The China Electric Vehicle Wars of 2023 and 2024, Then the World.

Oct 14, 2022

The Chinese government has extended the incentives for the purchase of electric vehicles (EVs) until the end of 2023. As my colleague Anastasia Ufimtseva and I detailed (Energy Policy 2021), the replacement of internal combustion engine (ICE) vehicles with EVs fulfils a number of strategic objectives for China. Most importantly, it will help remove the Chinese dependence upon the imported seaborne oil that is one of its greatest Achille’s heals in a conflict with the US. The greater the fleet of Chinese EV’s (including high mileage electric buses, taxis and local delivery vehicles), when combined with China’s extensive network of electrified trains and subways, the easier it will be for China to rely upon its domestic oil production (together with its strategic oil reserves) and overland supplies from allied nations such as Russia. China is also well on the way to becoming a dominant global player in “green” technologies and has an increasing number of major EV producers such as BYD (also a major supplier of EV batteries) and SAIC-SGW.

In September 2022, the share of EVs (predominantly BEV) in the Chinese personal vehicle market reached 30%, and total sales are forecast to reach over 6 million for 2022 as a whole; double that of 2021 and far above the perhaps 2.25 million in Europe and perhaps 750,000 in the US. As EV sales continue to expand rapidly in China during 2023 and 2024, they will pass the 50% domestic car market share and by 2025 be the predominant type of personal vehicle sold in China. This will create an existential crisis for the ICE manufacturers in China, both domestic and especially foreign (predominantly the German and Japanese manufacturers). In the first quarter of 2022 Chinese branded vehicles claimed a new high of 42.9% share of the domestic personal vehicle market. German brands (VW, Audi, Mercedes, BMW, Porsche) had 22.5% market share (25.2% in 2019), Japanese brands (Toyota, Honda, Nissan etc.) had a 21% market share (23% in 2019), US (Ford, GM, Chrysler, Tesla) had 8.8% (9.9% in 2019), and other foreign brands (predominantly South Korea) had 4.6% (8.8% in 2019). The relative stability of the US market share is the combination of a rapid increase in Tesla sales and a significant decrease in the “big three” market share.

The German manufacturers are far behind in the provision of EVs and the Japanese manufacturers are in even worse shape. The two countries’ manufacturers stand to lose their nearly half share of the largest personal vehicle market in the world in a period of 2-3 years; nearly all of their sales are ICE vehicles and they hardly register in the ranking of EV brand sales. In the last six months their market share can only have fallen somewhat further given the rapid rise in the sales of the Chinese EV brands and Tesla. In August 2022, only one German or Japanese EV model was ranked in the top 20 selling vehicles; with the VW ID.4 in 13th place (17th place for January-August). As EV market share rapidly increases and erodes the ICE share, the predominant beneficiaries will be the Chinese brands and Tesla, and the greatest losers the German and Japanese manufacturers. The problem will become acute for the latter two in 2023 as EV market share goes beyond 50% and possibly catastrophic in 2024 as ICE vehicles become a rapidly diminishing niche. The biggest German and Japanese manufacturers, and the two biggest global light vehicle manufacturers, VW and Toyota respectively are good examples of the scale of the issue.

VW, which owns Audi and Porsche, sold 2.16 million cars in China (8.6 million globally) in 2021, down very significantly from 3.1 million China sales in 2019 and is continuing the decline in 2022. As noted above, its highest selling Chinese EV ranks at only 13th in August with 1.7% market share; it stands to possibly lose a quarter of its global car sales in 2-3 years. VW sold 1.4 million cars in the rest of Asia, 3.7 million in Europe and 805,000 in the US. With Tesla’s Berlin factory now open, and the Chinese manufacturers expanding in both Asia and Europe, VW will have nowhere to hide from the EV onslaught (with some lessening in the US where Chinese manufacturers are hindered by the “Trump” tariffs).

Toyota sold 1.65 million cars in China (9.6 million globally) in 2021, with its sales increasing by about 7% per year over the past few years; with its market share increasing. Top Toyota executives have been vocal critics of EVs and the company has spent heavily on hydrogen fuel cell vehicles rather than develop EVs. Toyota sold 2.7 million cars in North America in 2021, 1 million in Europe, 1.5 million in Japan, 1.5 million in the rest of Asia. With the Japanese market heavily protected and the North American market predominantly protected from Chinese imports, about 45% of Toyota’s sales are outside the reach of Chinese competition in the next few years. So Toyota may see much pain in China (17% of global sales), the rest of Asia (16% of sales) and Europe (10% of sales) in the next 2-3 years, some pain in the US (28% of market share) from both Tesla and the US truck manufacturers, but be protected in its home base (16% of sales). This relatively positive position when compared to VW may be severely undermined though by Toyota’s severe deficiencies in current EV models and future EV plans.

About 40% of BMW and Mercedes global sales are in China, and they are developing EV models at a faster pace than Toyota but are woefully behind the Chinese manufacturers and Tesla; especially in the BEVs which are over 80% of the EVs sold in China. As premium car manufacturers, they are directly open to competition from Tesla in all markets, and the premium Chinese models in China and that will increasingly be seen in the rest of Asia and Europe. Both companies are still investing heavily in new internal combustion engines, showing an inability to understand the probable speed of the move to EVs and wasting funds that should be spent on EV models. All of the German manufacturing plants in Europe will be severely impacted by the extremely high energy prices stemming from Europe’s sanctions on Russia; a situation that may last many years. This will provide an extra advantage to manufacturers based in nations such as China and the US that have access to much cheaper energy; we may even see increased exports of German brand cars from the US and China to Europe.

Honda is heavily exposed to international markets, out of 4.1 million cars manufactured in 2021 over 3.5 million were made outside Japan; 2 million in Asia (75% of which were in China) and 1.3 million in North America. Its sales in Europe have been declining for many years, with a market share now well below 1%. Its sales mix places it in direct competition with the Chinese manufacturers and Tesla in Asia (half its sales, predominantly in China), and Tesla in North America (one quarter of its sales), in the next few years. Although more advanced than Toyota with its EV plans, it still lags far behind the Chinese and Tesla. The loss of its Chinese and Asian sales over the next 2-3 years would severely impact it financially. It has no models in the top 20 EV sellers in China. Nissan is also hugely exposed to international sales, out of just over 4 million global sales in 2021 nearly 1.5 million were in China, 1.2 million in North America, 400,000 in Europe and 500,000 mostly in Asia excluding China. That places half of Nissan’s sales in competition with Chinese manufacturers and Tesla in the next 2-3 years, and 40% open to Tesla with an increasing presence of the Chinese in the European market (one quarter of that 40%). Only 10% of sales are within the relatively protected Japanese market. As with Honda, Nissan has no EVs within the Chinese top 20 seller list. Seeing the writing on the wall, Renault is selling most of its large stake in Nissan.

The major South Korean car maker Hyundai-Kia is heavily skewed toward exports, it sold only 1.25 million cars in its home market of its total 7.5 million in sales. Its Chinese sales dropped 26% (to 540,000) in 2021 year over year and its market share fell from 3.8% to 2.7% and sales continue to plummet in 2022. It also had its Russian sales, which were in the region of 500,000 per year, significantly impacted by the Ukrainian invasion. In contrast its European sales jumped 20% (to over 1 million), its US sales increased to 1.45 million, its Indian sales increased to 687,000 and its Brazilian sales were 177,000. Hyundai-Kia’s sales mix, which heavily skews to Europe, the US and emerging markets, as well as its home market, may provide it some protection from Chinese competition in the next 2-3 years and even from Tesla in some markets. It is also more advanced in the introduction of electric vehicles than its German and Japanese competitors.

With the German and Japanese ICE car manufacturers so exposed to the Chinese market, and so much for the Chinese manufacturers and Tesla to gain, a market share “war” is probable within the next 2-3 years with profit margins being substantially reduced. Tesla may be production constrained and limited by its lack of new Chinese models until at least 2024. The end result will be an incredibly lean set of Chinese manufacturers that will increasingly invade other Asian and the European markets, adding to the pressure from increasing Tesla sales in the latter. Whilst dealing with this onslaught during a European recession in 2023, the German manufacturers will also be impacted by the extremely high energy costs caused by the European sanctions on Russia. It may be that by 2025 the list of global car manufacturers will be headed by Chinese manufacturers and Tesla, with a significantly reduced set of German and Japanese manufacturers suffering probable death spirals through falling sales, falling revenue, massive ICE plant write-offs and redundancies and a lack of investment funds for new products.

The other major car manufacturers, General Motors, Stellantis, Ford and Renault may be protected somewhat as their sales are more heavily skewed toward the European and US markets (the latter protected both by the “Trump” tariffs and the high market share of trucks). But their time will come unless they rapidly accelerate their moves to an all EV lineup. An extra bonus for the Chinese car manufactures is that with the exit of Western manufacturers from Russia (population 144 million) they may be handed the Russian and Central Asian markets on a platter.

These changes will have major geo-economic consequences given the scale and impact of the car manufacturing industries in Germany and Japan, with probable government rescues having to be organized in both nations. In Germany this will be exacerbated by the offshoring of German manufacturing to escape the ruinous energy costs in Europe, and the probably deep 2023-2024 European recession. Increases in Chinese car imports to Europe may be met with “voluntary” limitations and some pressure to set up Chinese manufacturing plants in Europe. If Chinese brands were to start selling significantly in South Korea, that nation’s government may have the same response given the existential nature of the threat to Hyundai-Kia. Japan can be expected to bureaucratically block Chinese car imports to maintain its manufacturers domestic sales. China will gain massively with respect to its place in the “green” industries of the future and also improve its current account balance through increased net car exports and reduced oil imports. The final challenge will be the move by Chinese manufacturers to set up final assembly plants in the US (and/or Canada and Mexico) to circumvent the “Trump” tariffs; which may create a political firestorm.

Update: In the first seven months of 2022, China-branded personal vehicles took a 47% market share. In the month of September they took a 50% market share. Showing an ongoing reduction in foreign-branded (i.e. German, Japanese etc.) vehicles market share. 2023 may be much worse for the foreign brands.

Below are some videos covering specific car manufacturers and their EV plans from the inimitable Electric Viking:

Toyota: