China’s automakers try turning Japanese

Electric-vehicle makers in the People's Republic want to go back to the future. Efforts to block car exports from China are inspiring the world's largest battery-powered car maker BYD and peers to set up factories overseas. The journey is reminiscent of Toyota Motor and Nissan Motor's long drive into the US and Europe nearly half a century ago. But Washington's worries over security and new technology will restrict how far the new insurgents can go.

China exported almost $40 billion-worth of pure battery and hybrid cars last year. Most of them ended up in Europe, where drivers bought a total of nearly 5 million electric vehicles in 2023. About 8 percent of all electric cars sold in Europe came from the People's Republic by mid-2023, compared with close to zero as recently as 2019. If unchecked, the figure could zoom to 15 percent by 2025, according to the European Parliamentary Research Service

That acceleration is faster than their Japanese counterparts managed last century: by 1980 exports of Datsun - Nissan's overseas brand at the time - and other marques accounted for, opens new tab 9 percent of Europe's market, up from 1 percent a decade earlier. In the United States, the figure more than doubled, opens new tab to roughly 20 percent over the same period.

In both eras, the upstarts offered newer tech and lower prices. In the 1970s, Toyota, Nissan and compatriots were able to woo customers with smaller, fuel-efficient models that were in high demand after the energy crisis jacked up petrol prices. The newcomers' stringent cost management also meant they could charge less than incumbents.

Today, China's mature supply chains and rapid research and development mean local carmakers offer relatively sophisticated products at low prices - even away from their home turf. BYD could manufacture electric cars for around a quarter less than legacy rivals in Europe, UBS estimated last year; the gap is even bigger if the Shenzhen-based giant makes the vehicles in the People's Republic.

The European Commission is currently investigating reports that cars from China sell for as much as a fifth less than similar EU-made models. Meanwhile the Middle Kingdom's domestic market is suffering from overcapacity and a bruising price war, all of which encourages Chinese companies to find new customers overseas.

Forty years ago, Western officials intervened for fear that uber-competitive imports would squeeze local auto industries too hard. The US negotiated voluntary import quotas with Tokyo in 1981; Europe quickly followed.

Their successors are clearly feeling the fear. Chinese automakers have barely scratched the US market. Yet earlier this month US President Joe Biden warned of a "flood" of electric cars from the country, echoing comments in September by European Commission President Ursula von der Leyen.

Brussels kicked off customs registrations for Chinese electric-vehicle imports in March – a pre-requisite for the imposition of retrospective tariffs. That lays the foundation for the European Union to claim additional duties later this year, if an inquiry concludes Chinese carmakers have benefitted unfairly from substantial subsidies back home. It's not yet clear how burdensome those duties would be, but on the other side of the Atlantic the tariff on Chinese EVs is already a hefty 27.5 percent, and there's talk, opens new tab of even higher rates, Bloomberg reported on Monday.

What happens next will decide whether or not Chinese cars can stay on Western roads. Last time around, 1980s import quotas drove Japanese companies to start making products closer to buyers. Led by Nissan, Toyota and Suzuki Motor , their output in Europe sextupled to more than 300,000 between 1985 and 1991, according to the International Journal of Business. 

Across the pond, Honda Motor opened its first American factory in 1982, followed by Nissan a year later, and Toyota a year after that. By the early 1990s, Japanese companies made more cars in the US than they exported to the country.

Europe seems to be fast approaching a similar turning point. China's automakers have already been setting up in friendly but smaller markets such as Southeast Asia, Russia and Latin America: last year, their outbound foreign direct investment in electric vehicles and supply chains probably surpassed the record $30 billion set in 2022, the Rhodium Group estimates. 

Now they are putting down deeper roots in the EU. In December BYD announced it will build a car factory in Hungary. The Italian government has been discussing local manufacturing with BYD, as well as with Chery and Great Wall Motor, Reuters reported, citing sources. SAIC, a major exporter which owns the MG brand, is keen to establish European production lines as well.An influx would pile pressure on established brands, but they recognise advantages too. 

"We welcome competition because it drives innovation", Volkswagen spokesperson Christoph Ludewig told Breakingviews, comparing the new arrivals to the Japanese and Korean marques that came before them. It will take time for Chinese badges to adapt to local tastes, which would offer a window for European companies to adjust to the threat.

Allowing China's brands a chance to succeed in Europe may also reduce the likelihood of a protectionist backlash in the People's Republic, which is still a major revenue stream for many EU groups. The country contributed a third of Volkswagen's unit sales last year.American roads look more treacherous, however.

Last month, BYD Americas CEO Stella Li said the world's largest electric-car maker has no intention of expanding into Tesla's home market. Tellingly, after Stellantis , made a $1.6 billion investment in Hangzhou-based EV specialist Leapmotor , allowing the New York-listed firm exclusive rights to build and sell the Chinese group's products overseas, Leapmotor said it would target Germany, France, Italy and Spain first, steering well clear of Detroit.

China's electric-car and parts makers pose more of a threat than their Japanese predecessors did. First, they hold sway over critical minerals like nickel. Second, they're at the cutting edge of popular battery chemistries like lithium-iron phosphate - which accounted for half the market for EV batteries in the People's Republic last year by gigawatt-hours deployed per Adamas Intelligence,  and more experimental products like sodium-ion cells.

Back in the 1980s, Japan's progress raised fears about jobs, but at least the country was a Cold War ally of the US and Western Europe. Today, Beijing and Washington are vying for supremacy, with the US concerned Nio , BYD and others will not just compete with homegrown businesses, but also pose an acute threat to national security.

Biden's Inflation Reduction Act has already made it hard for Chinese-made cars and components to qualify for tax benefits. Scrutiny is extending beyond the powertrain, too: in February, the White House announced an investigation into a new generation of Chinese internet-connected cars. Such smart cars risk becoming just as much of a political hot potato as short-form video app TikTok or Huawei telecom equipment, since Biden considers them akin to "smartphones on wheels".

Meanwhile, utility Duke Energy is phasing out the use of Ningbo-based CATL's  cells at a US marine base and civilian projects in response to pressure from Congress, the company told Reuters last month. Ford Motor , which wants to licence the $114 billion battery-maker's technology for its own factory in Michigan, is also facing scrutiny from lawmakers. As elections approach, it seems near impossible to avoid getting tangled in the political jumble.What does it matter if China Inc only manages to follow a Japanese roadmap in Europe?

For BYD and peers, the loss is quantifiable. With more than 15 million unit sales last year, the total American auto market is still some 50 percent bigger than the EU, including the gas guzzlers. And electric-car penetration is lower Stateside, suggesting more room to grow.

But by 2030, the global market for electric vehicles could reach 60 million, Morningstar estimates. The consolation prize, then, will be more capital left over to invest directly in Europe, as well as other promising destinations from Thailand to Mexico. History may not repeat itself any time soon in the US for Chinese carmakers; elsewhere, though, there's a high chance it will rhyme.