How Chinese EVs’ rapid growth put them in European crosshairs

BEIJING - In August, BYD chief executive and founder Wang Chuanfu recounted the difficulties the Chinese auto giant, which started out as a producer of mobile phone batteries in 1995, faced when it moved into making electric vehicles (EVs) about 20 years ago.

He was speaking at a press conference to mark the production of its five millionth new energy vehicle on Aug 9 – two years after BYD took 13 years to hit the one million mark in May 2021.

New energy vehicles include those fully powered by batteries, as well as hybrids, which also have traditional combustion engines.

“Some people said that BYD embarked on vertical integration to save costs. In fact, we were forced to do vertical integration,” he said, referring to the firm’s notable advantage in producing its own chips and batteries – the most costly parts of an EV.

BYD’s growth has mirrored the expansion of the industry in China, which had been the world’s largest EV market for eight consecutive years by 2022, when 6.8 million EVs were sold in China.

As the country makes a bid to be an automobile powerhouse, its consumers have taken to EVs in droves. The vehicles are now ubiquitous in China, especially with more mass market-friendly options that cost 100,000 to 200,000 yuan (S$18,600 to S$37,300), a market segment that used to be dominated by traditional combustion engine models.

Established brands from Geely and GAC Aion to newer entrants such as Leapmotor and Hozon alike have hit new sales milestones in 2023, even as the market appears to be headed for consolidation after years of cut-throat competition.

But the industry is now under scrutiny: The European Commission said earlier in September that it will

investigate whether to impose punitive tariffs

to protect European producers from a “flood” of cheaper Chinese EVs, which it said have benefited unfairly from state subsidies.

“Europe is open to competition but not for a race to the bottom,” said European Commission president Ursula von der Leyen in her annual State of the Union address to the European Parliament earlier in September. China-made EVs sold in Europe are typically 20 per cent cheaper than those made locally.

Analysts said that while government incentives have paved the way, the rapid rise of China’s EV companies was also because of factors such as supply chain advantages and strong market competition – including from abroad.

Mr Tu Le, managing director of the Beijing-based consultancy Sino Auto Insights, said state subsidies played a key role in getting the nascent EV and battery sectors as well as charging infrastructure off the ground in 2009.

Subsidies also encouraged start-ups to enter the market, but sales started taking off only in 2020 after Tesla built a factory in Shanghai and delivered its first made-in-China Model 3 in 2019, which excited consumers, he said.

“(This) benefited companies like NIO, BYD, XPeng, Li Auto and others, so they should be given quite a bit of credit for the sector exploding in 2020 and beyond,” he told The Straits Times.

Chinese vehicles are now competitive with those made by the likes of Tesla, BMW and Hyundai.

BYD’s new, upmarket Seal model,

which is scheduled for delivery in Europe in the fourth quarter of 2023, has been lauded by reviewers for its sleek design, sharp handling and good performance.

European Commission executive vice-president Valdis Dombrovskis told reporters during a Beijing visit earlier this week that foreign companies which received Chinese production-side subsidies also fall under the probe. Beijing has voiced its objections, labelling the decision a “naked act of protectionism”.

Retired Chinese car market analyst Jia Xinguang, who has more than 50 years of industry experience, said: “All the companies in China took subsidies, but why did only some rise up?”

Referring to teardowns of the BYD Seal model, Mr Jia noted that its production cost was 15 per cent lower than that of Tesla’s Model 3. This boils down to not just BYD’s control over raw materials, but also its prowess in battery production and manufacturing, he added.

In 2001, China made research in core EV technologies such as batteries and electronic control systems a national priority. In 2007, former Audi engineer Wan Gang became the Minister of Science and Technology and was widely seen as the architect of China’s EV strategy.

The country began handing out financial subsidies to such companies in 2009 for producing buses, taxis or cars for private consumers. From 2009 to 2022, an estimated 200 billion yuan was dished out in subsidies and tax breaks.

Efforts have been made to wean automakers and consumers off subsidies. For instance, a nationwide EV purchase tax exemption scheme that started in 2014 was extended in June 2023, but will taper off before ending in 2027.

Chinese economist Ren Zeping said that by 2021, growth in the sector had shifted from being policy-driven to market-driven, meaning that incentives were not needed to boost demand.

“The new energy vehicle market welcomed an explosion of growth in 2021, and this showed that China’s market has already entered a market-driven period, where consumers will buy these vehicles because of their technology and supporting facilities,” he wrote in a 2022 piece for the Sina Finance news portal.

The mature market seems headed for consolidation. Sino Auto Insights’ Mr Tu pointed to the Volkswagen Group’s investment in XPeng, announced in July 2023.

“All EV companies in China are in survival mode due to a price war, and those that are able to stay alive until it is over will come out of the space stronger and more formidable,” he said.

Singapore-based automotive consultant Pang Cheong Yan, who has more than 30 years of industry experience, said the current trend towards consolidation shows that, ultimately, the attractiveness of the products is key, regardless of the financial incentives on offer.

“Price is one factor, but if the car’s range is short, the design is not attractive, or the software doesn’t integrate well, consumers will not bite.”