There has been a lot of news about China’s Electric Vehicle (EV) industry lately, or more precisely statistics, and we think it is going to lead to greater trade issues globally.
The EU’s statistical agency Eurostat released the latest data on the trade in cars. China now accounts for almost 50% of Europe’s EV imports. To put this in context, Europeans bought about 9 million cars in 2022, of which 12% were EVs, or 1 million cars, of which 500,000 came from China. Digging a bit further, about half of those were China-made Teslas, but the others were largely Chinese brands. We are pulling this data from Eurostat, DW, a very good report from EU-China Think Tank MERICS, and the Financial Times.
This has lead to a fairly seismic shift in trade between Europe and China. China is an important market for European car makers. For years,they have had joint ventures in China to produce low and mid priced vehicles, so most of these exports were luxury cars. The balance of trade was about $3 billion to $5 billion in Europe’s favor. However, in the past two years, with a big acceleration in the past 12 months, the balance has shifted. It is still in Europe’s favor, but that has fallen to the $2 billion range. Almost all of that shift came in the form of EVs.
auto China is clearly on the rise not just in production of EVs but as a major player on the global export stage. We warned about this in January, and evidence of that rise is starting to jump into prominence in the trade data. Zooming out, economist Brad Setser recently tweeted his data showing the surge in China’s overall automotive exports in the past year. China is now a net exporter of cars for probably the first time in its history, and most of this growth is electric cars.
This is an important change and has some critical implications. The most obvious one is that it raises trade tensions. The US and China have been in a Trade War for several years already, and we have to think this latest data significantly raises the chance of the EU jumping into the fray.
Second, one of China’s big weaknesses in its rise to manufacturing prominence this century has been the inability of its companies to establish brands. Everyone has been buying lots of Chinese-made products but we can think of less than a dozen Chinese brands that would be recognizable to consumers outside of China – notably smartphone brand’s like BBK’s Oppo, Vivo and One Plus, Xiaomi and Transsion’s various brands. Brand owners can command a larger share of value, and the ability to achieve global-scale brands is a meaningful step in economic development. China auto makers now look to be achieving that in one of the richest industries out there.
Bringing this back home to semis. We think this trade data has two important implications. First, as we have detailed extensively, EVs require a lot of semis. Ex-Tesla, most of China’s EVs are fairly low priced, but even those vehicles require a lot of semis content. The low prices are likely to further spur the transition to EVs, which is an overall positive for the semis industry.
Second, from a trade perspective, one of the big concerns with the US’s sanctions on China’s semis has been the willingness of allied countries to participate. For the US sanctions to stick, the US government needs other countries’ support – especially Japan, South Korea and Europe. These are all places with large automotive industries. It seems likely that trade data like this will encourage those countries to take notice and be more welcoming of the US sanctions. In Europe in particular, Germany has seemed a bit resistant to the US broadening trade measures against China. We imagine that they may revisit that view with the cornerstone of their industrial model now potentially under threat.
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I’ve watched some videos from the shanghai auto expo and some cars coming out of there are very impressive. Esp. if you consider that with next generation of buyers software features probably matter as much as hardware.
The germans so far are making a lot of mistakes e.g. Mercedes Benz charging users for heated seats and hardware features. My guess is the increasing ease of building new software will help them catch-up in the longer term. But in the near term they will loose share esp. in emerging markets.
Building software and building software teams are very different. If VW is an example, it is going to be very hard for all the auto makers to build good software let alone differentiate with software, which is what they really need.