China’s electric vehicle (EV) market is a financial paradox like few others that multinational companies have encountered.
EV growth is going gangbusters. Even amid a demand-killing pandemic and semiconductor shortages in 2021, sales surged 160%.
Mainland EV makers sold roughly 3 million units domestically last year, up from 1.3 million in 2020. It means sales in China increased by more than double the pace globally.
And yet, as Michael Dunne, CEO of advisory ZoZo Go, reminds us, “everyone agrees there are too many electric vehicle brands in China.” Officials in Beijing claim there are as many as 200, Dunne says, adding that new ones “seem to surface weekly.”
This, Dunne notes, gets at an obvious mystery for the industry. “How many,” he asks, “will be standing in five years? Tough question, considering China’s murky political economy works in unpredictable ways.”
Most intriguing, perhaps, is how Volkswagen AG is going all-in on China despite overcapacity concerns. Europe’s largest carmaker reckons it will be building as many as 1 million EVs per year in China by next year.
Volkswagen brand CEO Ralf Brandstaetter notes that such an expansion will require upping the company’s sales network game in China as well as increasing its development ambitions.
The real push there, Brandstaetter says, will begin in August when he relocates to Beijing from Wolfsburg for a time to oversee the expansion. It’s emblematic of Volkswagen’s plans to succeed in China’s notoriously competitive EV market just as it had with gas-powered vehicles.
To do that, Volkswagen is adopting an act-locally-to-succeed-globally approach. That, it’s hoped, will win the trust and loyalty of Chinese motorists leaning toward supporting local job creation, much the way Japanese carmakers operate in the US.
“In the past, our approach was to develop in Germany and localize in China,” Brandstaetter told Nikkei Asia. “But this approach will be changed significantly by setting up more local resources for R&D, especially for software, to be faster, to be more independent in China.”
Brandstaetter adds that “we’re also using these technology trends for the rest of the globe and our other entities.” That means a strong focus on the internet-connected vehicles preferred on the mainland and EV offerings with self-driving functions.
The joint venture that’s majority-owned by Volkswagen will operate from a new plant in Anhui Province. By 2023, the facility hopes to churn out 300,000 vehicles annually.
Add in joint ventures with FAW Group and SAIC Motor and that puts Volkswagen at the 1 million cars-per-year mark. That will raise China to a 20% share of Volkswagen’s global production.
It also makes Volkswagen something of a microcosm for this most paradoxical of mainland industries.
On the one hand, the number of EV brands vying for a still-limited demand base seems a flashing red warning sign. So, it would seem, are bottlenecks in semiconductor production and other supply-chain snafus.
On the other, the surge in EV sales in China last year, despite myriad headwinds, is hard for officials in Europe to ignore.
“The electric offensive is on track even despite the supply bottlenecks,” Brandstaetter explains. “Customer demand isn’t declining. The impact was not driven by demand, but by availability of semiconductors.”
Volkswagen isn’t alone in its bullishness on China’s EV market. Warren Buffett-backed BYD did huge business in 2021: The Shenzhen-based manufacturer reported a 231.6% increase in EV deliveries from 2020.
That prompted Citigroup to raise its target price on BYD stock from HK$536 to HK$587 on the assumption that BYD in this year will come in double 2021 levels.
That, of course, is almost certain to keep the globe’s most revered value investor engaged, offering a “Buffett halo” to the mainland EV market.
Elon Musk’s Tesla, meantime, sold 240,000 EVs in China last year, giving Xi Jinping’s economy a 26% share of the automaker’s global sales. In fact, the October-December period was Tesla’s best quarter ever in China.
A buyer sits in the back seat in his new Tesla Model 3 after the Tesla China-made Model 3 delivery ceremony in Shanghai. Photo: AFPThe threat from Tesla, though, is mostly to EV startups in China. The competitive landscape is about to change considerably as the ginormous Volkswagen drives onto the scene.
Yet whether this is a wise pivot or a blunder in the short-to-intermediate term by Volkswagen will rely somewhat on President Xi’s ability to raise China’s semiconductor game.
In 2018, at the height of then-US president Donald Trump’s trade war, Xi acknowledged that China’s “dependence on core technology is the biggest hidden trouble for us.”
Accordingly, Xi earmarked the semiconductor industry space as a key economic battleground.
China, he stressed, “must accelerate the development of our own domestic plans, set up safe and controllable information technology systems, push forward and make breakthroughs in the research and development of high-performance computing, mobile communication, quantum communication, and core chips and operating systems.”
As this process plays out, geopolitics is raising the stakes, says Kia Kokalitcheva at Washington-based news and analysis portal Axios. Most of the supply of advanced chips comes from Taiwan Semiconductor Manufacturing Company (TSMC).
Trouble is, “the growing tensions with China over Taiwan are making dependence on this supplier very worrisome. Ditto for manufacturers in South Korea, where North Korea is the political concern,” Kokalitcheva says. And TSMC, it’s worth noting, is building a chip-making facility in Phoenix, Arizona.
Yet China’s approach to EVs is more nuanced than it seems on the surface, says David Tyfield, sustainability professor at Lancaster University. In Tyfield’s view, a conventional assessment of the current state of Chinese EV makers is the wrong lens through which to look. It’s more about the butterfly effect it has across the mainland’s private sector.
“The question is not just whether China will dominate the global EV market, but also whether the EV can help China achieve the technological, economic and geopolitical power it seeks,” he says. “In other words, even if China gets good at making EVs, will EVs be good for China?”
The EV boom, Tyfield argues, is its own emerging industrial revolution “that combines low-carbon and digital technology. So the country that takes the lead in producing and using EVs will likely be highly competitive on the world stage.”
Here, he says, consider the “inseparability” of the global rise of the US in the 20th century and its resulting dominance over the car industry. “The US situation back then and the Chinese situation today share many similarities,” Tyfield says.
“In both cases,” he adds, “major technological change was happening within each country in parallel with a rise in their geopolitical power. And just as the traditional car became not only the main form of citizen transport but also a key symbol of social change during the 20th century, so too will it be for the EV in the 21st.”
As such, Volkswagen’s big turn in China’s direction could be a major inflection point in the trajectory of EV innovation. It’s a sign that the globe’s other top automakers underestimate China’s EV potential at their own peril.
In December, Toyota Motor Corp announced it is introducing an all-electric small sedan in China working with BYD later this year. Crucially, Toyota is relying on BYD’s lithium-iron-phosphate batteries and engineering prowess.
Yet Volkswagen must navigate a notoriously labyrinthine EV matrix. As Dunne at ZoZo Go notes, an “unpredictable political economy” makes it “hard to pick winners in China’s EV industry because the political priorities can override market forces at any moment. That is why street-smart Chinese businesspeople like to say: ‘To succeed, first look at the mayor, not the market.’”
China, Dunne says, “continues to spawn new brands because significant clout resides at the provincial and city levels. Every mayor wants an EV company in his/her backyard, feasibility studies be damned.”
The bottom line, Dunne says, is that “companies with access to political and financial capital will outlast many of those with superior technology.”
Given this obstacle course of risks and opportunities, it seems wise for Volkswagen CEO Brandstaetter to be on the ground in Beijing to manage his company’s giant bet on Xi’s economy.
And Volkswagen’s doubling down on China’s potential suggests speculation of an EV market crash there is most likely off the mark.