Will China Disrupt the Automotive Industry?

Previously, I discussed how the European Union (EU) is losing its competitive edge due to excessive regulations. Volkswagen and Daimler (Mercedes) are the biggest R&D spenders in Europe, and they are facing the most pressure from China’s rapid rise in the automotive sector. Just think about it: who would have imagined driving a Chinese car ten years ago? With BYD’s investment decision in Turkey and the incentives in the investment deal, Turkey has also become part of this discussion. Let’s explore how China has become such a major player in the global automotive industry and how the rest of the world is responding.

Six out of ten electric vehicles (EVs) sold globally are sold in China, making it the largest market for EVs. China has also become a major production hub for EVs — not just for domestic use but for export around the world. In 2020, electric vehicles produced in China made up 10% of the global market, but by 2023, that number had grown to 26%. Competing with China is incredibly challenging. Why? Since 2015, China has been providing massive support to its EV sector. On one side, the government has increased supply by offering cheap credit, direct investments, funding R&D, tax incentives, and direct financial support. On the other side, it has driven demand through public procurement and subsidies. At one point, every province in China had its own version of a company similar to Turkey’s TOGG. Now, the government is consolidating these smaller companies into global giants. Similar support is being given to the battery sector, which means EV manufacturers can get one of their major cost components — batteries — at a lower price. For autonomous driving technology, the government provides AI systems with data gathered from the streets of the world’s most populous country.

It’s hard to fully grasp the scale of government subsidies in China. The American think tank CSIS conducted a study that found that in 2019, China provided $248 billion in state support for electric vehicles and other strategic industries, representing 1.5% of its GDP. In comparison, China’s military budget was 1.68% of GDP that same year. Among the countries analyzed by CSIS, South Korea was the next largest provider of state support relative to its GDP, at 0.67%, while the U.S. was at 0.39%. China’s level of state support was twice that of the U.S.

With this level of state support, China’s production capacity in several sectors grew beyond what was needed for its domestic market, extending to the global market. According to a Goldman Sachs study published last month, China’s production capacity for electric vehicles is now equal to 200% of China’s domestic market demand and 120% of global demand. Goldman Sachs estimates that under current market dynamics, China’s excess capacity will not match global demand until at least the end of 2026.

How are the world’s major economies responding to China’s overcapacity? The U.S. imposed a 100% tariff on electric vehicles produced in China this year. The EU also completed its subsidy investigation last year and, in June, introduced tariffs ranging from 17.1% to 38.1% on some electric vehicles imported from China. According to Goldman Sachs, producing an electric vehicle in China is, on average, 47% cheaper than producing it elsewhere. Chinese companies like BYD, which establish factories abroad, manage to keep production costs 17–24% below the global average, as they still source key components cheaply from China. How much profit are Chinese companies making by selling cars in the EU market? The Rhodium Group estimates that car prices in China are very low, resulting in an average profit of €1,300 per car. In the EU, however, this profit rises to €14,300. So, when selling in the EU instead of China, Chinese companies earn an additional €13,000 per car. Even with a 30% tariff, this profit margin only drops to €4,300. In other words, for the EU to truly deter Chinese car imports, they would need to impose tariffs of around 50%. Stopping Chinese cars is a very tough task.

Consider the investment agreement signed with BYD in July. Having such comprehensive agreements between the Turkish government and major companies is a positive step. When I worked at GE, I often envied how Gulf countries attracted investments from global giants like GE through such deals, while ministries in Turkey struggled to work together. Moreover, the BYD investment is important because it adds new technological capabilities to Turkey. In one of my previous articles, I highlighted how important foreign investments that enable technology transfer are for escaping the middle-income trap, drawing on the World Bank’s new report. If Volkswagen isn’t investing, then Turkey will take investment from BYD.

However, how much will BYD work with local suppliers? How much know-how will actually be transferred? Studies show that Chinese companies tend to operate in a more closed system. The Chinese Communist Party also prefers that Chinese companies do not get too involved with foreign partners. Another key issue is the 40% additional customs tax imposed on electric vehicles produced in China earlier this year, which Turkey agreed to lift for BYD for the next three years until the investment is complete. This exemption coincides with the period when China is expected to have excess capacity in electric vehicles. Lastly, how will the EU respond to Chinese investors who are able to bypass customs barriers through investments in Turkey, thanks to the Customs Union? Neither Turkey nor Hungary, where BYD also announced investments, has a particularly strong relationship with Brussels. If Brussels decides that the customs barriers are insufficient and starts imposing new obstacles on automotive exports to the EU — citing cybersecurity concerns or insufficient local content, for example — Turkey could face yet another challenge.

This article is a translated version of “Otomotiv sektörünü Çin çarpacak mı?” which was initially published in Economic Daily (Nasıl Bir Ekonomi Gazetesi) on September 27, 2024.

Previously, I discussed how the European Union (EU) is losing its competitive edge due to excessive regulations. Volkswagen and Daimler (Mercedes) are the biggest R&D spenders in Europe, and they are facing the most pressure from China’s rapid rise in the automotive sector. Just think about it: who would have imagined driving a Chinese car ten years ago? With BYD’s investment decision in Turkey and the incentives in the investment deal, Turkey has also become part of this discussion. Let’s explore how China has become such a major player in the global automotive industry and how the rest of the world is responding.

Six out of ten electric vehicles (EVs) sold globally are sold in China, making it the largest market for EVs. China has also become a major production hub for EVs — not just for domestic use but for export around the world. In 2020, electric vehicles produced in China made up 10% of the global market, but by 2023, that number had grown to 26%. Competing with China is incredibly challenging. Why? Since 2015, China has been providing massive support to its EV sector. On one side, the government has increased supply by offering cheap credit, direct investments, funding R&D, tax incentives, and direct financial support. On the other side, it has driven demand through public procurement and subsidies. At one point, every province in China had its own version of a company similar to Turkey’s TOGG. Now, the government is consolidating these smaller companies into global giants. Similar support is being given to the battery sector, which means EV manufacturers can get one of their major cost components — batteries — at a lower price. For autonomous driving technology, the government provides AI systems with data gathered from the streets of the world’s most populous country.

It’s hard to fully grasp the scale of government subsidies in China. The American think tank CSIS conducted a study that found that in 2019, China provided $248 billion in state support for electric vehicles and other strategic industries, representing 1.5% of its GDP. In comparison, China’s military budget was 1.68% of GDP that same year. Among the countries analyzed by CSIS, South Korea was the next largest provider of state support relative to its GDP, at 0.67%, while the U.S. was at 0.39%. China’s level of state support was twice that of the U.S.

With this level of state support, China’s production capacity in several sectors grew beyond what was needed for its domestic market, extending to the global market. According to a Goldman Sachs study published last month, China’s production capacity for electric vehicles is now equal to 200% of China’s domestic market demand and 120% of global demand. Goldman Sachs estimates that under current market dynamics, China’s excess capacity will not match global demand until at least the end of 2026.

How are the world’s major economies responding to China’s overcapacity? The U.S. imposed a 100% tariff on electric vehicles produced in China this year. The EU also completed its subsidy investigation last year and, in June, introduced tariffs ranging from 17.1% to 38.1% on some electric vehicles imported from China. According to Goldman Sachs, producing an electric vehicle in China is, on average, 47% cheaper than producing it elsewhere. Chinese companies like BYD, which establish factories abroad, manage to keep production costs 17–24% below the global average, as they still source key components cheaply from China. How much profit are Chinese companies making by selling cars in the EU market? The Rhodium Group estimates that car prices in China are very low, resulting in an average profit of €1,300 per car. In the EU, however, this profit rises to €14,300. So, when selling in the EU instead of China, Chinese companies earn an additional €13,000 per car. Even with a 30% tariff, this profit margin only drops to €4,300. In other words, for the EU to truly deter Chinese car imports, they would need to impose tariffs of around 50%. Stopping Chinese cars is a very tough task.

Consider the investment agreement signed with BYD in July. Having such comprehensive agreements between the Turkish government and major companies is a positive step. When I worked at GE, I often envied how Gulf countries attracted investments from global giants like GE through such deals, while ministries in Turkey struggled to work together. Moreover, the BYD investment is important because it adds new technological capabilities to Turkey. In one of my previous articles, I highlighted how important foreign investments that enable technology transfer are for escaping the middle-income trap, drawing on the World Bank’s new report. If Volkswagen isn’t investing, then Turkey will take investment from BYD.

However, how much will BYD work with local suppliers? How much know-how will actually be transferred? Studies show that Chinese companies tend to operate in a more closed system. The Chinese Communist Party also prefers that Chinese companies do not get too involved with foreign partners. Another key issue is the 40% additional customs tax imposed on electric vehicles produced in China earlier this year, which Turkey agreed to lift for BYD for the next three years until the investment is complete. This exemption coincides with the period when China is expected to have excess capacity in electric vehicles. Lastly, how will the EU respond to Chinese investors who are able to bypass customs barriers through investments in Turkey, thanks to the Customs Union? Neither Turkey nor Hungary, where BYD also announced investments, has a particularly strong relationship with Brussels. If Brussels decides that the customs barriers are insufficient and starts imposing new obstacles on automotive exports to the EU — citing cybersecurity concerns or insufficient local content, for example — Turkey could face yet another challenge.

This article is a translated version of “Otomotiv sektörünü Çin çarpacak mı?” which was initially published in Economic Daily (Nasıl Bir Ekonomi Gazetesi) on September 27, 2024.