China’s EV rise tailgates Japan

Much has been written about China’s slowing growth and similarities to Japan’s ‘lost decade’ in the 1990s. Fewer comparisons have been made between China’s investment in electric vehicles, or EVs, and Japan’s own dominance of car production in decades gone by.

But China’s relationship with vehicles mirrors Japan’s global success with its auto sector in the 1980s in many ways, including competition with an incumbent corporate America.

Like steel, cars have become central to the politics of global trade. Japanese car makers dominated global production for decades. Today, the increasing growth of Chinese cars – particularly EVs – is fuelling trade tensions.

Automotive trends reflect global priorities and are often linked with inflation cycles. In the 1980s, Japanese cars gained traction with their fuel efficiency and reliability. In today’s emission-conscious world, China’s EVs took off amid the Russia-Ukraine conflict and subsequent energy concerns in Europe.

Japan’s automobile industry began building in the 1960s and its production surpassed Germany in the 1970s and later the United States (US) in the 1980s. Despite a property crisis and economic stagnation in the 1990s, Japan continued to be the world’s biggest auto producer for nearly 20 years, largely thanks to affordable prices and fuel efficiency.

China replaced Japan as the largest auto producer in 2008, an achievement closely tied to the rise of its middle class. Production continues to ramp up across the automotive supply chain, from EVs to batteries, chips and more. China’s industrial advancement is irreversible.

Twin goals

China’s investment in EVs serves two purposes – one, the country’s stated goal to reach carbon neutrality by 2060, and two, as the foundation for broader industrial transformation in the future.

In isolation, China’s EV investment is not an immediate growth driver. The contribution of car manufacturing to China’s GDP is less than 4 per cent. Unlike property, EV investment will not generate wealth.

Passenger EV sales surpassed 50 per cent of all cars sold in the economy for the first time in July 2024. Despite the astonishing sales speed, EV penetration rate in China is still behind some Nordic countries, showing room remains for growth.

Export volumes sit at just 12 per cent of production. Those exports, however minor, are still globally competitive, which has created some trade tensions.

Data from the US National Science Foundation show China’s share of value-added in the global automotive industry rose from 6 per cent in 2002 to roughly 28 per cent by 2022. In contrast, the US global share fell significantly over the 2000s, as did that of Germany, Japan and South Korea.

China also has a production cost advantage. In 2023, the average export price of China’s EVs was less than half that of the US.

Further down the supply chain, China dominates EV battery manufacturing. Chinese groups CATL and BYD account for more than half of global market share. In total, Chinese manufacturers produced more than 75 per cent of the world’s lithium-ion batteries in 2023.

Battery-powered EVs (BEVs) accounted for 62 per cent of global EV sales in 2023, with the rest made up of plug-in hybrids (PHEVs). Seven of the top 10 global BEV and PHEV manufacturers are Chinese brands.

China has also built the world’s largest public charging infrastructure network, with 1.2 million fast-charging points and 1.5 million slow-charging points. China’s government is expected to invest in more public charging points to meet demand.

Rescue

China’s gross domestic product is forecast to grow by 4.3 per cent in 2025 and 4.0 per cent in 2026 – impressive, but far from the highs of previous eras. Chinese authorities will still need to prime the pump through monetary and fiscal policy, especially as 18 per cent of urban young people are jobless.

How China contributes to global economic growth will differ in there future. Europe, the US and Japan will speed up their investment and innovation in EVs. As China reduces subsidies, the US, the European Union (EU) and United Kingdom are injecting public funds to support their EV and battery sectors. Competition from China is motivating other economies to invest, and will continue to do so.

If history repeats itself, we could see investment flows replace trade flows: Chinese car makers will need to produce vehicles locally in the EU and the US instead of shipping the whole car. Only time will tell.

The auto sector did not rescue Japan from the ‘lost decade’ and the EV sector will not rescue China. But how the sector develops will be watched closely, nevertheless.

Raymond Yeung is Chief Economist, Greater China & Vicky Xiao Zhou is an Economist at ANZ

This story is an edited version of the ANZ Research report “A ride on China’s electric vehicle journey”, published July 31, 2024.