductor companies.

“… the standard seems to sponsor many companies, then let the Darwinian commercial Forces are at play across the sector, ultimately whittling the numbers down to a few battle-hardened champions, ready to compete on the global stage”

Commercially, this makes little sense, but other industries have shown that this approach can deliver benefits to the wider economy. Government planners want to encourage the growth of an industry, but are rightly aware that they should not pick winners. However, the standard seems to sponsor many companies, then let the Darwinian commercial Forces are at play across the sector, ultimately whittling the numbers down to a few battle-hardened champions, ready to compete on the global stage with proven supply chains and supplier ecosystems. China’s EV market now shows all the signs of following that playbook, and it will be fun (and important) to follow this process to that conclusion.

Finally, we think it is important to monitor the export ambitions of companies. Some of the biggest EV makers are busy building their global dealership and logistics networks. Again, this is very similar to Chinese handset makers, which balance strong local support at home to build export markets around the world. If this model plays out as we suggested above, in a few years, we will likely see Chinese EVs taking a large share of the global EV market.

That all being said, none of this is certain.

To put all this into perspective, EV sales in China are still relatively small. They will contribute about 25% of the total car sales in China in 2022, a very small share. The global car market fluctuated during the pandemic between 65 million and 88 million vehicles, so China’s EV sales are less than 10% of the world’s total car sales. That’s a big number where they were a few years ago, but it’s still not a big number relative to the overall market.

There are also many reasons to doubt the narrative around EVs completely displacing traditional gasoline vehicles. Much of the growth to date around the world has come from government support, policies that have declined everywhere. There are also many legitimate questions about how environmentally friendly EVs are. We’ve seen studies showing that an EV driven in China on electricity generated by coal-fired plants actually contributes more to carbon than the fuel-optimized engines driven by most developed economy.

There are also many reasons to doubt that China’s survival-of-the-fittest model for choosing winners will result in a desired outcome for some size competitors. The capital costs of making cars are punishing, and so we could end up with a few dozen sub-scale competitors, too small to grow globally, but too important to local economies to allow reason.

There are also real geopolitical concerns. The first of these risks has already appeared in the form of US chip sanctions. Currently, the EV industry is largely untouched by this, and most of the parts they need can be purchased from domestic vendors. Despite this, it is not too difficult to see sanctions spreading further and potentially creating supply chain constraints.

An even bigger wave of problems looms over the horizon. Many readers will remember the boom in the 1990s in which Japanese auto companies surpassed US auto manufacturers and gained significant share around the world. This led to a wave of hysteria about Japan taking over the world. They made movies about it (more than one, none good). And Japan is an ally, a friendly country. There is a significant backlash against Chinese automakers, governments are very concerned about the industry, and people are quite paranoid about China’s ambitions. It’s not in the headlines yet, but it’s close.

Despite all this, we still think it’s an industry worth watching. China’s EV market is already showing a new way of making cars, or at least new ways of building supply chains for cars. We have speculated in the past how car manufacturing may (or may not) resemble electronics manufacturing, with a decoupled, highly outsourced model.

If history is any guide (a reasonable big if) then it would give these companies a huge cost advantage, and before any regulatory measures to force non-Chinese companies to switch their models as well. The fact that Chinese OEMs go through this path makes for a “cleaning pipe” behind which other companies can “draft,” taking advantage of the new, emerging chain. in the power supply. It may not matter to Ford or Daimler, but it is likely to open the eyes of other countries about the realm of the possible (looking at you India). Our thesis is that China’s industrial development policy can be viewed as a loosely controlled set of experiments. These processes have ways of forcing change beyond their boundaries.

Which brings us to the topic of autonomous vehicles. We intentionally left it at the end because all of the above happens before we reach high-level autonomy, but many of the lessons remain here. Many, if not most, of China’s EV makers are exploring autonomy — some superficially, a lot.

Autonomous cars will obviously change the market. But as it stands now it’s unclear when that will happen, and there are many who argue it will take decades. In saying that it happens some time sooner than never, there is a sharp divide between those who can do it and those who don’t. A person who will not be named (but who runs an EV company and a social media company) says that autonomy is the first pass in the post winner-takes-all market. We believe that it is more likely that there will be many companies that can reach this close to each other and share the benefits of that small group. If that is true, it is likely that the small group is affiliated with a Chinese company.

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