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Leapfrogging: The Chinese Auto Industry’s Leap Forward

From the series The world car battle

It is predicted that next year in China the sales of electrified vehicles (mainly battery-powered or hybrid) will for the first time overtake those of cars with an internal combustion engine. This development will mark a historic about turn which will put the world's biggest auto market years ahead of its Western rivals [Financial Times, December 26th]. Meanwhile, the growth in sales of electric vehicles in Europe and the United States has slowed.

BYD's leap forward

Another important development in 2024 was the record sales of Chinese brands in China: they rose from 38% of the total in 2020 to 56%, a sign of the maturation of the national auto industry which is now able to challenge the Japanese, American, and European manufacturers.

BYD's leap forward is impressive, comparable to that of Ford Motors after the First World War, when with the Model T, introduced in 1908, it revolutionised the auto industry and ushered in the motorisation of the 20th century. In just five years, from 1920 to 1924, Ford's sales quadrupled from 460,000 to 1.9 million. Tesla Motors made a comparable leap forward in 2020-24, more than tripling its sales from 500,000 to 1.7 million.

BYD has outdone both of them, with a leap in sales in the five years 2020-24 from 400,000 motor vehicles to 4.2 million, a tenfold increase. Quantitative leaps of this kind result from the introduction of new production systems: in Ford, this was a question of standardisation, with interchangeability of car parts and the assembly line. In the case of Tesla and BYD, the sector analysts' prevailing thesis is of a return to vertical integration and the in-house production of car parts following decades of horizontal organisation in which parts production was offloaded to external suppliers. The evolution of product technology, with the transition from internal combustion to electric propulsion, has modified the technology of the productive process. An electric car is not simply an electric engine mounted on a chassis; it demands a radical transformation in car manufacturing methods, involving the destruction of a considerable proportion of the existing fixed capital.

According to the March 21st, 2024, report Global Auto Outlook: Steering through Turbulence by Allianz Research, an arm of the insurance giant Allianz Group, the transformation of the sector with electrification will put 730,000 jobs in the European Union at risk, with at least 260,000 of them in Germany.

SALES OF PASSENGER CARS
Chinese % others total
2020 7.7 38.4 12.4 20.2
2021 9.5 44.4 12.0 21.5
2022 11.8 49.9 11.8 23.6
2023 14.6 56.0 11.5 26.1
China: sales in millions of units.

Economic and military security

Viewing the electrification of the auto industry only from the perspective of its climate and carbon emission effects distorts the picture. A more correct explanation is given by Sabrina Howell, Henry Lee, and Adam Heal, of the Harvard Kennedy School, in their July 2014 analysis of the development of the auto industry in China, Leapfrogging or Stalling Out? Electric Vehicles in China.

According to these authors, for China, energy security is "both an economic and a military" priority. Concerned about the possible destruction of its oil supply-lines, Beijing designated the development of both conventional and renewable domestic energy sources as top priority. Thus, transport electrification, which in the short term will be entrusted to coal-generated electricity, will increase both economic and military security, even if it also increases carbon emissions.

We can extend what the Harvard authors say from China to Europe, which depends on imports for almost 100% of its oil consumption. Because of the close link between oil and combustion engines, any cessation of supplies would cause the European transport system, and hence its economy, to collapse. Just as in the case of China, the electrification of Europe's transport system can also be seen as an economic, political, and military necessity in the strategic perspective of the crisis in the world order. We can see a parallel strategy in the recourse to electrofuels and biofuels. In this scenario, the survival of the combustion engine could go along with a relative energy independence. Indeed, synthetic petrol has a technological precedent in Nazi Germany's war economy.

What is happening in the world today with the upheavals caused by the Chinese auto industry was set in motion by Beijing's policy more than a decade ago. With its Energy-saving and New-energy Auto Industry Development Plan 2012-2020 the State Council, China's government, maintained that the development of the "New Energy Vehicles" the new propulsion, i.e., battery-powered, hybrid, fuel-cell, and hydrogen, vehicles -- was an urgent and important task in order to gain an international competitive advantage. It is in this anticipation of the times, on which the leapfrog strategy is based, that we can pinpoint a Chinese strategic advantage.

In terms of its State organisation, which from the outside can appear to be monolithic, China is at one and the same time united at a strategic level and decentralised in its operative function. With few exceptions, when the central government issues a new policy, the localities (provinces and towns) are responsible for its implementation and often its funding. This has led to the proliferation of companies producing electric cars.

According to the magazine Just Auto of December 23rd, 2023, on the basis of official figures there are currently about 150 active brands in the Chinese auto market. Among these, there are 97 national and 43 joint-venture brands. Too many brands leads to inefficiency, but how does China intend to reduce their number via a consolidation in order to increase productivity and lower costs? This is where the Tesla plant in Shanghai comes into play.

According to the above-mentioned Allianz Research report, there is an on-going price war among the producers of electric cars, triggered by Tesla in 2023 and escalating in 2024, which is weighing heavily on the profits of all the car producers. In October 2022 and January 2023, Tesla made aggressive price cuts to its models produced in Shanghai, with up to 24% discounts, pushing the other auto producers to lower their prices. Competition has become fierce, and since the ongoing price war cuts profits and makes many companies incur losses, there will be a consolidation, with some big winners emerging.

MOTOR VEHICLE PRODUCTION (thousands)
of which
BYD electric Tesla Ford Model T
2020 404 131 509 1920 463
2021 737 323 930 1921 971
2022 1,819 917 1,369 1922 1,300
2023 2,683 1,590 1,845 1923 2,000
2024 4,250 1,778 1,733 1924 1,900

Source: InsideEVs, Bloomberg, The New York Times, CarNewsChina.com

The price war

The price war is the outcome of the start of production at Tesla's huge plant in Shanghai, with a capacity of from 750,000 to one million units. It has been said in China that the opening-up to Tesla was the application of a strategy of putting a predator into a fish tank, in this case the Chinese electric car market, so that the other frightened fish will swim harder [Internationalism, December 2023].

This is an example of government industrial policy which exploits market forces. The agreement with Tesla was signed in 2018; the American company started production in Shanghai in December 2019 and began cutting its prices in 2023. At the moment, some Chinese companies are coming out of this war strengthened, not only BYD, but also Changan, Chery, and Geely, each of which surpassed one million in unit sales in 2024.

In the past 50 years, from the death of Mao Zedong in 1976 until today, the successive leaderships have all claimed to follow a different strategy in managing the development of their own capitalist economy from that of the West. In the West, the financial form of shareholder value calculated on the basis of quarterly profits has prevailed. Sergio Marchionne explained this in his book interview [Tommaso Ebhardt, Sergio Marchionne, Mondadori, 2019]: as the Fiat CEO, he said, "I will do all in my power to increase shareholder value". At the end of the book, Marchionne revealed his intention to set up his own company, in order to be "free to act without answering any longer to a controlling shareholder, as he has done for more than 40 years in his career". Where the financial element prevails, CEOs subject to the control of shareholders do not have their product as their priority, but their stock-exchange listing.

Unlike the short-term vision of Western companies, including car producers, the Chinese State claims it provides capitalist companies with a long-term frame of reference, in which strategy prevails over stock-exchange listing. Actually, a State role in directing development has often been the rule in emerging powers, which have found themselves needing to force their way into stronger capitalisms. Today, paradoxically, this role is making a comeback in the declining West, in order to protect itself from the Chinese irruption.

In 1984, exploiting Deng Xiaoping's opening-up to German technology, Volkswagen opened a plant in China; this decision was followed by the formation of many joint ventures by the world's main car producers, from Toyota to Nissan and General Motors. In 2001, China joined the WTO and in 2008 it became the world's leading car producer.

Notwithstanding the Western companies' reluctance to transfer their most advanced technology, in 2009 the Chinese government perfected its leapfrog strategy. The result has been the proliferation of Chinese companies producing electric cars. In 2018, Tesla opened its own plant in China and in 2023 triggered a price war. In 2024, the production of electric vehicles in China exceeded that of combustion vehicles.

The leapfrog strategy has worked and is creating confusion and strategic uncertainty among the world leaders of the auto industry. If 2024 was a turbulent year, 2025 will be even more so.

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