Auto industry analysts disagree about the timeline for the electrification of the world’s transport system, but there’s one thing they all agree on: China has pulled far ahead of the US.
A recent article in The Atlantic by Michael Schuman, the author of several books about China’s history and economy, explains that the meteoric rise of China’s EV industry has relied heavily on state support. Exhibit A is Xpeng, a startup automaker that recently began exporting vehicles to Europe, fulfilling a long-held dream of the Chinese auto industry.
“In the past year, the company has signed deals with investment funds linked to the city of Guangzhou, Xpeng’s hometown, and the surrounding province, Guangdong, worth $700 million,” Schuman writes. “Xpeng has also gotten preferential terms on land, low-interest loans and tax breaks, and state subsidies that have helped it reduce [its vehicle prices].”
All governments support domestic firms in various ways, but China’s system of “state capitalism” manipulates markets to a far greater extent than would be tolerated in the laissez-faire US. “By offering funds and protection for nascent, high-tech industries including electric cars, [China] could potentially swamp the world with subsidized products,” Schuman warns.
It isn’t just economic leadership that Beijing seeks. If China succeeds in supplanting the US as the world’s foremost superpower, it would send an ominous message — that autocratic, repressive regimes are destined to prevail over liberal democracies. In Schuman’s view, the global competition over electric vehicles is nothing less than “a proxy war between the West and China, between their economic models and political ideologies.”
Of course, EV advocates have long argued that the US government should take a more active role in promoting electromobility, and lately these views have been getting more attention in Washington. Jake Sullivan, now President Joe Biden’s National Security Adviser, wrote in a paper last year that “US firms will continue to lose ground in the competition with Chinese companies if Washington continues to rely so heavily on private-sector research and development.”
The President seems to agree — his sprawling infrastructure bill includes $174 billion in new funding for charging infrastructure, support for automakers, and tax breaks for EV buyers. “China and other countries are eating our lunch,” Biden said, and the bill will “put us in a position to win the global competition with China.”
Electric vehicles were one of the primary targets of the Made in China 2025 initiative, which was unveiled in 2015. The state has made direct investments in EV manufacturers, granted them subsidies to reduce prices, invested in R&D and charging infrastructure, and offered benefits to EV drivers, including privileged access to vehicle registrations, which are limited in many cities.
Foreign automakers have also benefitted from the largesse — as long as they build cars in China, creating Chinese jobs and allowing Chinese suppliers to learn the latest technology. Tesla received a larger helping of the gravy than most — when the California carmaker announced plans to build its Shanghai Gigafactory, China’s government rolled out the red carpet, relaxing regulations on foreign ownership, expediting building permits, and even offering a residence permit to Elon Musk.
Of course, as any good capitalist would agree, heavy-handed industrial policy has its limits. There have been abuses and scams (including a couple of fictional electric bus factories invented out of thin air in order to claim cash subsidies), as well as unintended consequences (in order to qualify for otherwise-unobtainable vehicle registrations, many drivers bought plug-in hybrid SUVs, with no intention of ever plugging them in). More importantly, despite the billions of yuan in taxpayer money poured into the EV sector, Chinese automakers show no signs of conquering the West any time soon. Despite growing competition, Tesla’s Model 3 was the best-selling EV in China last year.
China-watchers point out that domestic startups suffer from a lack of brand recognition compared with Tesla and other valued global brands, and they haven’t closed the technology gap. Tu Le, founder of the Beijing-based consultancy Sino Auto Insights, told Michael Schuman that even Xpeng, which is considered one of China’s most advanced EV-makers, is “still a ways away from Tesla’s capabilities, from a technology and software standpoint.”
Beijing’s industrial policies have encouraged companies to pile into the EV sector, including a cellphone maker, a video-game developer, and a couple of internet commerce firms. By one estimate, there are now at least 119 would-be EV-sellers in China, far more than the market can sustain. In a capitalist economy, most of these would quickly go belly-up or be acquired, but subsidies, which come not only from the federal government, but also from provincial and city governments, could prop up money-wasting zombies for years. Schuman tells us that NIO, a darling of the US media and stock market, was “rescued from probable ruin last year by a $1-billion investment organized by the city of Hefei, where the company agreed to base some of its operations.”
As Schuman sees it, “China’s industrial program has resulted in a lot of production, but only questionable competitiveness.” Beijing seems to have caught wise to this, and has been rolling back direct subsidies to carmakers. Xpeng Vice Chairman Brian Gu believes Chinese leaders are realizing that current policies “may not be the most efficient way to support this industry. They have given a lot of subsidies, but it did not really build world-class companies or world-class products.”
US policymakers are on track to expand federal support for the EV industry, but they would be wise to study, and learn from, Beijing’s experience. As Schuman concludes, subsidies to automakers and EV buyers may be necessary for now, but in the long term, “taxpayer money might be more productively spent supporting R&D and building infrastructure such as charging stations, because in the end, the electric-vehicle war will be won in research labs and car showrooms, not the halls of Congress.”