01 Feb Barron’s : China Has a New Crackdown Target: EVs

Media Source : Barron’s

January 26, 2024

By Craig Mellow

You really can have too much of a good thing.

That is Chinese authorities’ apparent conclusion with respect to electric vehicles. A ministerial broadside last week promised “forceful measures” to rein in “blind” EV expansion that has led to “disorderly competition behaviors.”

It looks weird at first glance that Beijing is bad-mouthing its most conspicuous good-news story these days. China produces more EVs than the rest of the world combined. Domestic sales jumped nearly 40% last year, despite a lackluster economy.

Internal-combustion car sales may disappear entirely in China within five years, says Ernan Cui, China consumer analyst at Gavekal Dragonomics.

Alarm is spreading globally that cheaper and better vehicles from BYD and other Chinese manufacturers will dominate this industry of the future.

Yet the mandarins are right about the blind and disorderly part. China pushed hard on developing EVs and their supply chain for two decades starting in the early 2000s. It tapered official support as consumers started to buy the vehicles of their own accord. Formal subsidies were phased out in 2022, says Paul Gong, head of China autos research at UBS.

Buyers are picking a few winners and leaving an army of also-rans. “There are probably over 100 companies that have tried to make EVs, but the top 10 have 80% of the market,” says Bill Russo, CEO of Shanghai-based consultant Automobility.

BYD itself gobbled 35% of the market by volume last year. Tesla was a distant second at 8%. Even the leaders engaged in some disorderly price wars.

Just letting 90 no-hope would-be EV manufacturers go broke isn’t so simple in paternalistic China, however. Cooling the sector’s fever runs contrary to Beijing’s broader policy of pumping up manufacturing as former growth driver real estate stumbles, says Niels Graham, associate director for geoeconomics at the Atlantic Council. Bank loans to the industry grew by some $700 billion last year, while property-related flows turned negative, according to his figures.

Industrial projects in China take on a life of their own, gaining patronage from local officials with access to independent funding. Regions will cling all the more tightly to EV investment as internal-combustion plants face a “death spiral,” Russo says.

“You haven’t seen consolidation because a lot of people at the local level keep pouring in money past the point of death,” he says.

Gavekal’s Cui predicts that Beijing will seek “balance,” curtailing new EV construction permits without forcing mass bankruptcy. “Going out of business will take some time,” she notes.

Adam Smith would say, if you make too much of a good thing, start selling it abroad. Substantial Chinese EV exports to the U.S. are probably off-limits, thanks to the generous domestic-content subsidies and stiff tariffs embodied in the Inflation Reduction Act. The big prize that BYD and its rivals have to play for is Europe.

The European Union last October launched an “anti-subsidy” investigation into Chinese EVs. That should wrap up this year, with a tariff hike above the bloc’s 10% levy on all imported cars, Graham predicts.

Beijing’s declaration on reining in production is more for Brussels’ benefit than domestic impact, he thinks. “I’m more inclined to see this as a head fake,” he adds.

Many Western consumers would probably be inclined to buy the best-value EV, regardless of its origin. “The world needs affordable EVs, and China knows how to do that,” Russo says.

But it probably isn’t so simple.

SOURCE: https://www.barrons.com/articles/china-ev-market-tesla-byd-crackdown-12464c55