The opening of the Tesla factory in Shanghai in 2019 was a breakthrough for electric vehicles and for foreign automakers: it was the first wholly foreign-owned factory in the world’s largest auto market. But it also marked the start of an even bigger trend, which promises to upend the structure of global manufacturing, bring a new wave of deindustrialization to Europe and trigger trade tensions of an intensity comparable to that of the 1980s. This trend is the emergence of China as an exporter of cars.
As Gregor Sebastian and Francois Chimits of the Mercator Institute for China Studies recently documented, Chinese car exports are taking off, many of them electric vehicles and most of them going to Europe. From almost nothing a few years ago, China exported half a million electric vehicles in 2021, and its market share in Europe was second only to that of Germany. As the automotive market goes electric, Europe could quickly find itself with a trade deficit with China in the automotive sector.
It would be a radical change in the structure of the market. Europe and Japan are now buying consumer goods from China and sending luxury cars – or their most vital components – the other way. The badges of Chinese vehicles arriving in Europe do not necessarily reveal their origins. About half of them are Shanghai Teslas; other brands include Dacia, Polestar and BMW. Tesla recently opened a European factory in Germany, but production decisions from other manufacturers suggest a significant cost advantage for China.
If batteries replace combustion engines and China dominates car production, the disruption will be immense. Car manufacturing is the basis of the prosperity of Europe and Japan. Companies such as Toyota and Volkswagen, and their supply chains, employ millions of people in stable, skilled manufacturing jobs. They underlie national current account surpluses. A shift in the location of automotive manufacturing would have an even greater impact than past migrations from steel, electronics or shipbuilding.
Sebastian and Chimits argue that Europe should already be fighting back against China’s industrial policies, which provide cheap capital to automakers and tie subsidies for electric vehicles for Chinese consumers to local production. Meanwhile, electric vehicles made in China are eligible for EU subsidies to European consumers and they are subject to a tariff of just 10% compared to the 27.5% levied by the United States.
Europe should indeed demand fair and reciprocal treatment. However, protection does not replace competitiveness. Even if the United States and Europe close their auto markets with high tariffs, the price of the global auto trade is to produce for the many rich countries – from Norway to Australia and the Middle East – which do not don’t have the scale to sustain an automotive industry of their own.
For Japanese and European automakers, the challenge is that while electric vehicles are high-tech, they are not complex. Internal combustion engines were central to the industrial prowess of the 20th century. A vehicle built around one is a complex assembly of crankshaft, pistons, fuel pumps, turbochargers and a myriad of other components, each of which must be mastered and integrated. Even after 150 years of development, it remains a difficult task, requiring deep technical expertise and an extensive network of suppliers, rather than access to the lowest possible labor costs.
The powertrain of an electric vehicle, by comparison, is extraordinarily simple: a battery, a motor and not much else. Producing the crucial component, the battery, is a large-scale, thin-margin business; the economy is similar to another green technology, the solar panel. Assembling electric vehicles requires some of the skills of traditional car building, but is also comparable to other electric products. Solar panels and consumer electronics are industries where Chinese manufacturing dominates in terms of cost.
You can still buy a Philips or Sony TV, but they are no longer made in Japan or the Netherlands. Something similar can happen to famous automotive names. Additionally, the value of electric vehicles may migrate to the software that powers them, as has been the case with consumer electronics. If so, Europe could find itself in the familiar and depressing position of buying Chinese-made products that run American software.
But in any version of that future, there will be a traumatic reshaping of the global economy. The arrival of Japanese cars on world markets caused something close to a trade war in the 1980s. However, if China begins to absorb the global auto industry, the trade tensions of the 2020s will be much worse.