China to Dominate the Global EV and EV Battery Markets
The Chinese Party-state has long supported the domestic producers of electric vehicles (EVs), with the strategic aim of building a globally competitive vehicle industry; an industry that is at the core of the largest global manufacturing grouping. The advent of the electric vehicle has greatly aided Chinese manufacturers as it removes the one thing that they were not competitive at, the internal combustion engine (ICE) drivetrain, while also leapfrogging European, Asian and US “legacy” manufacturers weighed down by massive ICE investments and competitive edges. These legacy manufacturers have been slow to move to EVs, greatly aiding the Chinese manufacturers’ (and Tesla’s) competitive advantage; especially in China where ICE car sales are predominantly from foreign legacy manufacturers (e.g. VW, Toyota, Honda). As recently as the first quarter of 2020, German brands had a 25.7% share of the Chinese car market, Japanese 25% and American 9.4%; with China brands only at 33.3%. This is now changing, for the whole of 2021 foreign brand share fell to 45.6% from 51.1% the previous year - with sales drops for German (8.9%), Japanese (1.8%) and South Korean (25.9%) brands. This trend continued in Q1 2022, with German brands falling to a 22.5% share, Japanese 21% and American 8.8%.
Against expectations, the Party-state will not be removing EV incentives at the end of this year, providing continuing support to the rapid growth of Chinese EV manufacturer sales and the rapid displacement of foreign legacy ICE manufacturer sales. In June of this year, Chinese EV sales (565,000) grew 132% year over year and took 28% of the overall car market; by December of this year that share could be closer to 50% for the month. Although the top three selling brands overall (ICE and EV) that month were VW, Toyota and Honda, they were followed by BYD, Wuling, Nissan, Changan, Tesla, Geely and Audi; four Chinese brands plus Tesla. In the EV market, only Tesla among foreign manufacturers has a meaningful market share, and therefore the rapid growth of EV sales will inevitably lead to lower foreign brand market share. 2023 may be the year of most pain for foreign ICE manufacturers, as the EV market share climbs above 50% and continues to grow rapidly – producing a general collapse in foreign brand sales.
At the time when Chinese EV market share, and Chinese EV manufacturer production, is rapidly growing the European and US markets are far behind. In a Europe that is slipping into recession, and with many European nations reducing EV incentives (e.g. the UK at the end of last year and Germany from the end of this year), EV sales in June 2022 (220,000) were actually below the year ago month. Given the extremely negative impact of Russian sanctions on European economies, no sales recovery may happen until well into 2023. In a US that is already in a recession, battery electric vehicle sales (BEV, excluding plug in hybrid EVs) in the whole of the second quarter of this year were only 197,000 with BEV market share growth constrained by a dearth of offerings in the truck and SUV segments that make up the majority of US vehicle sales. With Chinese EV sales possibly reaching 6 million in 2022, two out of every three EVs sold globally will be within China and the Chinese EV market dominance may even grow further in 2023. This will give a huge advantage to Chinese manufacturers, as they gain major process efficiencies as they rapidly ramp up production. In addition, Chinese manufacturers such as BYD are now expanding into Europe, Australia and Asian markets – which will increasingly put pressure on European and Japanese brand sales, as well as possibly Tesla if the European market remains in the doldrums. Tesla is somewhat protected in the US market by Trump era Chinese import tariffs, but suffers from the large delays in its truck product and the lack of an affordable SUV.
The above scenario may prove somewhat toxic for a Tesla that has added significant new production in the US of 500,000 cars/year by year end (Texas, higher cost base than China) and Germany of 150,000 cars/year by year end (Berlin, much higher cost base than China), in markets that may be stagnant or not growing that fast. At the same time, Tesla is production limited in a China where EV sales are growing at a rate of over 100% per year. Replacing China-produced EV sales in Europe with a Berlin-produced EV sales will significantly reduce Tesla’s margins given the large production cost differential between the two; even when transport costs are included. But at the same time Berlin production needs to be ramped up to start paying off the investment and basic operating costs, as well as for political reasons. Tesla may also find itself having to sell an increasing percentage of its low cost China production in China at lower prices than in Europe so as not to lose significant market share, while supplying Europe with higher cost output from Berlin and US plants; even with the upgraded capacity of its Shanghai plant to produce approximately 1.2 million cars per year. The construction of a whole new plant in China would take approximately one year in total, and with no formal announcement of such plans it can be assumed that Tesla may be significantly capacity constrained in China throughout 2023 at a time when Chinese EV sales may be still rapidly growing. The ongoing delays in the Cyber truck, now planned to start delivery around mid-2023, has also provided a window for the traditional truck manufacturers, such as Ford and GM, to pre-empt Tesla’s offering in the US. The lack of any new products in the Chinese market, especially more affordable models, until probably at least 2024 may also be a severe handicap given the intense competition and the ongoing plethora of new model introductions by Tesla’s rivals. Examples of the increasing competition that Tesla faces in China:
The above scenario greatly benefits the Chinese producers who will be able to rapidly increase sales in the Chinese market, until 2024/2025 when domestic EV market share may be approaching 100%. This allows for an increasing penetration into a European (and Japanese) market that may be stagnant through 2023 and which may start to grow again just when the Chinese producers have increasing ability to export abroad without sacrificing domestic market share. An ongoing recession in the US through 2023 will also provide time to build the final assembly plants in the US required to circumvent the Trump tariffs. The slow progress of the legacy car manufacturers to move from ICE to EV models will greatly aid the Chinese producers; in June 2022 only 2 of the global best selling EVs were from a legacy brand while the top two were from Tesla and the rest from Chinese brands.
The market for EV batteries is dominated by four big players; CATL of China (32.6% market share in 2021), LG of South Korea (20.3%), Panasonic of Japan (12.2%) and BYD of China (8.8%). The next two manufacturers are from South Korea (SK On 5.6% and Samsung SDI 4.5%), followed by the Chinese CALB (2.7%) and Gotion High-Tech (2.1%), AESC from Japan (1.4%) and SVOLT from China (1%). The Chinese manufacturers have a combined 47.2% share, and the South Koreans at 30.4%, with the Chinese manufacturers gaining significant market share from the South Koreans during 2021. This trend can be assumed to continue given the rapid growth of the Chinese EV market compared to others, and the rapid growth in EV sales in the vertically integrated BYD (which overtook Panasonic in the first few months of 2022); i.e. Chinese dominance of EV battery manufacturing will continue to grow. There are no EV battery manufacturers in the top 10 outside China, South Korea and Japan. The overall market grew 102.3% in 2021 to 296.8 GWh.
The dominance of Chinese manufacturers in global EV and global EV battery production, and the probability of this dominance increasing in the next few years, should greatly concern Western policy makers. Such dominance will also spin-off into other related technologies such as electric motors, transportation software and electronics. Vehicle manufacturing is at the core of a production cluster that is the largest in the world and produces many manufacturing and other spin-offs for other parts of the economy. Chinese dominance of this industry will have severe impacts upon manufacturing in the US, Japan and Europe – with many of the dominant Western players such as VW and Toyota becoming significantly diminished at best. Given the overlap between civilian vehicle production and military requirements such a reversal between China and the West will also impair the relative military capabilities of the latter.
When the Chinese global dominance in solar panel production, and its large growth in wind turbine and nuclear technologies are added, the incredibly advantageous position of China with respect to the West in “green” technologies is evident. China does not need to fight any military battles with the West, it is winning on the battlefield of manufacturing capabilities and strength. Such advances also aid China in steadily reducing its reliance on seaborne imported oil and gas supplies, removing the possibility of an energy embargo as a geopolitical weapon for the West.
With the above trends, China can continue to not be provoked into tactical mistakes by the West – as with the Pelosi sideshow in Taiwan, which has provided China with the opportunity to turn the screws on Taiwan without triggering war. It was also notable that the South Korean president was “busy on vacation” when Pelosi visited; has he sensed the direction of history? The Chinese ability to produce 7 nanometer microchips also helps remove TSMC of Taiwan as a major issue for China, while it remains as a major problem for a US that has fallen significantly behind the field in microchip technology. Economically, Taiwan has already been heavily integrated into the Chinese economy and therefore China has many levers short of war to increase the pressure on the Taiwanese government. If the US officially recognizes Taiwan as an independent nation, or implicitly through something like a “lend lease” armaments purchase relationship, China will have its causes célèbre to blame the US for its takeover of Taiwan; greatly reducing the possibility of the Rest (7/8ths of humanity) supporting Western sanctions or military aggression.
With every day that passes China gains a little more with respect to the West, and with every Western provocation it intensifies its’ relationships with the Russia, Iran and the Rest while working on the removal of the US$ as the global reserve currency. The sooner the West accepts the reality of a multi-polar world the less will be their losses, the longer they wait the more they lose. A lesson that the Ukrainian government is learning every day.
References
https://insideevs.com/news/601632/china-plugin-car-sales-june-2022/
https://insideevs.com/news/601256/europe-plugin-car-sales-june-2022/
https://www.coxautoinc.com/market-insights/ev-sales-hit-new-record-in-q2-2022/
https://cnevpost.com/2022/04/02/byd-beats-panasonic-to-third-place-in-global-ev-battery-market/
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