Archives January 2023

China-Made Cars Are Taking Over the World

The country is poised to become the No. 2 exporter of passenger vehicles, surpassing the US and South Korea and risking new tensions with trading partners and rivals.

Car made in ChinaBy Tom Hancock
2023.1.26

When Andreas Tatt, a manager at a greeting card company in Canterbury, UK, was interested in buying a new car, he knew he’d go electric. But after considering a Tesla Model 3 and the Porsche Taycan, he settled on a less familiar choice: a yellow-gold, battery-powered Polestar 2 manufactured by Volvo and its Chinese parent Zhejiang Geely Holding Group Co.

“It turns a lot of heads, partly due to its color, partly due to people not knowing what it is,” says Tatt, who waited four months for the vehicle to be shipped from Luqiao in eastern China. “I did have some concerns that the build quality may not be the best,” he says. “Upon test driving, any doubt of quality issues was put to rest.”

As China’s auto brands woo more and more foreign customers like Tatt, the nation is poised to become the world’s No. 2 exporter of passenger vehicles, a milestone that could reshape the global auto industry and spark new tensions with trading partners and rivals.

Overseas shipments of cars made in China have tripled since 2020 to reach more than 2.5 million last year, according to data from the China Passenger Car Association. That’s only a whisker (about 60,000 units) behind Germany, whose exports have fallen in recent years. China’s numbers, behind Japan but ahead of the US and South Korea, herald the emergence of a formidable rival to the established auto giants.

Chinese brands are now market leaders in the Middle East and Latin America. In Europe, the China-made vehicles sold are mostly electric models from Tesla Inc. and Chinese-owned former European brands such as Volvo and MG, and European brands like Dacia Spring or the BMW iX3, which is produced exclusively in China. A raft of homegrown marques like BYD Co. and Nio Inc. are ascending as well, with ambitions to dominate the world of new-energy vehicles. Backed by Warren Buffett’s Berkshire Hathaway Inc., BYD is already charming EV buyers in developed countries such as Australia.

The Tesla Gigafactory in Shanghai.

The Tesla Gigafactory in Shanghai.

It’s just the beginning, according to Xu Haidong, deputy chief engineer at the state-backed China Association of Automobile Manufacturers. The target is to sell 8 million passenger vehicles overseas by 2030—more than twice Japan’s current shipments, he says.

The trend underscores that China has moved beyond being the “world’s factory” for low-cost consumer electronic devices, appliances and Christmas toys. By shifting to more complex and sophisticated products for competitive, highly regulated markets, Chinese companies are moving up the value chain in manufacturing—a key driver of growth that transformed the once-struggling communist economy into today’s quasi-capitalist $18 trillion juggernaut. Indeed, the Economic Complexity Index compiled by the Growth Lab at Harvard University, which analyzes the range of products a country exports, ranks China 17th in the world, a rise from 24th a decade ago.

“We have to have them on the radar screen, without counting out the usual suspects,” Mercedes-Benz Group AG Chief Executive Officer Ola Kallenius said during the Paris Motor Show in October. “The competitive intensity is increasing. It’s the most fun time to work in automotive since 1886”—the year that Carl Benz, the father of the automobile, rolled out the first car powered by a gas engine—“but it’s also the most uncertain time.”

The surge in car exports has largely gone unnoticed in the US, partly because it happened during the coronavirus pandemic and partly because Chinese carmakers are mostly focused on Europe, Asia and Latin America. General Motors Co. did sell about 40,000 of its China-made Buick Envision compact SUVs in the US in 2021, but political tensions, the continuation of Trump-era tariffs and subsidies aimed at boosting domestic EV production have diminished the appeal of that market.

Entry into Europe had long been a goal for Chinese companies, which started exhibiting at motor shows on the continent in the early 2000s. A series of failed safety tests around 2007 dashed those hopes. “Frankly, I thought that was it, forever,” says Jochen Siebert at JSC Automotive, a car consulting firm in Singapore.

BYD’s exhibit at the 2023 Brussels Motor Show.100th European Motor Show
BYD’s exhibit at the 2023 Brussels Motor Show.

But thanks to increasing automation and resulting standardization— Goldman Sachs Group Inc. says new auto plants in China have the highest levels of robot usage in the world—those concerns are now history. As quality improved over the past decade, Chinese cars started acing European safety tests. China’s tough curbs on air pollution have also helped most of its cars meet European emissions standards.

“To fight the Chinese, we will have to have comparable cost structures,” Stellantis NV CEO Carlos Tavares said on Dec. 19, speaking to reporters at a powertrain plant in Tremery in northern France. “Alternatively, Europe will have to decide to close its borders at least partially to Chinese rivals. If Europe doesn’t want to put itself in this position, we need to work harder on the competitiveness of what we do.”

In a watershed year for China-made cars, exports to the European Union surged 156% in 2021, to 435,000 units, according to Eurostat. But the rapid rise in EV shipments from the country risks provoking a political backlash in the European Union, according to Agatha Kratz, a director at Rhodium Group. “Part of this is just Chinese companies are getting better, but some of it is overcapacity in China,” she says. “This is going to be a pain point. It could generate a really strong reaction in Europe in terms of trade protections.”

The premium-priced Polestar that Tatt purchased is an exception: China tends to export relatively cheap cars. At around $13,700, the average price of an exported China-made passenger vehicle was about one-third that of a German car in 2021, and about 30% less expensive than a Japanese make, according to data provided by UN Comtrade. That means Chinese cars are most likely to pose a threat to cheaper Japanese and South Korean models, rather than to German marques.

Domestically-manufactured cars to be exported are lined up in a terminal at the Port of Lianyungang in Lianyungang City, east China’s Jiangsu Province

Domestically manufactured cars lined up for export at China’s Port of Lianyungang.Domestically manufactured cars lined up for export at China’s Port of Lianyungang.

Authorities in Beijing aren’t too concerned, at least for now. “It’s been proved that the strength of one country’s auto industry will be finally tested by the international market,” says Gao Yang, a director of foreign investment at the Ministry of Commerce. She added that the government will encourage Chinese automakers to acquire foreign companies.

Having demonstrated that it’s a reliable manufacturing hub for industry majors, China has been leading the charge on the next frontier: EVs. Local carmakers have found the electric platform relatively easy to master compared with the complex internal combustion engine.

“The switch to battery means the motor is no longer a differentiator,” says Alexander Klose, executive vice president for overseas operations at Aiways Automobiles Co., a pure-Chinese EV maker, which has sold several thousand vehicles in Europe. Technologically, “it’s created a level playing field,” he says.

A global push to cut carbon emissions and save the planet has prompted Beijing to encourage EV makers and buyers with subsidies, while a robust local supply chain has made it cheaper to make an EV in China than in any other place. Tesla’s Shanghai factory produced almost 711,000 cars last year and accounted for 52% of the company’s worldwide output. The measures have also spawned dozens of domestic manufacturers like Aiways. Many have barely made a dent, but BYD, Nio and XPeng Inc. are among standouts with potential to shine on the global stage.

BYD, which also makes its own batteries and chips, is the biggest EV producer at home. It has ambitions of becoming the Toyota of EVs for the world’s budget buyer, and it’s betting its own cells and semiconductors will help it reach that goal.

Tesla Inc.’s biggest competitor is likely to be a Chinese company, Chief Executive Officer Elon Musk said on a call with analysts following the electric-vehicle maker’s quarterly earnings.

Asked about Chinese car companies, Musk said they “work the hardest, and they work the smartest,” describing them as the most competitive in the world. “If I were to guess,” he said, “probably some company out of China is the most likely to be second to Tesla.”

“We’re not hiding the fact that we are Chinese and Europeans are slowly getting used to the fact that products from China are high quality,” says Alan Visser, the global head of Lynk & Co., a Geely-owned EV brand that says it has more than 180,000 registered users in Europe for its rental services. Geely said its total exports were 190,000 vehicles in 2022 and the target is 600,000 a year by 2025.

From selling just a few thousand cars in the mid-1980s, China’s carmakers have come a long way. Up until 2018, when Tesla was allowed to fully own its China plant, foreign carmakers had to form partnerships with local companies to manufacture in China. While foreign companies guarded their most advanced technology, local players became competitive by learning processes from their partners and via acquisitions of brands such as Volvo and Lotus. A rapid pace of growth in domestic demand made China the world’s biggest auto market in 2009.

In 2018 domestic sales fell for the first time in nearly three decades, just as locally made vehicles were getting competitive in international markets.

“Chinese automakers saw that and said, ‘This fast-expansion period is coming to an end,’ so many of them said, ‘let’s try other markets,’” says Stephen Dyer, managing director of consultant AlixPartners in Shanghai and a former Ford Motor Co. executive.

The growth in the supply chain in China has also kept pace with car manufacturing. Domestic companies now make almost all parts, including those they used to import until about a decade ago, such as high-strength steel and reinforced fiberglass. As a result, China ran a trade surplus in vehicles and vehicle parts for the first time in 2021. The assembly lines still depend on advanced machines from Japan and Germany, though.

“There seems to have been a step change,” Dyer says. “The long-term trend is for increasing sales of Chinese brands around the world.” —With Chunying Zhang, Selina Xu, Craig Trudell, Albertina Torsoli and Wilfried Eckl-Dorna

America’s China Policy Is Not Working — The Dangers of a Broad Decoupling

By Henry M. Paulson, Jr.
January 26, 2023

US China policyFor all the talk of how we have entered a new global era, the last year bears a striking resemblance to 2008. That year, Russia invaded its neighbor, Georgia. Tensions with Iran and North Korea were perennially high. And the world faced severe global economic challenges.

One notable difference, however, is the state of Chinese-U.S. relations. At that time, self-interested cooperation was possible even amid political and ideological differences, clashing security interests, and divergent views about the global economy, including China’s currency valuation and its industrial subsidies. As Treasury secretary, I worked with Chinese leaders during the 2008 financial crisis to forestall contagion, mitigate the worst effects of the crisis, and restore macroeconomic stability.

Today, such cooperation is inconceivable. Unlike during the financial crisis, the COVID-19 pandemic failed to spark Chinese-U.S. cooperation and only intensified deepening antagonism. China and the United States jab accusatory fingers at each other, blame each other for bad policies, and trade barbs about a global economic downturn from which both countries and the world have yet to recover.

The world has clearly changed. China has very different and more assertive leadership. It has more than tripled the size of its economy since 2008 and now has stronger capabilities to pursue adversarial policies. At the same time, it has done far less to open its economy to foreign competition than many in the West have advocated and expected. Meanwhile, U.S. attitudes toward China have turned sharply negative, as have the politics in Washington. What has not changed, however, is the fact that without a stable relationship between the United States and China, where cooperation on shared interests is possible, the world will be a very dangerous and less prosperous place.

In 2023, unlike 2008, nearly every aspect of Chinese-U.S. relations is viewed by both sides through the prism of national security, even matters that were once regarded as positive, such as job-creating investments or co-innovation in breakthrough technologies. Beijing regards U.S. export controls aimed at protecting the United States’ technologies as a threat to China’s future growth; Washington views anything that could advance China’s technological capability as enabling the rise of a strategic competitor and aiding Beijing’s aggressive military buildup.

China and the United States are in a headlong descent from a competitive but sometimes cooperative relationship to one that is confrontational in nearly every respect. As a result, the United States faces the prospect of putting its companies at a disadvantage relative to its allies, limiting its ability to commercialize innovations. It could lose market share in third countries. For those who fear the United States is losing the competitive race with China, U.S. actions threaten to ensure that fear is realized.

COALITION OF THE WILLING
The United States is attempting to organize a coalition of like-minded countries, especially the democracies of Asia and Europe, to counterbalance and pressure China. But this strategy is not working; it hurts the United States as well as China; and over the long term, is likely to hurt Americans more than Chinese people. It is also clearly in Washington’s interest to cooperate or work in complementary ways with China in certain areas and to maintain a beneficial economic relationship with the world’s second-largest economy.

Although many countries share Washington’s antipathy to China’s policies, practices, and conduct, no country is emulating Washington’s playbook for addressing these concerns. It is true that nearly every major U.S. partner is tightening up its export controls on sensitive technologies, scrutinizing and often blocking Chinese investments, and calling out Beijing’s coercive economic policies and military pressure. But even Washington’s closest strategic partners are not prepared to confront, attempt to contain, or economically deintegrate China as broadly as the United States is.

In fact, many countries are doing the opposite of what the hardest-line voices in Washington seek. Instead of decoupling or deintegrating economically, many countries are instead deepening trade with China even as they hedge against potential Chinese pressure by diversifying business operations, building new supply chains in third countries, and reducing exposure in the most sensitive areas. Perhaps that is why, in 2020, despite years of American warnings, China overtook the United States as the European Union’s largest trading partner. Both EU exports to and imports from China grew in 2022. And Asian and European leaders, spurred by the November 2022 visit to Beijing by German Chancellor Olaf Scholz, now look set to beat a path to Chinese President Xi Jinping’s door, with trips by Philippine President Ferdinand Marcos, Jr., French President Emmanuel Macron, and Italian Prime Minister Giorgia Meloni likely to drive a broader trend.

Washington risks pushing against economic gravity.
Washington’s “less of China” approach is faring even worse in the global South. Chinese-African trade reached a historic high in 2021, rising by 35 percent from 2020. An intensive U.S. campaign to push Chinese technology firms like Huawei out of backbone telecommunications architecture has fared comparatively well in Europe and India but poorly nearly everywhere else. Just take Saudi Arabia. Its largest trading partner is China, and its Vision 2030 reform plan leans heavily on hoped-for collaboration with Chinese tech firms, including Alibaba and Huawei, even in the sensitive areas that are squarely in Washington’s crosshairs, such as artificial intelligence and cloud services. Indonesia, a huge Asian democracy that Washington has courted to counterbalance Chinese influence, has actually made Huawei its partner of choice for cybersecurity solutions, and even for government systems.

These U.S. efforts are likely to be even less successful now that China is reopening. Beijing is matching Washington’s “less of China” strategy with its own “more of everyone but America” strategy.

Beijing is reversing its restrictive COVID-19 policies, reopening its borders, courting foreign leaders, and seeking foreign capital and investment to reboot its economy. Last year, Xi made his first foreign trips since the outbreak of the pandemic to Central Asia and the Middle East, underlining his strategy to increase China’s global connectivity. With Xi now traveling the world again after a three-year hiatus, scattering renewed pledges of Chinese investment, infrastructure, and trade at every stop, it is Washington, not Beijing, that may soon find itself frustrated.

Trade rules are a good example. In 2017, U.S. President Donald Trump withdrew from the Trans-Pacific Partnership (TPP), and six years later, Washington clearly has no intention of rejoining it. Yet Beijing has applied to join the pact, now called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). China has also ratified the Regional Comprehensive Economic Partnership in Asia, applied to join the Digital Economy Partnership Agreement, and upgraded or initiated new free trade agreements with countries from Ecuador to New Zealand. China is now the world’s largest trading nation. Nearly two-thirds of all countries trade more with China than with the United States.

Competition with China begins at home.
Meanwhile, the United States is pursuing a “worker-centric” trade policy that looks very much like protectionism. And Washington’s Indo-Pacific Economic Framework looks timid by comparison. The framework is struggling, not least because it denies new market access to the very countries that have joined the pacts that Washington has shunned.

Washington risks pushing against economic gravity. The United States has succeeded in controlling the most sensitive technologies, including advanced semiconductors. But it will have less success with a strategy premised on promoting broader technology deintegration with China because most countries are not following its lead and may, eventually, find ways to adjust.

These efforts to shut out China will certainly hurt China, but they hurt the United States, too. American businesses are put at a huge competitive disadvantage, and U.S. consumers pay the price. One sensible step to correct this problem would be to limit tariffs on imports of Chinese consumer goods, which make them more expensive for U.S. consumers. These are politically popular but economically nonsensical. They hurt China but hurt U.S. job creators, as well, including ordinary companies that depend on Chinese suppliers, have few workarounds, and have been crushed under the weight of inflation and high energy bills. But these should not be lifted without getting something in return. For example, Washington should push China to live up to the terms of the 2020 Phase One trade agreement, including by buying more U.S. agricultural products. China also should be required to open its markets to more U.S. goods.

TALK IT OUT
Ultimately, competition with China begins at home. The United States and China have very different political systems. The United States’ is superior, but it must be demonstrated through results. This means sticking to the principles that made the U.S. economy the envy of the world and underpin U.S. national security. It also means demonstrating economic leadership abroad.

It is critically important that Washington win the race to develop technologies and attract talent. Economic success will be driven to a large extent by technological superiority. This requires the United States not just to develop those technologies of the future but to commercialize them and not hoard them. It demands the United States set global standards rather than ceding the playing field to China. And the United States should be leading on trade, not withdrawing from the very pacts China has applied to join and cutting U.S. workers off from export opportunities.

To be sure, security tensions are baked into the relationship, and Xi’s China is a formidable competitor with which the United States must take a very tough-minded approach. Beijing is pursuing policies inimical to U.S. interests in many areas, and it is unlikely to adjust anytime soon. Washington needs to be tough-minded but fair, open to dialogue but not for its own sake, and prepared for a tough, long slog in pursuing self-interested coordination with China.

Such cooperation has been meaningful in the past. At the height of the financial crisis of 2008, China was a huge holder of corporate, banking, and Fannie Mae and Freddie Mac securities. The close coordination established with Chinese leaders during the Strategic Economic Dialogue helped Washington convince Beijing not to sell U.S. securities, which was critical to avoiding another Great Depression. The Chinese stimulus package that followed the first G-20 in 2008 also helped to counteract the effects of the crisis and assist the global economic recovery.

Xi’s China is a formidable competitor.
Financial crises are inevitable, and they will be much easier to manage in ways that limit the economic hardship in both countries and the world if the two largest economies and drivers of economic growth are able to communicate and coordinate to anticipate and forestall economic disruption, as well as to mitigate its impact. And it is in China and the United States’ shared interests to do just that. But this requires U.S. Treasury Secretary Janet Yellen and her colleagues to have a regular dialogue with their Chinese counterparts where they discuss and monitor global and domestic macroeconomic and financial risks.

A shock in the real economy can move quickly to the financial system, and financial excesses can wreak havoc on people’s lives if left unaddressed. Modern finance, where money can move around the world with the speed of light, makes the world seem like an increasingly small place. The Chinese economy is so large and integrated globally that disruptions there in 2015 and 2021 immediately rippled through global financial markets. And, of course, the primary and secondary economic and financial linkages between China and the United States are so broad and deep they cannot be wished away, which makes it particularly important that the two states share views on macroeconomic risks. China is the second-largest holder of U.S. Treasury bonds and a large investor in other U.S. securities, so it is in both countries’ interests for China to have an understanding of U.S. economic policy and confidence in U.S. policymakers, particularly when Congress is wrangling over the debt limit. The lack of transparency around China’s lending to some very troubled economies and the large amount of U.S. business investment in the Chinese economy, which can seem like a black box to outside analysts and where abrupt policy changes can take the market by surprise, mean it is critical to both states that U.S. policymakers have a better understanding of China’s economic policies and challenges.

The United States needs to solidify the floor that the Biden administration has tried to put under the freefall. This is essential because the allies and partners Washington hopes to enlist to pressure China expect a good-faith effort to seek cooperation with it, where possible. And that is one reason that U.S. President Joe Biden, in his meeting with Xi in Indonesia last November, sought to establish guardrails around a deteriorating relationship.

To improve coordination, Chinese and U.S. decision-makers should meet more frequently and talk much more candidly. Friendship is no prerequisite for such coordination. And obvious political, security, and ideological tensions do not preclude self-interested cooperation on issues such as macroeconomic stability, pandemic preparedness, climate change, combating terrorism, nuclear nonproliferation, and firewalling the global financial system against future crisis and contagion. U.S. Secretary of State Antony Blinken’s upcoming meeting with Chinese State Councilor Wang Yi is a good starting point. Yellen should be talking regularly to China’s new economic czar, He Lifeng. Federal Reserve Chair Jerome Powell should also be speaking with China’s top central banker.

Washington should negotiate aggressively with Beijing to win opportunities for Americans in its market.
And Beijing should not hold hostage cooperation on global issues such as climate change because it is upset about unrelated issues. Linking different foreign policy issues undermines China’s effort to present itself as a constructive global problem solver.

The United States also needs to carefully distinguish what it must have from its allies from what is merely nice to have. Controlling weapons-related technologies and dual- and multiple-use technologies, and more intensively screening Chinese investments and mergers and acquisitions with global tech companies are a must. But Washington does not need to encourage deintegration in areas that are not central to national security or the competitiveness of the world’s democracies at the technological bleeding edge.

Some level of decoupling is inevitable. In the case of high technologies, some targeted decoupling will be absolutely necessary. But wholesale decoupling makes no sense. Americans benefit from access to the world, and China will remain a huge market that Americans can either partake in or abandon to competitors. China is the world’s second-largest economy, its largest manufacturer, and its largest trader. It will be a big part of the global financial picture for decades to come. Instead of fatalistically accepting the descent of an economic iron curtain, Washington should negotiate aggressively with China to win opportunities for Americans in its market. Administration officials should have serious discussions with Chinese leadership about how to manage the decoupling in a way that allows for mutually beneficial trade. Right now, the two countries are mostly trading charges and countercharges while doing nothing to expand mutually beneficial economic opportunities.

Chinese-U.S. security tensions cannot be wished away, and Americans are rightly concerned, especially after the brutal Russian invasion of Ukraine, that Beijing will throw its weight around, not least by coercing Taiwan. Bolstering deterrence is a big part of the answer. So are improved relations with allies. But U.S. allies and partners have made no secret of their desire not to isolate or contain Beijing. That is one message Washington should take away from the world’s refusal to disengage with China—and from China’s effort to drive wedges between Washington and everyone else.

The political winds are strong and the desire to punish China even at the United States’ expense is driving many in Congress. Biden will need a lot of courage to be smart and bold in the face of these challenges.