Chinese cars have been in the news lately, as they — to many — represent a threat to the American auto industry. At the same time, they represent a potential relief in what many see as an overly expensive EV landscape, and thus a way to potentially get more people to give up gas guzzlers for cleaner cars. Will China come to the U.S. or won’t they? In Western countries that are less protectionist, China is already there, competing hard via genuinely compelling and outside-the-box EVs. While in Germany last summer, I had a chance to drive some of those Chinese EVs and…well, they are good. Very good.
How did we get here? How is it that China is building world-beating electric cars? It wasn’t long ago that China’s automotive industry found itself multiple steps behind that of the West. In fact, many Western automakers considered the Chinese market a veritable gravy train — a place where the local automakers weren’t meeting an astronomically large demand for good cars, leaving a humongous gap for American and European companies.
And so the West filled the gap, and as a result, its coffers with exorbitant quantities of cash. In fact, ten years ago, the Chinese market was pretty much the only thing any Western automaker wanted to talk about. The sales opportunities seemed endless, and in many ways, it felt like the beginning of a huge opportunity for corporate growth.
The Joint Venture: China’s Brilliant Chess Move
But China isn’t dumb. It was not just going to allow the West to sell cars and export billions of dollars out of China. No, China wanted something in return for access to the biggest car market on earth: It wanted its own competitive auto industry. And to make that happen, it established a Joint-Venture system. Some version of this had been around for a while (since the late 1980s, at least), but, especially in the last decade, the system’s value has become undeniable as China finally — for the first time ever — becomes a dominant player in the auto world.
To describe how this all went down, I’ll quote my colleague Tycho, who is a world-class expert in the Chinese auto market, having lived in China and covered its auto industry for over a decade. I asked him a bit about the origin of the Joint Ventures, to which he replied:
“In the 1980s, the Chinese government realized it was way behind the West in car making. To kick-start the industry, it created the joint venture system. Under this system, foreign car makers could only produce cars in China with a local partner, and they could not have more than 50% of the shares. Deng Xiaoping, the chief architect of China’s reform and opening up [to the west], gave a very important instruction to the automobile industry, “Joint ventures are allowed, not only for cars, but also for heavy-duty vehicles.“
Really, they were more than just “allowed,” they were required. And western automakers gladly accepted this knowing full well why China was doing it. “The goal of the Chinese government was clear to everyone and not a secret,” Tycho told me. “But with such a large and potentially lucrative market, Western car makers just couldn’t resist the deal.”
Tycho says that, early on, the system didn’t seem to spur much innovation locally, much to the chagrin of the government. “[Local companies] were happy to let the foreign partners develop the cars and cash the profits,” he said, though this began changing in the 2000s when stronger local carmakers like BYD, Chery, Geely, and Great Wall rose to power. This, along with the financial crisis that led western partners to reduce investment in China, Tycho told me, led the Chinese partners in the joint ventures to focus more on building their brands.
He told me that, prior to the Joint Venture era that began in the 1980s, Chinese car manufacturing “was basic at best,” with little auto development, dated production methods, and certainly no true efficient “mass production” strategy. “It was a notch above handbuilt, but not a big notch,” he said. “The joint ventures certainly taught Chinese car companies how to mass produce cars, everything from production to managing supply chains to distribution.”
Tycho went on, discussing the state of the Chinese car market even just ten years ago.”In 2014, some 19.7 million passenger cars were sold in China. The local brands accounted for 38%, the rest was for the joint ventures,” Tycho told me. “EV sales were non-existent, there were a few PHEVs and HEVs that sold in tiny numbers. The SUV segment was booming, followed by MPVs and sedans. There was some EV development, but at the time, nobody took it seriously.” Tycho says foreign partners were loving all the cash flowing in.
When I asked how China became so dominant in the auto world recently, Tycho broke it down for me. “China could become dominant because the country was at the right place at the right time, with the right policies and the right companies,” he said. “In 2009, during the financial crisis, China became the largest auto market in the world. It was expected that China would become the largest one day, but not that soon. This led to more investments in the automotive sector, with many new suppliers and new car makers.”
Beyond the Joint Venture system, there were other key policies related to a Chinese government category called “NEVs,” or New Energy Vehicles, which include BEVs, PHEVs, and hydrogen fuel cell vehicles. This category was subject to absolutely enormous subsidies from both the central and state governments, which played huge roles in accelerating this class of vehicle development.
“With a booming local market, the government saw an opportunity to get ahead of the rest of the world in EVs, and set up policies to support electric vehicles,” Tycho told me, with subsidies — which essentially reduced the price of an EV by 20 to 30 percent — acting as the primary support. “Other perks included easier access to license plates, a roll-out of charging stations by state-owned energy companies, and local perks like free parking spaces for NEVs.”
Building infrastructure was critical, too, with Tycho discussing the supply chain needed to build NEVs at scale:
At the same time, Chinese companies began with creating a fully Chinese supply chain for EVs. It was not a state-only operation, more like a mix of state-owned and private companies.”
“Chinese businesses already owned large mining concessions in countries like the DRC [Democratic Republic of the Congo], and these were now extended to cobalt. There was no large-scale refinery for cobalt, or for lithium, anywhere in the world, so China expanded its existing facilities. That, in turn, made it possible for other Chinese companies to setup battery-part and battery production. It is also important to mention the Chinese consumer, which is quite a different kind than the average American/European/Japanese consumer. Chinese consumers are not vested in the ICE age, they are less traditional, and not loyal to any brand or technology. They are willing to try and buy new brands, with new tech and with new design.”
NEVs were crucial in the Chinese automotive revolution, as Wired writes in its story “How China’s EV Boom Caught Western Car Companies Asleep at the Wheel.” That piece quotes Andy Palmer, who was COO of Nissan for a while, CEO of Aston Martin, and subsequently in the EV bus and charger space:
“China has a vast market, it has economies of scale, it has subsidies and encouragement from central government, and it has an international strategy that seeks dominance in overseas markets with a product—affordable electric vehicles—that Western manufacturers aren’t able to make,” says Palmer. He saw China’s long-term game plan firsthand when, in 2005, he was a board member of a 50-50 joint venture between Nissan and China’s Dongfeng Motor Corporation.
“I was a rare foreigner in the middle of that environment,” says Palmer, “and I saw how China carried out its series of five-year plans. Even back then, it was apparent that China had concluded that they couldn’t compete with the West with internal combustion engines. Their risky but innovative solution was that the way to leapfrog the West was through what they called ‘new energy vehicles.’”
Today it’s local brands leading the EV revolution in China. But what about all the joint-ventures that dominated that market and helped bring auto engineering know-how to China? How did they get overtaken? Tycho says these companies find themselves behind, having not taken the EV boom seriously.
“In the 2010s, some joint ventures paid lip-service to the policies of the Chinese government by setting up half-baked electric sub-brands,” he told me. “The government was not amused. For a long time, joint ventures thought that EV development would lead to nothing. The Chinese partners were split. Some expected more and pushed for it, others agreed and didn’t do anything.”
He gives the example of SAIC, which developed EVs for its own brands rather than relying on its Joint Ventures with General Motors and Volkswagen. He also mentions Dongfeng. “It has joint ventures with Honda, Nissan, and Peugeot-Citroen,” he wrote. “All of these are in big trouble because they missed out on EVs. Dongfeng itself is in trouble too, it was too late for the early boom, and is now trying to catch up.”
It’s been a wild ride for the Chinese auto industry, from building fairly crude automobiles up until the 1980s to building expertise through joint ventures to finally becoming a worldwide powerhouse in EV design thanks to heavy government investment, battery mineral mining advantages, consumers who were willing to buy from new brands, a history in excellence when it comes to electronics design, and a slew of other factors that all converged to bring China to the cutting edge. Finally.