Will the East wind prevail over the West wind?
On 25 February 2024, BYD’s first cargo ship, Explorer No. 1, the first of eight cargo ships, docked at Bremerhaven, Germany, carrying around 3,000 BYD new energy vehicles (EVs) for the overseas market. BYD has plans to establish its own factory in Hungary with an annual capacity of 150,000 cars, likely to be operational in 2-3 years. In 2023, BYD sold a total of 3,024,417 vehicles, a substantial 61.9% surge from the year 2022. BYD’s international market presence surged remarkably, with exports growing by 334.2% to 242,765 units and its reach across over 70 countries on six continents, according to the BYD website. BYD’s brand matrix varies from the cheapest Honor ($13,900) to top end sedan Yangwang ($233,000). On 5 March 2024, while presenting his government work report, Premier Li Qiang revealed that the EVs accounted for more than 60% of the world’s production and sales. A few years back, the powerhouses of internal combustion engine (ICE) cars like Germany and Japan perhaps never in their wildest of imagination ever thought that China would become the global auto giant, and challenge their supremacy.
It all started in 1995 when everyone was taken by the Nokia frenzy in China. Wang Chuanfu, a graduate from the Beijing Institute of Non-ferrous Metals took a fancy to Nokia’s batteries and founded BYD in Shenzhen. He believed that this segment offered huge opportunities for investment. By 2003, BYD became the world’s second largest rechargeable battery manufacturer, supplying to Motorola, Ericsson and Nokia. In the same year, the company decided to enter the automobile sector and acquired Qinchuan Automobile, a company founded in 1985 having military industry background. The decision to buy Qinchuan was to enter the electric vehicle segment, for Wang saw huge potential for EVs and hybrid vehicles. Two years later, BYD rolled out F3, and in 2009, it surpassed Chery for the first time. In 2008, BYD launched its first hybrid car F3DM and claimed that it could travel up to 100 kilometres on a single charge. By the end of 2008, Warren Buffet announced that he would invest $230 million in BYD, accounting for 10% of the shares, swelling to $6 billion in 2021, a return of about 3,000%.
After 2010, the company entered the phase of strategic expansion, but the sales were just halfway of the announced 1 million mark. As many as 308 dealers withdrew from the BYD sales network. In 2011, its pure EV e6 based on lithium ion battery was launched. However, the sales plummeted drastically, it could sell only 437,000 units, a year on year decrease of 13.33%. BYD resorted to downsizing its employees, and there were issues related to quality including malfunctioning of the airbags and even fatal accidents. In 2012, its “Four Years or 100 kilometres” warranty policy on all variants restored confidence of the consumers. In 2012, BYD launched its “Su Rui”, a remotely controlled vehicle. Until a year back, when BYD’s sales outnumbered Tesla, no one took it seriously. Deloitte forecasts that total EV sales globally will grow from 2.5 million in 2020 to 11.2 million in 2025, then reaching 31.1 million by 2030. Deloitte expects that by 2030 China will hold 49% of the global EV market, Europe will account for 27%, and the United States will hold 14%.
There are a number of factors behind BYD’s success. One, rather than chasing the established powerhouse automobile manufacturer and their patented technologies, BYD got a level playing field in the EVs. The capacities built in electric batteries, motors and controls during the reform period provided an added advantage to the EVs. Even though China’s production of ICE cars exceeded that of the US in 2009, but it would have been impossible to overtake the established players like Germany, Japan, the US, and even South Korea. Thanks to people like Wan Gang, an auto engineer who had worked for Audi in Germany for a decade, became China’s minister of science and technology in 2007, and vigorously pushed the development of EVs.
Two, the massive subsidies provided by the Chinese government to consumers as well as the producers are instrumental in reaching the present scale. For example, in 2001, the Ministry of Science and Technology implemented a major scientific and technological project on electric vehicles—the “863” Plan, which has been continued since then in all the Five-Year Plans of China. In 2010, the project got a funding of 738 million yuan that included various segments like research and development of hybrid electric vehicles, power batteries, capacitors, and related materials. According to a report released in 2023 by the Ministry of Finance, the State Administration of Taxation, and the Ministry of Industry and Information Technology of the People’s Republic of China, as of the end of 2022, the cumulative tax exemption scale (2009-2022) for the EVs exceeded 200 billion yuan ($29 billion), and it is expected that the tax exemption amount for the year 2023 will exceed 115 billion yuan ($16.4 billion). With a dominance in the upstream and downstream segments and government subsidies, BYD produces much cheaper EVs that are 25% cheaper than European automakers and 15% cheaper than Tesla.
Three, BYD pursued a vertical integration strategy, owning all links in the supply chain, especially the battery supply chain that accounts for up to 40-50% of the value of today’s EVs. According to the 2022 International Energy Agency report, China produces three-quarters of all lithium-ion batteries and is home to 70% of production capacity for cathodes and 85% for anodes. Over half of lithium, cobalt and graphite processing and refining capacity is located in China. The report forecasts 70% of battery production capacity for the period to 2030 in China. Besides, China also procures lithium carbonates, cobalt and nickel from countries like Australia, Chile, Argentina and Congo. According to the Institute for Energy Research (IER), of the 136 lithium-ion battery plants in the pipeline to 2029, 101 are based in China.
The docking of the Explorer No.1, undoubtedly has challenged the monopoly of global auto giants. Nevertheless, the aggressive marketization by the Chinese EVs globally, especially in the Global North is bound to raise many eyebrows. In order to protect their domestic markets, the Western countries are likely to adopt various measures. For example, France has already excluded the Chinese made EVs from subsidies to its people under “Green Industry” plan. The EU is likely to follow suit and exclude the Chinese EVs on the basis of “poor carbon footprints” as most of the manufacturing in China depends heavily on coal. According to a Nikkei Asia report, a small sedan made in China produces 45% more emissions than the same model made in Europe, and a battery produced in China emits 1.7 times more carbon than a battery produced in France. The EU has already announced that it will investigate the subsidies provided to the Chinese EVs and if established there could be higher tariffs.
Then there are security hazards, as every component of the EVs is connected to the central computer; charging the car will make EVs vulnerable to malware and being hacked. Furthermore, Chinese EVs use Huawei’s 5G technologies, Beidou navigation and made in China chips. In absence of the standard cybersecurity laws, data collected by the EVs of people and critical infrastructure could be sensitive and subject to misuse. Geopolitical rivalries amongst nations would certainly flag out such issues and ban EVs originating from certain countries. In a statement on 29 February 2024, President Joe Biden said, “I am announcing unprecedented actions to ensure that cars on US roads from countries of concern like China do not undermine our national security.”
Domestically, overcapacities, a typical Chinese characteristic, could pose new challenges if exports dwindle. The rising number of chips in the EVs, and China’s visible gap with the US in this field, may also create roadblocks for having a robust nerve centre in the EVs.
Finally, given the kind of investment China has made in clean energy, it would be extremely difficult for competitors to upstage China’s global dominance in EVs in short term. If the statistics are to be believed, the clean-energy sector contributed an estimated 11.4tn yuan ($1.6tn) to China’s economy in 2023, an increase of 30% year-on-year. Implying that clean energy accounted for 9.0% of China’s GDP in 2023, up from 7.2% in 2022. The so-called “new three”—EVs, lithium ion batteries and solar cells—have dominated the growth; their exports increased by almost 30% in 2023 according to Li Qiang’s 2024 Government Work Report.
Though impressive, yet is dwarfed by the tailspinning real estate sector that contributed to almost 30% of the GDP, and saw Chinese people parking 70% of their savings. Therefore, will China’s clean energy sector replace the investment driven growth to the one driven by consumption? Well, it will depend on how best China deals with the above challenges. For present, China is determined to lead the EV revolution globally. The intent has been made clear, as the rise of the EVs in China has been aligned to the Chinese dream of national rejuvenation, China’ high quality development driven by Xi Jinping’s “Five Major Development Concepts”—“innovation, coordination, green, openness and sharing,”—and above all the superiority of the Chinese system, Chinese model and Chinese style modernisation.
B.R. Deepak is Professor, Center of Chinese and Southeast Asian Studies, Jawaharlal Nehru University, New Delhi.