Government subsidies for electric vehicles are hurting domestic suppliers
Will China be the car manufacturer of the future? If one reads some of the more recent headlines in German media, it certainly seems like it. The leading tabloid paper Bild was in full panic mode, worrying that Chinese cars “will overrun Germany” and that they have “tripled their market share”. A closer look at the data, however, reveals that this 300% increase took place exclusively in the electric vehicle (EV) market, and even there Chinese cars are not the most popular. Starting from very low historic sales numbers, the market share for newly registered passenger cars between January and April 2023 was a meagre 0.8%, compared to the almost 60% share of German car manufacturers.
Still, there are tendencies that could make Bild’s sensationalist headline more prescient than it seems now. The strength of the German car industry has been the internal combustion engine, and while VW, Mercedes, and BMW are beginning to put more resources into the development of electric vehicles, they are still outperformed by Elon Musk’s Tesla on their home turf, and the market share of cheaper Chinese models will most certainly continue to grow. Echoing Bild, Politico asked if “Das Auto” can survive the transition away from the internal combustion engine.
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What all these headlines ignore, however, is that this transition is not market- and consumer-driven, but instead a top-down project pushed by legislators, regulators, and the provision of massive subsidies. When the German government cut financial support to consumers for buying battery electric vehicles in early 2023, the sales numbers collapsed by 83% between December 2022 and January of the following year. Banning the ICE and subsidising EVs are bigger threats to the German car industry than China, although the latter will most certainly profit from these policies.
Conventional cars consist mostly of steel and iron, two input factors that are abundant in the world. EVs, on the other hand, are less complex from an engineering perspective, but require more rare minerals that go into the production of batteries and help make the car lighter, since these batteries come at significant extra weight. Not surprisingly, the supply of these minerals (often called “energy minerals”) is dominated by China, providing between 50 to 80% of what is currently required. Beijing is equally dominant in the production of batteries for EVs, with China the home of six of the 10 largest manufacturers, an unmatched position that is only reinforced by the vertical integration of the EV production chain. By way of comparison, Chinese has more control over these supply chains than OPEC has over the supply of crude oil.
In many ways, electric cars are a Chinese dream: they require fewer moving parts and are not as engineering-intensive as traditional cars, making their production at scale easier. The decades-old advantage of sophisticated German engineering could become less relevant compared to standardised mass production, a key strength of the Chinese manufacturing sector.
If Europe and the US follow through on their designs to force the internal combustion engine out of the market and replace it with EVs, it would do China a huge favour. Destroying one’s own domestic car industry to replace it with someone else’s vehicles is as close to a textbook definition of economic suicide as one could get.