Beijing\u2019s grand ambitions threaten to take down the global car industry.<\/b>
\nThis sign of serious problems in China\u2019s electric-vehicle industry may come as a surprise to many Americans. The Chinese electric car has become a symbol of the country\u2019s seemingly unstoppable rise on the world stage. Many observers point to their growing popularity as evidence that China is winning the race to dominate new technologies. But in China, these electric cars represent something entirely different: the profound threats that Beijing\u2019s meddling in markets poses to both China and the world.
Bloated by excessive investment, distorted by government intervention, and plagued by heavy losses, China\u2019s EV industry appears destined for a crash. EV companies are locked in a cutthroat struggle for survival. Wei Jianjun, the chairman of the Chinese automaker Great Wall Motor, warned in May that China\u2019s car industry could tumble into a financial crisis; it \u201cjust hasn\u2019t erupted yet.\u201d
What happens in China\u2019s EV sector promises to influence the entire global automobile market. China\u2019s emergence as the world\u2019s largest manufacturer of EVs highlights the serious challenge the country poses to even the most advanced industries in the U.S., Europe, and other rich economies. Given the vital role the car industry plays in economies around the world, and the jobs, supply chains, and technologies involved, the stakes are high.
But the wobbles in China\u2019s EV sector demonstrate the downside of China\u2019s state-led economic model. China\u2019s government threw ample resources at the EV industry in the hopes of leapfrogging foreign rivals in the transition to battery-powered vehicles. The Center for Strategic and International Studies estimates that the government provided more than $230 billion of financial assistance to the EV sector from 2009 to 2023. The strategy worked: China\u2019s EV makers would likely never have grown as quickly as they have without this substantial state support. By comparison, the recent Republican-sponsored tax bill eliminated nearly all federal subsidies for EVs in the U.S.
The problem is that China\u2019s program encouraged too much investment in the sector. Michael Dunne, the CEO of Dunne Insights, a California-based consulting firm focused on the EV industry, counts 46 domestic and international automakers producing EVs in China, far too many for even the world\u2019s second-largest economy to sustain.
Dunne told me that the EV sector in China is consolidating; 11 Chinese companies now dominate the local car market. But the industry should probably shrink further. The capital-intensive car business relies on economies of scale, which is why the world has so few major automakers.
Yet China\u2019s auto industry is still nascent enough to attract new players, including major electronics companies. Xiaomi, which makes everything from smartphones to rice cookers, launched its first EV model just last year. To woo customers in this crowded market, China\u2019s EV companies have been slashing their prices, making profits slim.
In most economies, the market would sort out this mess by culling the weakest players. But China\u2019s leaders don\u2019t trust markets to achieve their national goals, so they readily intervene. In China, state support or ownership of automakers extends the life of struggling businesses. Local governments are also reluctant to lose the jobs they bring, so officials prop up unprofitable companies. The city of Wenzhou recently helped arrange financing for an EV maker called WM Motor, to get the company\u2019s local factory humming again. The city of Hefei rescued the EV start-up Nio in 2020, but the publicly listed company continues to lose money\u2014$1.6 billion in the first half of this year.
China\u2019s EV woes are a direct consequence of these interventions, which have engineered an unsustainable glut of vehicles. But instead of addressing these market problems, China\u2019s leaders are cracking down on what they call \u201cdisorderly competition,\u201d such as the aggressive EV price war and the sale of zero-mileage \u201cused\u201d cars.
Beijing has its own reasons to avoid the economic reforms that would make its EV industry more viable. By keeping factories running, even at a loss, the government can shore up an economy plagued by sluggish consumer spending and a slumping property market. More important, EV makers are a key part of Beijing\u2019s plan to expand China\u2019s global power.
China\u2019s state-led EV program, by design, has been predatory. By subsidizing these companies, China sought to edge out more established automakers in the U.S., Europe, and elsewhere. Beijing\u2019s economic planners are willing to sacrifice something as frivolous as profitability to fulfill their dreams of building an internationally competitive car industry. China \u201csustains a lot of inefficiency at home in order to dominate industries and markets globally,\u201d Dunne told me.
Yet even the Chinese state may not be able to prop up its automakers indefinitely. The research firm Rhodium Group figures that Chinese policy makers spend the equivalent of 3 percent of the central government\u2019s fiscal revenues to subsidize car sales. Gregor Sebastian, a senior analyst at Rhodium, told me that this level is probably unsustainable, particularly if the Chinese government also hopes to develop semiconductors and AI. He recommends that Chinese policy makers \u201cslowly take the foot off the gas pedal, but in a way that the sector doesn\u2019t collapse.\u201d
China\u2019s EV industry\u2019s gains in the international market are also under threat. President Joe Biden\u2019s administration imposed a 100 percent tariff on Chinese EVs last year, which President Donald Trump has maintained, effectively shutting these vehicles out of the U.S. market. The European Union, Canada, Turkey and Mexico have also hiked duties on Chinese cars. Restricted access to key international markets could make it even harder for Chinese EV companies to survive without aid from their government.
The international automobile industry is shaping up to be a test of wills between the Chinese leaders determined to dominate it and the global policy makers who hope to stop them.
This contest isn\u2019t all bad. By pushing down car prices, China\u2019s policies may benefit consumers worldwide. But China\u2019s state-led economic model still comes at a high cost, given the ways its huge subsidies and low prices are forcing governments around the world to use tariffs to meddle with the markets. China\u2019s distorted EV market now threatens to hoard industry jobs by making it impossible for any car company to turn a profit. In the end, China\u2019s EV industry may overrun its competitors, but still be a financial catastrophe.<\/p>\n