How China rose to lead the world in electric vehicles

China has been a dominant force in the global market for electric vehicles, but competition is increasing both at home and abroad.

China is the world’s biggest producer of electric vehicles (EVs) – and it’s growing.  In 2022, the country accounted for 59% of global EV sales, according to data from the EV Volumes database, with sales of new EVs increasing by 82% from the previous year to reach more than 6 million^[1].  China also dominates global production of EVs, accounting for almost two-thirds (64%) in 2022.

Government support

China’s current dominance in the EV market has deep roots.  According to an analysis by the MIT Technology Review^[2], in the early 2000s, the country realized that despite having a developed auto industry, it faced a near-impossible task in seeking to challenge the pre-eminence in making traditional internal combustion engine vehicles enjoyed by manufacturers from the US, Germany and Japan – the latter of which had also established a lead in hybrid vehicles.

China therefore took the alternative and high-risk approach of focusing on pure EVs.  And it has paid off.  In 2001, the government made EV technology a priority science research project in its five-year plan, which sets out the country’s high-level economic strategy.  In 2007, Wan Gang, previously an engineer at Audi in Germany and a champion of EVs, was appointed minister of science and technology.  Wan’s influence is seen by many as crucial in China’s consistent prioritization of EVs.

The Chinese government sees the EV industry as strategically important and has supported its development through a range of well-funded policy measures to boost both supply and demand.  Between 2009 and 2022, it spent more than 200 billion yuan (US$ 28 billion) on EV subsidies and tax breaks[3].  Until 2022, for example, buyers of EVs could benefit from a reimbursement of up to 60,000 yuan (more than US$ 8,000).  Many local governments continue to generously subsidize EV purchases[4].  And in 2023, the national government unveiled a four-year package extending tax breaks for EV buyers, worth 520 billion yuan (more than US$ 72 billion).  EVs and other green cars will continue to be exempt from purchase tax in 2024 and 2025, with the rate halved for 2026 and 2027[5].

China’s government has also directly subsidized many domestic EV manufacturers – and continues to do so.  An analysis by Nikkei Asia last year, for example, found that five of the 10 companies receiving the most in grants from the Chinese government in the first half of 2023 were local manufacturers of EVs or EV batteries.  BYD Auto, China’s largest EV producer, received 1.78 billion yuan, while the state-owned company SAIC Motor received more than 2 billion yuan^[6].

The national government is equally active in its support for innovation in the sector, providing procurement contracts to a range of nascent EV manufacturers to help them get up and running^[7].  Initially, this strategy focused on public transportation.  From around 2010, the government provided contracts for public buses, shuttles and other transport modes, helping the industry gain real-world test data as well as valuable revenue.  Local governments in China have also offered incentives to EV manufacturers.  Shenzhen, for example – the first city to completely electrify its public bus fleet – maintains a close relationship with BYD.  Research in 2016 found that the support of central and local governments had been “central to BYD’s expansion”^[8].

As well as financial support to the industry, the Chinese government has also prioritized and supported the development of the necessary infrastructure for EVs. The country has 1.8 million public EV charging points: that’s more than 14 times the number in the US^[9], despite a population just four times larger.  This coverage helps to reduce range anxiety, which can be a significant barrier to EV take-up among consumers.  It has been achieved in no small part through state efforts.

The country’s State Grid is a significant provider of charge points and works closely with relevant authorities to make it easier for drivers to charge their vehicles.

In Jinan’s Laiwu district, for example, the Laiwu Power Supply Co – part of the State Grid – has invested in 75 charging stations and 280 piles, creating “10-minute charging circles” to provide peace of mind for EV owners^[10].  The company says its efforts mean it is now possible for EV owners to apply to install residential charging facilities with “remarkable speed and convenience”.  Initiatives like this form part of a national drive to boost EV infrastructure, with a goal of reaching a ratio of one charging pile for every electric vehicle across the country by 2030.

“Efforts to boost ‘new infrastructure’ have been highlighted at many high-level meetings in recent years, and China has an urgent need for such efforts amid its green transformation push,” one investment consultant told China Daily last year^[11].

Vehicle licensing policies are also encouraging the growth of EVs.  To combat pollution and congestion, several large Chinese cities restrict the issuing of license plates to ICE vehicles – with a lottery system used in Beijing and auctions in Shanghai.  In contrast, it is much easier to get licenses for EVs: Shanghai will continue to offer free EV licenses in 2023^[12], while of the 100,000 additional license plates available for Beijing last year, 70% were for EVs^[13].

Battery technology

Alongside vehicle production, China has also established a world-leading role in the manufacture of EV batteries.  With the battery typically accounting for about 40% of the cost of a new EV^[14], the country’s focus on developing affordable technology in this field is now paying major dividends.  Many Western EV makers initially favored lithium nickel manganese cobalt (NMC) batteries, which offer a longer range and higher performance.  In contrast, Chinese companies have prioritized lithium iron phosphate (LFP) technology, which is cheaper and more reliable.

By focusing on improving LFP batteries, the Chinese firm CATL has become the leading global EV battery manufacturer, with more than a third of the global market^[15].

“The rest of the world’s ‘miss’ on batteries is that they prioritized battery chemistry tied to performance, not affordability,” said Bill Russo, founder of consultancy Automobility, told the Financial Times last year. “By making it cheaper, China wins.”

China’s strength in battery production is bolstered by the good access it has secured to the raw materials used, thanks to a long-term strategy of buying stakes in key mining companies for minerals such as lithium[16].  It also controls “the majority of the refinery capacity in the world when it comes to critical components”, according to the MIT Technology Review[17].

Factors such as these are contributing to the growing global dominance of China in EV batteries.  According to SNE Research, in the first three quarters of 2023, six of the top ten firms in terms of global battery usage were Chinese, accounting for 62.9% of the global lithium battery market[18].

Key players

The country’s strength in the manufacture and supply chain for EV batteries underpins the growth of its wider EV industry.  In fact, China’s largest EV manufacturer, BYD Auto, was originally a battery maker that supplied mobile phone companies.  In the 2000s, the company entered the EV market.  It now sells the largest number of fully electric cars worldwide, overtaking the US company Tesla last year^[19].  BYD also dominates China’s domestic EV market.  In 2023 it sold 2.7m green cars (including EVs and hybrids) with a market share of 35% – the only company with a share bigger than 10%.

Given its background, it is perhaps not surprising that BYD’s success has been driven by its innovation in advanced battery technology.  In 2020, the company launched the Blade battery, which provides good energy density (the energy it can provide relative to its weight) alongside strong safety credentials.  The Blade is used in BYD cars such as its Han sedan model, as well as EVs from companies such as Tesla, Toyota and Mercedes-Benz.  BYD was backed with a US$ 230 million investment by Warren Buffett’s Berkshire Hathaway in 2008^[20].  The company also benefits from what the UK’s The Guardian newspaper describes as “near-total control over its supply chain”^[21], with a range of close links to mining and processing companies.  Strategic partnerships with other firms, whether in the auto industry (Toyota, Daimler), or in areas such as software (the Chinese tech giant Baidu) have also helped to drive its growth.

The second largest share of China’s EV market is held by a foreign firm – the US-based Tesla, which accounted for 7.8% of the market last year.  Western auto firms have historically operated in China through joint ventures.  But since 2019, Tesla has had its own wholly-owned factory in Shanghai, which received national and local government support and now makes 150,000 cars a year[22].  The company has also benefited from Chinese government subsidies.  Tesla primarily targets the high-end market, while BYD’s main focus is on more affordable cars such as the Seagull, billed as the world’s cheapest electric car.  Nonetheless, Tesla is in increasingly fierce competition with Chinese firms.  In 2023, it significantly cut prices for some of its Chinese models[23] and the country now accounts for half its total EV sales.  Another top Chinese EV maker, Geely, is also increasingly competing with Tesla through its premium brand, Zeekr[24].

While established overseas auto brands such as Volkswagen and BMW have historically enjoyed a significant presence in China, the growing popularity of EVs is eating into their market share – and they face a major challenge in breaking into this hotly contested sphere themselves[25].

“Chinese brands – particularly new and EV-first brands, are very strong in their electric vehicles offers, while legacy international brands are, at the moment at least, rather weaker, so the market share of Chinese brands is increasing and overtaking international brands”, explained George (王恒) Wang, Country General Manager, Abdul Latif Jameel China.

Nonetheless, many international brands continue to invest as they seek to build a long-term presence in the country.  US automotive giant General Motors, for example, partners with two Chinese firms in the SAIC-GM-Wuling joint venture – which had the fifth largest share of the country’s EV market in 2023.  Abdul Latif Jameel’s long-standing partner Toyota meanwhile, a pioneer in sustainable mobility, continues to have a significant presence in China, and in 2023 announced plans to boost its development of EV technology in the country[26].  Abdul Latif Jameel Motors has worked with Toyota in China for more than 25 years, and now operates in eight locations across four different provinces.

“With our long experience in China, the good reputation of Abdul Latif Jameel China in the local market, the trust of more than 270,000 customers and a professional, dedicated and loyal team, we are well placed for further growth and new business opportunities in this exciting market,” said George Wang.

International growth

Amid intense domestic competition, Chinese EV brands are increasingly looking to international markets.  BYD’s recent ousting of Tesla from the top spot in global EV sales is indicative of a wider trend.  Chinese brands now account for about half of all EVs sold globally[27].  In 2022, China contributed 35% of global EV exports, according to a report from the International Energy Agency (IEA)[28], compared with just 4.2% in 2018.

Europe – where Chinese-made EVs can typically be sold for around twice the price they fetch in their home market[29] – is a major target for many firms, accounting for around a third of China’s EV exports.  The EU’s decision to ban the sale of ICE vehicles by 2035 creates a strong incentive for consumer purchases, while compared to the US there are lower trade tariffs and fewer political tensions.  According to customs data, Chinese ‘new energy vehicle’ shipments to the EU more than doubled in the first seven months of 2023, and have increased more than fourfold since 2021[30], while EU imports of Chinese cars have quadrupled in the past five years[31].

BYD, for example, already has 230 outlets across 19 European countries, and has signed a deal to supply the German-based car rental company Sixt with 100,000 EVs by 2028[32].  The company plans to launch three new car models in Europe in 2024, in addition to the five it currently sells[33].  Underlining its European ambitions, BYD also recently announced plans to build its first car factory in the continent.  The company says the planned plant in Szeged, Hungary, will act as a base for its European operations and create thousands of local jobs.  Michael Shu, European managing director, believes the company has the potential to “be 10 times bigger” in Europe[34].

Other growing markets include Southeast Asia, where Chinese firms sell around three quarters of EVs, and have committed to invest around US$ 1.5 billion in production facilities[35].  Last year, BYD began constructing a passenger car plant in Thailand which is expected to produce 150,000 vehicles annually, beginning this year[36].  By developing distribution partnerships with local dealers, the company had gained more than a quarter (26%) of Southeast Asia’s rapidly growing EV market by the second quarter of 2023[37].  Other Chinese EV firms operating in the region include GAC Aion, which began selling cars in Thailand in 2023 and started building a plant in the country this year.  It is the firm’s first overseas production site, underlining Thailand’s central role in its globalization strategy[38].

Challenges for Western automotive brands

The global initiatives of Chinese EV firms are already achieving success.  Although almost 90% of BYD’s sales came from China in December in 2023, its exports are rapidly increasing: in the second half of 2023, overseas sales were more than three times their level a year earlier[39].  According to Chinese industry groups, growing EV sales helped China overtake Japan last year as the world’s biggest exporter of cars[40].

China’s growing international clout in EVs is causing Western automotive and government leaders to take notice.  In September 2023, Renault chief executive Luca de Meo said he believed Chinese EV makers were “a generation ahead of us,” adding that “we need to catch up very, very quickly”[41].  Similarly, European Commission (EC) President Ursula von der Leyen has expressed concerns over the influx of generally cheaper Chinese EV brands.

The EC said China’s share of EVs sold in Europe has risen to 8% and could reach 15% in 2025, with vehicle prices typically 20% below EU-made models[42].  The Commission is carrying out a formal investigation, due to conclude by the end of 2024, into whether it needs to impose new tariffs on EV imports from China due to “illegal subsidization”[43].  The move followed pressure from the French government[44], which in December imposed measures of its own that are expected to curb Chinese EV sales – revamping the rules for consumer cash incentives to favor French and European models[45].  Italy is reportedly considering a similar approach[46].

The current tariffs on importing cars to the EU are relatively low, at 10%.  In the US, Chinese EVs face much higher barriers: a 27.5% tax on Chinese auto imports imposed under Donald Trump, to which the current president Joe Biden has added further protectionist tax credits which favor North American manufacturers[47].  So far, such measures have limited the penetration of Chinese EVs into the US market.  But some lawmakers in the country believe they do not go far enough and are calling for further tariffs[48].

Future trends

The increasing political pushback against China’s global EV ambitions may slow them down, but it is unlikely to bring things to a halt.  For one thing, the growing production presence of Chinese firms close to their target markets could well help them avoid tariffs.  BYD’s factory in Hungary is seen as a possible way to avoid punitive measures from the EU[49].  The Chinese firm is also planning a factory in Mexico[50], which could help it avoid import tariffs to the US – joining other Chinese carmakers that have adopted similar strategies[51].  In addition, any measures taken against cars made in China would also hit Western firms with factories in the country.

Progress through partnership

Tesla chief executive Elon Musk recently warned that Chinese EV firms would “demolish” most of their global rivals without trade barriers[52].  But Western car makers have not been universally supportive of protectionist measures.  Recent moves suggest the future may see increasing collaboration between Western and Chinese firms.  Carlos Tavares, Chief Executive of multinational Stellantis – which counts Chrysler, FIAT and Peugeot among its brands – for example, has criticized the EU’s subsidy probe, saying “we have to adopt a global mentality”[53].

In October 2023, his firm announced it would buy a 21% stake in the Chinese EV maker Leapmotor.  The firm will own a majority stake in a joint venture that will give it exclusive export, sale and manufacturing rights for Leapmotor products outside China[54].  The move followed Volkswagen’s acquisition of a 5% stake in Chinese firm Xpeng for US$ 700 million a few months earlier: the companies plan to develop two new VW-branded EVs for the Chinese market by 2026[55].  Increasing competition in the EV industry may well drive further collaboration. Renault boss de Meo recently suggested a collective European EV initiative, on the model of the Airbus consortium, could benefit the continent’s car makers[56].

Within China itself, future consolidation within the industry is widely expected, with the head of one EV firm, Li Auto, recently calling for the government to facilitate this[57].  Shares in several key manufacturers have recently fallen amid profitability concerns[58] – indeed, it’s partly in response to the squeezed domestic market that the industry is focusing its attention overseas.  This will certainly involve further challenges.  The difficulty of establishing brand awareness and trust, as well as sales networks, in new markets should not be underestimated.  But a strong head-start, affordable prices, and dominance in battery production all point to a bright future for Chinese EVs as their presence grows on the global stage.

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[6] https://asia.nikkei.com/Spotlight/Electric-cars-in-China/China-gives-EV-sector-billions-of-yuan-in-subsidies

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[15] https://www.ft.com/content/1f95d204-ea6a-4cf3-b66a-952362e8092a

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[20] https://www.cnbc.com/2008/09/27/warren-buffett-invests-in-chinese-company-developing-green-cars.html

[21] https://www.theguardian.com/environment/2023/jul/29/battery-power-how-china-could-take-charge-of-the-electric-vehicle-market

[22] https://graniteshares.com/institutional/uk/en-uk/research/tesla-s-china-strategy-how-the-world-s-largest-auto-market-impacts-stock-prices/

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[26] https://www.reuters.com/business/autos-transportation/toyota-says-boost-ev-development-technology-china-2023-07-31/

[27] https://www.bloomberg.com/news/articles/2023-07-17/how-china-beat-everyone-to-be-world-leader-in-electric-vehicles

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[29] https://www.bloomberg.com/news/articles/2023-12-20/china-is-under-pressure-to-keep-exporting-electric-cars-to-the-eu

[30] https://www.reuters.com/business/autos-transportation/what-is-driving-chinese-ev-exports-their-price-competitiveness-2023-09-14/

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[38] https://carnewschina.com/2024/01/31/gac-aion-thailand-factory-officially-started-construction/

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[42] https://www.reuters.com/world/europe/eu-launches-anti-subsidy-investigation-into-chinese-electric-vehicles-2023-09-13/

[43] https://ec.europa.eu/commission/presscorner/detail/en/ip_23_4752

[44] https://www.politico.eu/article/brussels-officially-starts-probe-into-chinese-electric-vehicles/

[45] https://www.reuters.com/business/autos-transportation/sixty-five-percent-electric-cars-sold-france-can-quality-state-bonus-scheme-2023-12-14/

[46] https://www.reuters.com/business/autos-transportation/italy-weighs-auto-incentive-scheme-reduce-chinese-ev-price-advantage-sources-2023-10-02/

[47] https://www.politico.eu/article/china-us-europe-electric-cars-miles-apart-the-us-and-europe-diverge-on-car-threat/

[48] https://www.wsj.com/business/autos/why-americans-cant-buy-cheap-chinese-electric-vehicles-53473383

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[52] https://www.reuters.com/business/autos-transportation/tesla-ceo-musk-chinese-ev-firms-will-demolish-rivals-without-trade-barriers-2024-01-25/

[53] https://europe.autonews.com/automakers/eu-probe-chinese-car-exports-slammed-carlos-tavares

[54] https://europe.autonews.com/automakers/stellantis-plans-buy-20-stake-chinas-leapmotor

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[57] https://www.bloomberg.com/news/articles/2024-02-21/li-auto-ceo-calls-for-industry-m-a-as-china-ev-demand-softens?leadSource=uverify%20wall

[58] https://www.cnbc.com/2024/01/11/chinas-ev-stocks-start-2024-in-reverse-gear-as-price-wars-pressure-profitability.html