Your next car could be electric — and Chinese.
Once a fringe topic in a global energy market centered on oil, EVs (Electric Vehicles) are now part of a potential new ecosystem of self-driving cars. [Source]
The business of manufacturing electric cars has reached a crucial juncture — and it looks like China is in the driver’s seat.
In September 2020, electric cars and other new energy vehicles — a category covering plug-ins, hybrids and hydrogen-powered autos — hit record sales in China.
This article breaks down China’s unprecedented rise in the EV market and why it may take years for other countries to catch up.
Accounting for a third of global sales, China is both the biggest manufacturer and the biggest market for cars globally.
With 20 million automobile registrations in 2020 alone, it’s bigger than the American and Japanese auto markets combined. [Source]
The key driver of China’s electric vehicle manufacturing ramp-up has been the unstinting subsidies offered by the Chinesegovernment. [Source]
The subsidies have enabled China to cling to ownership and control of the EV industry, and the strict licensing procedures in thecountry have held off foreign EV manufacturers from taking over.
Major global automakers (Toyota, Ford, Daimler) are already developing electric cars in China. This is an indication that China iswell-positioned to cement its supremacy in electric vehicle production.
Since economic reform began in late 1978, China has achieved astonishing poverty reduction. [Source]
Based on Pew’s income band classification, China’s middle class has been among the fastest-growing in the world. It grew from 39.1 million people (3.1 percent of the population) in 2000to approximately 707 million (50.8 percent of the population) in 2018. This represents an increase of 667.9 million (or 47.8 percentage points). 
A slew of Chinese companies is now angling for a piece of the largest middle-class market in the world. [Source]
More relevant to electric vehicles, China’s motorization rates point out that there is less than 1 car for every 5 individuals. In the U.S., the statistic is over 4 cars per 5 inhabitants. [Source]
As China’s middle class continues to grow, we expect motorization rates to also see an increase. Given the size of the population, this could significantly impact the size of the automobile market.
In November 2020, China released the “New Energy Vehicle Industry Development Plan (2021-2035).”
Under the new plan, the country established a bold goal of 20 percent EV penetration by 2025 (meaning that by 2025, 20 percent of all new car sales would be new energy vehicles). The same plan also aims to have 100% EV penetration by 2035.
That is an audacious goal especially considering that, during 2019, China had a mere 5.2 percent EV penetration.
Similarly, China aims to be a net-zero carbon economy by 2050, which may likely drive $7.9 trillion of spending on renewable energy and infrastructure that supports EVs.
China has a history of adopting technology faster than any other nation, and is now in some areas and by some measures a world leader. The country is on course to becoming a technological superpower. [Source]
A good example is China’s adoption of e-payments and other Fintech (Financial Technology) solutions throughout the country in recent history.
In 4 years (from 2014 to 2018), China’s mobile payment volume rose from $0.9 Trillion to an astonishing $26 Trillion -double its GDP. Over the span of just a few years, China went from a typical cash society to a cashless society.
China has a unique culture and regulatory environment that makes it uniquely capable of identifying new technologies and fostering their adoption throughout society as a whole. It has happened before with Fintech, and we believe this time may enable China to become a global leader in the electric vehicle industry.
Monetary consumer subsidies are nothing new. Countries around the world provide subsidies to assist in nurturing emerging industries.
The common practice is high initial subsidies to kick-off, then a gradual decrease in the amount with the organic decrease in production costs and maturing of the supply chain. [Source]
Chinese Consumers have heavy regulatory incentives to buy electric vehicles instead of ICE (internal combustion engine) vehicles.
China’s electric vehicle subsidies refund buyers different amounts depending on a car’s range (how far it can travel on a full charge).
Under the new policy for 2021, pure electric vehicles (PEVs) with a driving range of 300-400 km get a subsidy of 13,000 yuan ($2,004) per vehicle, while those with a driving range of 400+ km get 18,000yuan ($2,775). Subsidy for plug-in hybrid vehicles is 6,800 yuan ($1,048). [Source]
Subsidies on electric-vehicle purchases have helped China become the world’s largest market for EVs.
China’s government seems to have fully embraced the transition to electric vehicles and is doing everything they can to foster this transition – including some unorthodox regulations. Regulations that would not be possible in western countries, and that seem to be working, given the strong current state of the Chinese electric vehicle industry.
One of them, Nio, is powering ahead to new highs with forecast-topping performance. In fact, the innovative automaker is even doing better than Tesla.
In a 2020 report by market research firm J.D. Power, the firm assessed vehicle quality by measuring “problems per 100vehicles. Nio topped the report with 109 problems per 100 vehicles, with Tesla following closely with 113 Problems per 100 vehicles.
Henry Ford did not invent the car; he invented the affordable car through his innovation of the moving assembly line. That being said, innovating how you make the car is just as important as innovating the car itself.
Tesla took this to heart, and it seems its Chinese counterparts have as well.
Technological innovation has proven to be a vital engine in the transformation of China from a big to a powerful manufacturing country.
China removes the high rate of failure that is prevalent in domestic manufacturing. Production efficiency is unparalleled and due to the affordable labor costs, complications like defects rarely derail the operation.
Automated manufacturing is useless if you do not have robust supply chains to meet your high growth expectations.
Local Chinese supply chains are very robust for EV batteries, semiconductors, metals, and other essential materials.
For example, the top 3 companies for EV batteries are originally from Asia and account for over 70 percent of the EV battery market share. [Source]
These companies are LG Chem, CATL and Panasonic.
China topped Bloomberg NEF’s (BNEF)lithium-ion battery supply chain ranking in 2020, beating Japan and Korea that were leaders for most of the previous decade. [Source]
Having supported EV manufacturers and sales over the last decade, Beijing (China’s capital) now aims at expanding its presence outside China. [Source]
Beijing already controls a significant part of the global EV supply chain, starting with critical minerals processing. [Source]
The market for these products is mostly the EV supply chain.
One vulnerable leg of the supply chain is semi-conductor manufacturing, which has already started experiencing global shortages.
EVs require far more semi-conductors than ICE (Internal Combustion Engine) vehicles. This is attributed to the sensors and computing power required for autonomous driving.
Fortunately, the top 4 semiconductor manufacturing companies are originally from Asia and make up over 60 percent of the global market share for semiconductor manufacturing. [Source].
These companies are TSMC, UMC, SMIC, and Samsung.
Public markets can bring a lot of value to publicly traded companies, which has certainly been the case for electric vehicle companies.
As public markets raise the value of a given company’s stock (and therefore the company valuation), the company can sell shares to raise capital.
The higher the stock price, the more capital that gets raised for selling the same amount of shares. As EV stock prices rose, EV companies took advantage of these high valuations to issue new shares, allowing them to have more funds to invest in future growth.
A favorable regulatory environment and high-quality products & services are driving unprecedented demand for Electric vehicles in China. Impressive manufacturing technology, strong supply chains and favorable capital markets enable an unprecedented supply of Electric Vehicles in China.
Together, these factors have led to some very impressive growth figures for the leading Chinese electric vehicle companies.
We believe the above mentioned factors may remain unchanged for the foreseeable future and may continue to drive significant growth for Chinese electric vehicle companies.
Competition may actually be good for the following reasons:
One concerning risk, in my opinion, is the risk of political tensions between China and the western world.
As an emerging economy whose growth has been a focus of worldwide fascination, the U.S-China relations are at their lowest point in decades.
The biggest concern, in my opinion, is supply chain shortages. Even though China may have the most robust supply chain for electric vehicles, especially for critical components such as semiconductors and battery cells, it is still possible that the supply chain will experience shortages due to the unprecedented demand for these critical components. Remember, lithium battery cells and semiconductors are useful for much more than just electric vehicles. Over the course of a few years, our society is shifting from using lithium batteries exclusively in mobile applications like phones and computers to large scale applications like electric vehicles and grid scale energy storage - which require significantly more raw materials. Similarly, the semi-conductor market has also needed to grow rapidly due to emerging markets such as AI, cloud computing, 5G communications and electric vehicles.
Supply Chain constraints seem to be taking a bigger toll with GM and Ford having to shut down multiple factories for several weeks. issues seem to be taking a bigger toll on Western EV companies, with GM and Ford needing to stop production at several factories for numerous weeks. Nio seemed less affected, only needing stop production for 5 days.
China, we believe, may likely be the fastest-growing and ultimately one of the largest electric vehicle markets on the globe. Favorable regulatory incentives, strong consumer reports, and a growing middle class seem to be driving the high demand for electric vehicles. On the other hand, impressive manufacturing technology, strong supply chains, and favorable capital markets support an unprecedented supply of electric vehicles. Chinese EV companies may be able to use these supporting factors to grow faster than international competitors and establish better economies of scale, which can then be used to provide more competitive prices in international markets.
In short, there are many reasons to believe China may dominate the global Electric Vehicle market – and it seems there is little standing in their way.