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| BYD electric cars waiting to be loaded on a ship are stacked at the international container terminal of Taicang Port at Suzhou Port, in China's eastern Jiangsu Province. (Photo by -/AFP via Getty Images) |
Envisioning a chic American in the 70s driving down Manhattan's Park Avenue in a Trabant 601, a symbol of the Soviet bloc's automobile industry, stretches the imagination. Yet, the idea of a stylish Ivy League graduate driving a cutting-edge Xiaomi electric vehicle (EV) today feels entirely within reach, assuming the car is permitted in the U.S. market.
The situation in Europe (the Mecca of modern automaking) is not much different. At last year's Munich global mobility show, I observed crowds of Bavarians drawn to Chinese EV brands, attracted by their good emissionless specifications, design, and competitive pricing—qualities that make these vehicles appealing to environmentally aware European consumers. In response to increasing demand for Chinese EVs in Europe, the European Commission has launched special anti-subsidy investigations to try to limit their market penetration. With China now commanding more than 55% of global EV production, the pressing question is how the EV revolution will impact China's economic structural transformation and its broader commercial relationship with the world.
The prevailing Western narrative regarding China's EV revolution suggests that China's dominance is not sustainable because other automobile corporations are investing in competitive technologies, whether it be different battery chemical architectures (solid state batteries), entirely new energy systems (such as hydrogen), or hybrid engines combining battery power with internal combustion engine (see Toyota's core strategy). This perspective, however, overlooks the fact that Chinese battery production leaders are significantly investing in R&D resources themselves and are continually developing more efficient and cheaper batteries. The Huawei industrial model, which prioritizes an R&D-centric strategy, appears to be the approach adopted by Chinese battery manufacturers. While the possibility of a disruptive future technology emerging from a non-Chinese automobile company cannot be ruled out, relying on hope is not a viable strategy. Given the current circumstances, it is unlikely that Chinese EVs will fall prey to "creative destruction."
Another critical view on China's EV revolution springs from the belief that even if China's dominance in the sector is hard to surpass, the contribution of EVs to China's GDP will be minimal. This argument suggests that transitioning from internal combustion engine (ICE) manufacturing to EV production could lead to a significant rise in structural unemployment, as EV production plants are less labor-intensive. Moreover, supplementary ICE manufacturing, from clutches to gearboxes, will disappear as these tools have no function in an EV. With China's aggregate demand already below what most macroeconomists consider optimal, the increasing structural unemployment could further destabilize China's macroeconomic fundamentals precipitating a hard landing.
This view, however, overlooks the pace of transitioning to EV manufacturing. In fact, China exported more ICE cars than EVs in 2023. To be sure, this may be attributed to its ties with Russia, which turned to China for car imports after Western-imposed sanctions related to the Ukraine war. These conditions are unlikely to change in the near future and China's ICE production will not sharply decline. Furthermore, EVs, due to their higher added value, create higher-paying jobs along the "smiley curve;" that is, R&D and design on one side, and marketing and advertising on the other. Thus, the effect of the EV transformation to employment and crucially aggregate demand can well be positive, significantly enhancing GDP. Lastly, as Chinese EVs become more and more prevalent, domestic automobile manufacturers may procure domestically sourced core technologies thus further enhancing China's techno-industrial ecosystem. Therefore, it comes to no surprise that China has asked Chinese EV manufacturers to prioritize domestically sourced microchips. Geely-backed auto suppliers have just unveiled a 7nm smart drive chip rivalling Nvidia.
Perhaps the most significant positive impact of EVs on China's GDP stems from their role in economizing energy. The lower a country's imports relative to its exports, the greater the positive contribution to GDP. China may reach peak oil earlier than expected. From an energy production side, replacement of imported petroleum with domestically produced green electricity is a quantitative and qualitative boost of GDP.
The effect on China's domestic economy of the EV revolution is undeniably positive, demonstrating the rise of China's industrial competitiveness. From an export perspective, however, the influx of affordable Chinese EVs into Western markets might exacerbate tensions with the United States and Europe, with some media outlets already writing about an imminent "China shock 2.0." This new wave contrasts with the first "China shock," which impacted labor-intensive manufacturing, as it threatens to decimate high-value manufacturing in G7 economies. The EV revolution compounds recent disruptions in high-added value manufacturing and ICT caused by solar panels and 5G technology, during which complacent and overly financialized Western economies neglected productive investments, allowing China to dominate industries that the West once led. The fall of General Motors in 2008, where financial operations overshadowed manufacturing profitability, exemplifies the dangers of unrestrained western capitalism.
This backdrop sets the stage for a determined response from the European Union, as voiced by a senior EU official, aiming to curb China's dominance in the EV market. As European China specialist Matthias Niedenfuhr noted, the EU is increasingly wary of Chinese industrial overcapacity in key sectors such as e-mobility and green technology, viewing it as a "train wreck in slow motion." Concerns are mounting that unchecked imports from China could overwhelm core industries in both the EU and the U.S., crushing employment and causing widespread anxiety among political leaders. US treasury secretary Janet Yellen has been quite outspoken about these fears.
With both the U.S. and Europe prioritizing economic security and employment protection, China may need to diversify its global EV strategy. Greenfield investments in the EU and the USA, enabling Chinese battery manufacturers to construct batteries in the domestic markets, could be an acceptable solution. BYD's $8 billion strong investment in Hungary appears to follow this model. Penetrating the U.S. market will be more challenging, as Biden's Inflation Reduction Act imposes minimum production requirements, necessitating producers in the U.S. to procure primary sources independent from China's supply chain. Overcoming the national security narrative presents another obstacle, with Chinese cars often pejoratively dubbed "rolling spy balloons."
The broader strategic question, however, is whether Western, and particularly American, industrial protectionism can eventually level the playing field. Could non-Chinese automobile companies close the competitiveness gap and offer domestically and internationally affordable, high-quality EVs? During its industrial zenith, the U.S. was able to produce cars like the Ford Model T at a price about one-third of the global GDP per capita. Today, China, with BYD's Seagull model, achieves a price point close to 60% of the global GDP per capita. As Chinese economies of scale in EV manufacturing continue to advance thus driving costs lower, the appeal of Chinese EVs to the Global South could soon become unassailable.
The Soviet Union and its geopolitical bloc never truly managed to rival the West in the production of advanced consumer goods. China presents a unique challenge unlike any the United States has encountered in its 250-year history. Chinese industrial dominance is not just bolstering national power but also positioning China as an increasingly appealing partner to the Global South. Even if the United States and the EU were to restrict imports of Chinese EVs, regions such as ASEAN, Africa, and South America would likely welcome affordable Chinese EVs and EV-related greenfield investments, potentially leaving Western companies at an unbridgeable competitive disadvantage in these increasingly more important markets.
The strategic focus on industry and advanced manufacturing is at the core of China's economic statecraft. President Xi Jinping's recent statements, where he frequently mentioned the concept of "new productive forces," are unambiguous: China will double down on future emerging industries. With Chinese universities producing scientists at a significantly higher rate than their Western counterparts and the Chinese government intensifying efforts toward industrial transformation, China's rapid advancements in the EV sector may just be the onset of numerous future “industrial leapfroggings” that could further shock the West and tilt the economic balance of power to the East. To be sure, while Europe and the United States possess significant strengths, recognizing and accurately assessing China's capabilities constitutes the foundational first step in competing with China. Long gone are the days of China being the world's sweatshop. This is the new era of China being an industrial juggernaut.
