Chinese EV, a "Barbarian Invasion" of the West?

Peking University Professor Reveal Factors Behind Chinese Automakers' Rapid Transformation

Hello, my readers. Today's episode brings you an article on the rise of the Chinese EV industry. It was originally published by Wenhua Zongheng magazine (I've lost count of how many times I've quoted articles from them!). I think this article helps clarify some common myths surrounding the rapid rise of the Chinese automotive industry. It also reveals how competition in the traditional automotive sector boosts the rise of Chinese EVs. After being authorized, I'm able to present you with a translated version of this article.

The article was written by Professor Feng Kaidong (封凯栋). and Chen Junting(陈俊廷) Professor Feng is an Associate Professor at the School of Government, Peking University. His main research areas include China's industrial and corporate capabilities, science and technology policies, innovation policies, and government-business relations. Chen Junting is a PhD candidate at the School of Government, Peking University Professor.

Souce: 德国工业“壮士断臂”, 意外点醒美国和中国 | 文化纵横https://mp.weixin.qq.com/s/1Ev7StEYIo1HvgVL96nFLQ

Professor Feng Kaidong from PKU

The New Machine Changing the World?
— Prospects for Global Competition in New Energy Vehicles

Against the backdrop of an increasingly complex international environment and growing attention to issues such as environmental protection and energy security, the development of new energy vehicles, particularly in China's industry, has become a global focal point. Since 2016, China has consistently led the world in annual sales and ownership of new energy vehicles. In 2023, China's new energy vehicle sector experienced explosive growth, with production and sales reaching 9.587 million and 9.495 million units, respectively, accounting for 66% of global sales.

In 2023, China surpassed Japan to become the world's largest automobile exporter, a historic achievement closely tied to the surge in new energy vehicle exports. According to data from the China Passenger Car Association (CPCA), China exported 1.73 million new energy vehicles in 2023, representing over 30% of total automobile exports. Simultaneously, the quality of China's new energy vehicle exports has improved steadily, with export unit prices rising continuously. Nearly half of these exports are destined for European countries such as Germany, France, the UK, and Belgium, marking a shift from China's traditional automotive export markets, which were predominantly developing countries.

On the other hand, in February 2024, the U.S. government clarified policies restricting the entry of Chinese new energy vehicles. The Alliance for American Manufacturing urged the Biden administration to take measures to prevent Chinese industries, including the automotive sector, from essentially entering the U.S. market through investments in Mexico. Almost concurrently, Apple Inc. announced the abandonment of its new energy vehicle project after a decade of development and billions of dollars in investment.

European countries and their automotive companies had previously engaged in a public relations race to announce timelines for phasing out combustion engine vehicles, while also being key proponents of implementing "carbon tariffs." However, in late February 2024, Mercedes-Benz announced an adjustment to its original timeline, planning to continue producing internal combustion engine vehicles.

Given these developments, what will the international landscape for new energy vehicles and the automotive industry look like in the coming years?

The automotive industry has a strong pull effect on many different industrial sectors, which led renowned management theorist Peter Drucker to call it the "industry of industries" in the mid-20th century. In 1990, three professors from MIT even referred to the automobile as "the machine that changed the world." Today, few would question the importance of new energy vehicles in international competition; they are likely to become the "new machines changing the world" in the new century. In the next 10-20 years, they will not only serve as crucial application platforms for various new technologies such as chips, cloud computing, artificial intelligence, and satellite communications, but also be closely linked to the development of intelligent transportation, smart grids, and smart cities. Whether driven by ambitions to dominate cutting-edge technological competition or to protect the economy and stabilize employment, no developed country can accept being eliminated from the new energy vehicle industry competition. This means that the competition between China and Western developed countries surrounding new energy vehicles will persist for a considerable time. It will not only be a competition of technology and products but also a contest of policies and strategies closely related to geopolitics.

In fact, the rise and global expansion of China's new energy vehicles is not a "nouveau riche" style invasion of traditional automotive powerhouses by new forces, as portrayed by some domestic media. This is reflected in both domestic and international aspects: Domestically, the growth of China's new energy vehicle industry has benefited from the "independent innovation" of China's traditional automotive industry, a long and arduous process of capability building, rather than relying on clever shortcuts. Internationally, as early as the 1980s when China pursued a "market for technology" strategy, traditional automotive powers had already incorporated Chinese manufacturing and markets into their global landscape. They have long cultivated the Chinese market and successfully reaped enormous profits. Therefore, Chinese automobiles are not newcomers beyond their vision. Over the past 20-30 years, the "independent innovation" of China's automotive industry has risen from very unfavorable soil, breaking through the framework set by Western countries, and finally achieving a breakthrough by seizing the opportunity window of new energy vehicles. This was never part of multinational companies' plans.

From a global perspective, the rise of China's new energy vehicles is not the first challenge faced by traditional automotive powers since World War II. If we view the rise of China's automotive industry as another impact of new players on the global automotive industry landscape, then undoubtedly, the "root cause" of traditional automotive powers' issues lies within themselves. Meanwhile, for a considerable period in the future, competition and trade disputes surrounding new energy vehicles will inevitably intensify, and China also faces new challenges.

The "World War" of Traditional Automobiles

Due to the special importance of automobiles in the modern industrial economy, each historical shift in the dominance and competitive advantage of the automotive industry has not been determined solely by internal technological and product competition within the industry, but has been accompanied by intense trade wars between major countries.

After the birth of the automotive industry in the early 20th century, the United States gained initial dominance by creating a large-scale assembly line production system. In 1950, U.S. car production accounted for as much as 80% of the global share. From the 1960s, Germany, Japan, and South Korea successively challenged the U.S. The challenge first came from Volkswagen's low-priced models; in 1970, imported passenger cars from Germany accounted for about 10% of U.S. domestic passenger car sales. The subsequent challenge from Japan was even more intense. In 1980, the U.S. imported 1.89 million passenger cars from Japan, accounting for 21% of its domestic sales. That same year, Japan topped global production with 11.04 million vehicles. Entering the 1980s, the new "invader" was Hyundai from South Korea. In 1987, Korean passenger car exports to the U.S. approached 5% of the U.S. market share.

The rise of challengers from Germany, Japan, and South Korea relied on new design concepts, manufacturing technologies, and production organization methods, most notably Japan's lean production system. Japanese companies, led by Toyota, not only emphasized compact design and fuel efficiency in product design but also empowered work teams to control production lines, fully utilizing the skills and enthusiasm of front-line workers to improve manufacturing efficiency and quality. In terms of collaboration between assembly plants and parts factories, Japanese companies designed a kanban production system, requiring just-in-time supply at all stages, greatly reducing inventory pressure. In the product development process, Toyota's collaborative suppliers were involved in body design and improvement from the product development stage, while American suppliers only produced according to technical parameters and quantity requirements provided by manufacturers.

These challenges significantly impacted the U.S. In 1978, the U.S. auto manufacturing industry employed over 1 million workers; two years later, employment decreased by 22%. To counter this, the U.S. government not only provided substantial policy subsidies and loans domestically but also took a series of countermeasures externally. In 1981, the U.S. and Japan signed a Voluntary Export Restraint agreement, limiting Japan's annual exports to 1.68 million vehicles for the next three years, and 1.85 million vehicles in 1984. Japan quickly adjusted: on one hand, Japanese companies maintained profit margins by exporting higher-priced products; on the other hand, Japanese automakers began setting up factories in the U.S. and Canada from 1982. Since the 1980s, the eight major Japanese automakers' factories in the U.S. have produced about 2.4 million vehicles annually, accounting for over 20% of new car production in the U.S. that year. Even though the Big Three U.S. automakers invested $125 billion in factory renovations and new product development from 1988, closing some old factories and streamlining personnel and operations, their domestic market share continued to decline: from 72% in 1995 to 59% in 2005.

Facing the rapid expansion of Japanese companies' production capacity in the U.S., the American government again escalated restrictive measures. On one hand, the U.S. initiated Market-Oriented, Sector-Selective (MOSS) talks with Japan, and in 1986 used MOSS to demand that the Japanese government relax restrictions on U.S. auto and parts companies entering the Japanese market. On the other hand, after Japanese companies set up factories in the U.S., trade frictions in auto parts between the two countries intensified. In 1993, the U.S. government demanded that the Japanese government make clear and specific commitments regarding the quantity and growth rate of auto parts purchased by Japanese companies from U.S. producers. After negotiations broke down, the U.S. launched a "Super 301" investigation against Japan and implemented punitive tariffs. With increasing trade frictions, yen appreciation following the Plaza Accord, and rising domestic production costs in Japan, Japanese auto companies' market competitive advantage began to decline from the latter half of the 1990s.

The auto industry war from the 1960s to 1990s profoundly changed the global automotive industry landscape. After multinational companies adjusted their strategies, a wave of global automotive industry reorganization, mergers and acquisitions, and formation of technology alliances ensued. This meant that competition in the auto industry shifted from domestic or regional competition to global competition. Large auto companies focused on developing several global product platforms, then developing diversified models to meet the differentiated needs of various countries, balancing demand fluctuations in different regional markets, and expanding economies of scale in product development and parts procurement. From the 1990s, large automakers began divesting non-core businesses while accelerating investment in factories in developing countries, hoping to leverage local labor cost advantages and fully explore local markets.

As the auto war neared its end, the global auto industry scale reached unprecedented levels, growing from 33.4 million units in 1971 to 58.95 million units in 2000, causing severe overcapacity—global excess auto capacity reached 20 million units at the beginning of the 21st century, equivalent to the entire capacity of Western European countries. Some auto brands or companies did not survive the war. British auto brands suffered the most severe acquisition wave, with Rolls-Royce, Bentley, Jaguar, Aston Martin, Lotus, Rover, and others being acquired, some brands even changing hands multiple times. Britain no longer owned controlling stakes in mass-production automakers.

However, developed countries with automotive industries do not view auto industry development purely from economic rationality, as it has a strong employment multiplier effect. Each assembly plant employs an average of 5,000 workers, while also driving 20,000 jobs in supporting parts companies. In the mid-20th century, when the U.S. auto industry was still thriving and Detroit was still the center of the auto industry, one in six Americans was directly or indirectly employed by the auto industry. Therefore, even in the face of severe overcapacity, production cuts and layoffs in the auto industry remain politically very difficult.

According to the latest data, in 2022, Japan's automotive-related industry workforce reached 5.54 million, accounting for 8.2% of total employment. In 2021, the EU's automotive-related industry workforce reached 12.9 million, accounting for 6.8% of total employment. In 2022, in the U.S., the number of people engaged in auto manufacturing, wholesale and retail, and after-sales service industries was 7.39 million, accounting for about 5% of total employment. This makes competition in the auto industry not just a contest for market share between companies, but also a political and economic game between nations.

The traditional automobile "World War" brought a series of "aftershocks" to the new automotive industry competition in the 21st century. This was first reflected in Japan's problem of "choosing the wrong tech tree" in the field of energy-saving and new energy vehicles. Since the mid-1990s, to seize new technological heights, Japan invested enormous R&D efforts in traditional hybrid and hydrogen energy technologies, achieving significant results. However, mainstream European and American companies were slow to follow Japan's technological path. This was not only due to strategic judgments at the technical level, not simply because Japan "chose the wrong tech tree," but also an inevitable choice for European and American companies to resist Japanese advantages in competition at that time.

Another unexpected aftershock was the development of China's automotive industry. On one hand, traditional auto giants took advantage of the Chinese government's "market for technology" policy to incorporate China's auto industry and market into their systems, either to gain larger market scale to spread costs or to monetize by selling mature or even previous generation product blueprints and equipment. Before China joined the World Trade Organization (WTO) in 2001, more than a dozen famous multinational companies had established over 20 joint ventures in China; after 2001, all well-known multinational automakers targeting the mass market entered China using the "market for technology" policy. These joint ventures deliberately suppressed the technological innovation of their Chinese partners, requiring joint ventures to focus resources on localizing production of imported models.

On the other hand, the traditional auto "World War" also created conditions for the rise of China's independent innovative auto companies. Due to widespread overinvestment and sluggish growth among multinational giants, many specialized technical companies gradually became independent from vehicle manufacturers, trying to obtain better survival environments by leveraging external markets. Some design and engineering companies that originally mainly served mainstream automakers also began to seek survival space in emerging markets. For instance, famous Italian design companies like Pininfarina, Bertone, and Italdesign played important roles in the early growth of technical capabilities of China's independent innovative auto companies (such as Hafei Auto, Chery, Geely, Great Wall). A large number of engineering technology companies like Lotus, Ricardo, AVL, FEV, and Mitsubishi were also dedicated to selling engineering technology services to Chinese innovators.

When China's policy shifted towards "independent innovation" in 2005, disappointed companies from the previous round of the "World War" became acquisition targets for Chinese auto companies. This measure helped Chinese companies (especially traditional state-owned enterprises) accelerate the acquisition of vehicle technology and enter international markets - although the effects varied greatly between different cases. For example, SAIC first acquired Korea's Ssangyong, which was not successful; subsequently, SAIC and Nanjing Auto separately acquired parts of British Rover's assets, which were eventually integrated into SAIC's MG brand; BAIC acquired some of Saab's technical drawings; Geely, a standout among independent innovative enterprises, successfully acquired Volvo with national support, and also incorporated brands like Lotus and Smart.

Breakthrough in the Chinese New Energy Vehicle Industry

Entering the new century, a new round of "World War" was gradually brewing in the new energy vehicle sector. The industrialization efforts for new energy vehicles originated at the end of the previous "automotive World War." Due to the impact of the oil crisis and society's general increase in environmental protection and fuel economy requirements, major industrial countries successively began research and development projects for new energy vehicles. With the gradual development of power battery technology, the rise of new companies like Tesla after 2003, and the increasingly active role of environmental protection in social and political life, new energy vehicles became increasingly clear as the future direction of development.

Although China was a latecomer in the field of new energy vehicles compared to Japan and the United States, it was the first to clearly define the development direction of new energy vehicles at the national strategic level and achieved a fundamental breakthrough in large-scale industrial application. In 2001, the "863" project of the 10th Five-Year Plan established a major science and technology special project for electric vehicles, establishing a "three vertical and three horizontal" R&D layout. In 2010, new energy vehicles were listed by the State Council as one of the seven strategic emerging industries. In 2012, the "Energy-saving and New Energy Vehicle Industry Development Plan (2012-2020)" clearly outlined the pure electric drive development strategy. Although China has long been in a state of rapid follow-up in terms of key core technologies, a series of factors enabled China to take the lead in the industrialization process of new energy vehicles, achieving progress in key technological systems such as power battery safety, power battery structure, and pure electric car chassis platforms.

First, the development of China's traditional automotive industry laid a solid foundation. In the late 1990s, the rise of independent innovative enterprises such as Chery and Geely drove fierce competition in scale and product innovation in the domestic traditional automotive industry. By 2009, China ranked first in the world with a production of nearly 13.8 million units and sales of 13.65 million units. This process not only directly nurtured a series of very important local enterprises in the current new energy vehicle field but also laid a solid foundation for the industrial chain of China's automotive industry. At the same time, due to the persistent advantage of foreign brands in reputation and cultural influence in the traditional fuel vehicle consumer market, Chinese independent brand passenger cars were unable to break through the market positioning of "cheap small cars" for a long time before 2010. Many attempts in the larger B-segment car and higher-priced "boutique car" fields were unsuccessful, which gave auto companies pursuing independent innovation stronger motivation to transform when faced with new industry opportunities.

Secondly, the Chinese government resolutely implemented policies to promote the development of strategic emerging industries. Measures such as "Ten Cities, Thousand Vehicles" and "Promotion and Application Pilot" were successively rolled out starting from 2009. Although there were some twists and turns in the early stages, by 2015, the goal of having 500,000 new energy vehicles in use was basically achieved. More importantly, during the pilot process driven by high-level central government and active participation of local governments, a domestic new energy vehicle supply chain gradually took shape. The central government provided over 150 billion yuan in subsidies for new energy vehicle purchases (commonly known as "national subsidies") from 2010 to 2020, which built attractive expectations for corresponding participants in the early stages of industry development. Most of the local parts suppliers active in the new energy vehicle field today started their businesses during this period. From the end of 2015, intelligent connected vehicle testing demonstration zones began to spring up across China. Local governments in Shanghai, Chongqing, Beijing, Zhejiang, Changchun, Wuhan, Wuxi, and other places actively cooperated with the Ministry of Industry and Information Technology to promote testing and verification in semi-closed and open road environments. By the end of 2020, the construction of "dual smart" (smart transportation, smart city) pilot cities gradually unfolded. In November 2023, the Ministry of Industry and Information Technology announced the opening up of L3 and L4 level autonomous driving road tests, marking a new milestone for China's intelligent connected vehicles and officially initiating the mass production application phase.

Furthermore, the Chinese government's continuous reforms leveraged market forces. Especially since 2015, a series of institutional reforms and adjustments have created space for the rise of new car-making forces. On the one hand, clear subsidy phase-out policies and dual-credit policies forced companies to win market space more through investing in technology R&D and improving manufacturing scale and quality; meanwhile, the state continued to implement inclusive policies such as purchase tax preferences and infrastructure construction rewards. On the other hand, introducing Tesla not only created a "catfish" for innovation competition in new energy vehicles but also encouraged capital from the internet and high-tech industries to enter the field. Additionally, the government adopted a relatively tolerant attitude towards various workarounds for new car-making forces, such as contract manufacturing and purchasing qualifications. The entry of new car-making forces brought new thinking and technologies. The introduction of technologies like the internet and artificial intelligence led to rapid development in intelligent cockpits and intelligent driving in China. New companies also brought new business models. They are good at capturing changes in market demand, focusing on extending the value creation chain for users through continuous iteration and upgrading of product technology, transforming traditional business models from "manufacturing" to "manufacturing + service," with even more product value coming from post-delivery services and upgrades. All of these have created new advantages for China's new energy vehicle industry.

These factors led to China taking the lead in achieving large-scale industrialization of new energy vehicles and power batteries. In 2015, China's new energy vehicle penetration rate exceeded 1%, reaching 25.6% in 2022, achieving the 20% target three years ahead of schedule. China has also produced new energy vehicle manufacturers with global competitive advantages. For instance, in 2022, BYD surpassed Tesla for the first time to become the world's highest-selling new energy vehicle company, and in 2023, it broke into the global top ten in automobile sales with annual sales of 3.02 million units. More importantly, China has initially formed a new energy vehicle industry system with an independent, secure, and controllable supply chain, without any components being absolute "bottlenecks".

It's worth noting that the promotion of new energy vehicles in China has deeply penetrated the vast markets of third- and fourth-tier cities and rural areas. According to data from the China Association of Automobile Manufacturers, since the Chinese government began promoting new energy vehicles in rural areas in July 2020, the total sales of rural models had reached 4.1248 million units by the end of 2022. This has allowed the overall market to maintain continuous rapid growth even after the central government implemented multiple rounds of national subsidy reductions and completely eliminated national subsidies in 2023. It can be said that the market mechanism has successfully taken over the baton and become the most important driving mechanism for China's new energy vehicles.

In fact, the long-standing situation where domestic brands couldn't break through a 45% market share in China's automobile market was broken with the rise of the new energy vehicle industry. Different data show that the share of domestic brands in China reached around 55% in 2023. After 2020, not only did German, Japanese, and Korean brands show a clear downward trend in sales share in China's automobile market, but their absolute sales levels also declined.

During this period, with breakthroughs in key technologies for new energy vehicles, various countries successively formulated national-level electrification transition strategies:

• In 2018, the UK Department for Transport released "The Road to Zero", a programmatic policy document that set a phased timeline for full vehicle electrification, proposing to stop selling traditional fuel vehicles by 2040.

• In 2021, the Japanese government released the "Green Growth Strategy", proposing the goal of achieving all new car sales as electric vehicles by 2035.

• In the same year, the EU proposed an amendment to the "Light Vehicle Emission Regulations", clearly stating that newly sold light vehicles need to achieve zero emissions by 2035.

• The US also clearly proposed in 2021 the goal of new energy vehicles accounting for 50% of new car sales by 2030.

However, compared to the government's ambitious statements, traditional auto companies in the US, Europe, Japan, and South Korea have been moving heavily in the transition process. The reasons for "big ships being hard to turn around" mainly include the following aspects:

Firstly, these countries and regions generally face resistance from large interest groups related to the petrochemical industry. Labor and social public may also become forces opposing the new energy transition. For example, in September 2023, the United Auto Workers (UAW) in the US launched a strike against the three major auto giants simultaneously for the first time in history. On the surface, the strike was caused by workers hoping to gain wage increase opportunities and other benefits in the new round of labor contract negotiations; in essence, this strike also reflected workers' concerns and dissatisfaction with the electrification transition.

Secondly, Western traditional auto giants find it difficult to change in terms of cognition and strategy. The technical architecture of traditional cars can be briefly considered as centered on mechanical power systems; the design concept of new energy vehicles is centered on batteries, software, sensors, and intelligent computing. This change is prominently manifested in the differences in vehicle electronic systems. The electronic systems on traditional cars serve to assist mechanical and electrical systems in completing their functions; new energy vehicles, in addition to traditional mechanical control chips, have added chips related to intelligent cockpits and intelligent driving. These chips need to complete instant communication with various control chips, becoming the neural network that dominates the entire product system. In terms of hardware, the number of chips on new energy vehicles is increasing, and a large number of consumer-grade computing chips that were not previously present have been added; in terms of concept, this electronic system defines the underlying logic of the vehicle's basic design, manufacturing, and control. Moreover, this architecture is still developing dynamically, currently transitioning from distributed control to domain control, and in the future, it is likely to evolve into centralized computational control by a small number of chips to meet the requirements of improving communication efficiency and reducing costs. This architecture also brings expandability and upgradability to the product, allowing intelligent vehicles to adapt to different users' habits and iterate and update their functions with the development of software technology, which has brought a huge impact on the design and development ideas of traditional companies.

Thirdly, the transformation dilemma of traditional enterprises is also reflected in path dependencies in internal and inter-enterprise relationships. During the long-term development of the automotive industry, they have formed a structured institutional arrangement in terms of internal organization and external collaborative relationships. When traditional giants are forced to transform due to technological challenges, various departments within the organization can easily conflict over "internal political" issues such as strategic discourse power and resource allocation priority. This makes it difficult for them to complete organizational structure adjustments in a short time and to smoothly promote the research, development, and industrialization of emerging technologies. Some multinational companies even developed quite successful products in their early years, but success in products and technologies can easily be overwhelmed by organizational struggles within the company during times of crisis.

For these large multinational companies, they may need to transfer a large amount of new vehicle development work to China. Traditionally, multinational companies mainly conduct new product development at their headquarters and then launch new models to other global markets (possibly with minor adjustments to products based on market characteristics). However, China has become a leading market in the new energy vehicle industry. They now need to fully understand the changes in China's technological frontier and potential consumer demand changes to better complete development work; at the same time, it also better avoids various problems within the original organization of the enterprise. More importantly, the automotive revolution brought by new energy vehicles is not carried out in isolation but is intertwined with the energy revolution, transportation revolution, information technology revolution, and so on. New energy vehicles can widely absorb new technologies in information, networking, intelligence, big data, and cloud computing, as well as new technologies, new materials, power electronics, advanced manufacturing, and other aspects, serving as a large platform for the integration and innovation of many industries. For example, new energy vehicles need to integrate and develop with the information technology industry to achieve information interconnection between vehicles and cities, roads, and charging facilities. This requires corresponding developers to immerse themselves in innovation ecosystems closely related to cutting-edge technologies such as 5G, big data, artificial intelligence, smart grids, and smart cities. However, this compound frontier innovation ecosystem has mainly flourished in a few countries and regions such as China, which undoubtedly increases the difficulty for multinational giants to develop technologies and products based on their home markets.

The "rise in the East and decline in the West" of new energy vehicles on a global scale has profoundly changed the original industrial landscape. In 2021, China's automobile production accounted for over 30% of the global total production, while Japan and the United States only accounted for about 10% each. In the Chinese domestic market, ordinary consumers' recognition of local new energy vehicle brands has surpassed that of multinational company brands, which is a barrier that domestic brands have always been unable to break through in the traditional fuel vehicle market. The newly launched new energy vehicles from major multinational companies have had to repeatedly lower their prices, and there was even a phenomenon of "inversion" where some multinational companies' new energy vehicles were priced lower than fuel vehicles. After experiencing the huge impact brought by auto shows in Shanghai, Munich, and other places in 2023, multinational auto giants began to invest in or cooperate with Chinese new energy vehicle companies, hoping to accelerate their own transformation by borrowing Chinese companies' technology and product architecture. For example, Volkswagen invested in Xiaopeng, Stellantis invested in Leapmotor, and Audi cooperated with SAIC.

The Unfolding Conflict: The “New World War” in the Automotive Industry

Reflecting on the course of the automotive wars from the 1960s to the 1990s, one can almost certainly conclude that new energy vehicles will inevitably become the focus of intense competition among major industrial nations in the new era. The COVID-19 pandemic and the Russia-Ukraine war have exacerbated economic difficulties in European countries, leading Western nations to adopt overtly protective policies to support the development of their new domestic energy vehicle industries.

In August 2022, the United States passed the Inflation Reduction Act. This legislation will invest $369 billion to stimulate the development of new energy-related industries, particularly providing highly exclusive preferential policies and protective clauses for the U.S. domestic new energy vehicle and key components industries. According to the Act, consumers can receive up to $7,500 in tax credits for purchasing new energy vehicles, provided the vehicle is assembled in the U.S., with a certain percentage of battery pack components and critical battery materials sourced from domestic U.S. companies. This move aims to attract European, Japanese, and Korean vehicle and key component manufacturers to invest and set up factories in the U.S. In December 2023, the U.S. government announced proposed new rules for electric vehicle tax credits, directly restricting U.S. electric vehicle manufacturers from sourcing battery materials from China or other competitor countries. According to the National Defense Authorization Act for Fiscal Year 2024 passed in late 2023, starting from October 2027, the U.S. Department of Defense will be prohibited from procuring batteries from Chinese companies such as CATL and BYD. At the end of February 2024, the White House officially released "President Biden's Statement on Addressing National Security Risks to America's Auto Sector," explicitly requesting the Department of Commerce to investigate and take "de-risking" actions against connected vehicles using China-related technologies.

U.S. policies not only impact China's exports but the Inflation Reduction Act further exacerbates Europe's predicament. As traditional automotive powerhouses, France and Germany jointly issued a statement in November 2022, strongly responding to the challenges posed by the Inflation Reduction Act, with France even proposing to formulate a "Buy European Act." In February 2023, the European Commission proposed the "Green Deal Industrial Plan." In March, the EU successively unveiled draft proposals for the "Net-Zero Industry Act" and the "Critical Raw Materials Act" as important pillars of the "Green Deal Industrial Plan." The former aims to stimulate investment and financing activities in green industries and boost European domestic green production capacity by simplifying regulatory frameworks and improving the investment environment. Battery technology is listed as one of the eight strategic net-zero technologies, and the act is currently still under negotiation. The latter sets requirements for domestic extraction and processing rates of strategic raw materials, strengthening supply chain security for critical raw materials and clean technology products. The EU passed this act in early December 2023. In the EU, 21 member states provide direct subsidies for consumers purchasing new energy vehicles; France's new industrial policy further tightens the scope of subsidies, linking subsidy standards to carbon footprints, which also imposes requirements on carbon emissions during the production process. The French Finance Minister stated in May 2023 that 40% of France's electric vehicle subsidies were going to Asian automakers, and the new policy is essentially aimed at reserving subsidies for European domestic manufacturers. In December 2023, the French government announced a list of new energy vehicle models eligible for subsidies of up to 7,000 euros, with three popular electric vehicle models produced in China not making the list.

The EU has also taken targeted measures in the key component power battery industry. In August 2023, the “EU Battery and Waste Battery Regulation” officially came into effect, imposing three mandatory requirements on locally produced and imported batteries in the EU: First, a detailed battery passport must be provided, including information on battery mineral sources, rare metal content, and battery cycle count; Second, battery manufacturers are required to recycle used batteries and use a certain proportion of recycled materials in new battery production; Third, provide carbon footprint information for the entire battery life cycle. This move is intended to curb the development of China's lithium battery industry, which has been exporting well to the EU, and to seek buffer time for the development of Europe's domestic battery industry. This is similar to how the U.S.-Japan auto war in the late 1990s gradually spread from the whole vehicle sector to the key components sector.

Faced with the rapid growth of Chinese electric vehicle exports to Europe, the EU has even adopted more direct protectionist policies. According to data from the China Passenger Car Association, China's exports of pure electric vehicles to Europe reached 338,000 units in 2022, a year-on-year increase of 94%; in the first eight months of 2023, the number of pure electric vehicles exported to Europe had already reached the full-year scale of 2022. In early October 2023, the European Commission launched an anti-subsidy investigation into pure electric vehicles from China, indicating that the EU's crackdown on Chinese electric vehicle exports has reached a new level. The legal basis for the anti-subsidy investigation comes from the 'Foreign Subsidies Regulation' passed by the EU in November 2022. This regulation defines 'foreign government subsidies' quite broadly, including preferential loans, tax reductions, provision of land or energy at low prices; moreover, some common commercial transactions, such as obtaining loans from policy banks or state-owned commercial banks, debt-to-equity swaps, debt restructuring, obtaining equity investments from government investment funds, government public procurement, etc., may also be identified as foreign financial assistance; state-owned enterprises with government capital injection backgrounds may also be considered as receiving subsidies. In fact, the prices of Chinese-made cars exported to Europe are generally higher than domestic prices.

In addition to providing a legal basis for anti-subsidy investigations, the “Foreign Subsidies Regulation” adds two investment review tools, which will have a significant impact on Chinese companies' investment and business activities in Europe. From October 2023, companies engaging in mergers and acquisitions and public procurement activities in the EU must make prior declarations to the European Commission if they have received foreign subsidies in the previous three years and meet relevant reporting thresholds. In the corresponding penalty provisions, the maximum fine can be up to 10% of the previous year's total turnover. These systems will greatly increase the transaction costs, extend the transaction preparation period, and increase uncertainty for Chinese companies investing and operating in Europe. Some industry insiders judge that the overseas strategy of acquiring the excess production capacity of local European factories or merging and acquiring poorly managed companies will face great obstacles in the future.

Is “New Globalization“ a Way Out?

In the face of intense global competition, any optimistic 'quick victory' theory about China's new energy vehicle industry may be unrealistic. The increasingly protectionist tendencies of major industrial nations will prolong the competition process in mainstream European and American markets, thereby winning more time for the transformation of local multinational giants in Europe and America. Under the influence of protective policies, European and American countries will lobby more component and whole vehicle enterprises from China or other East Asian regions to directly invest in local markets. At the same time, multinational companies will more actively acquire new energy vehicle technology assets from China through investment, mergers and acquisitions, and other means to accelerate their own transformation. The production capacity, brand influence, and market channels formed by multinational companies on a global scale during their long-term development history are also valuable resources in the transformation process.

Looking back at the last round of the automotive industry 'World War', on one hand, Japanese and Korean companies opened the doors to mainstream markets in developed countries by relying on product quality, technological level, and new vehicle models, facing the existing market share held by traditional large automobile manufacturers. This, in turn, promoted the continuous improvement of their technology and products. On the other hand, Japanese and Korean companies also achieved rapid growth in global sales by exploring new markets, which also benefited from their solid product quality and recognition in mainstream markets. According to export data from the Japan Automobile Manufacturers Association (JAMA), from 1975 to 2023, in addition to gaining recognition in mainstream European and North American markets, Japan's automobile exports to other countries and regions accounted for an average share of about 38% of overseas markets, reaching 48% in 2022.

Currently, Chinese new energy vehicle companies are also actively exploring emerging markets that were previously underdeveloped, with South Asia, Southeast Asia, and the Middle East becoming growth points for China's new energy vehicle exports. In 2022, China exported more than 50,000 new energy vehicles to countries such as Thailand, the Philippines, India, and Bangladesh, with exports to Thailand approaching 80,000 units, accounting for 7% of total new energy vehicle exports. China's new energy vehicle exports to Israel and the UAE rapidly grew from less than 10,000 units in 2021 to nearly 40,000 units in 2022; exports to countries such as Uzbekistan, Jordan, and Turkey exceeded 10,000 units for the first time. In addition, China's new energy vehicle exports also performed well in countries such as Australia, New Zealand, and Brazil in 2023. According to data from the International Organization of Motor Vehicle Manufacturers (OICA), in 2020, the number of vehicles per 1,000 people in the United States reached 860, the overall level in Europe was about 518, while China only had 223. Some South Asian and Southeast Asian countries have not yet reached 100 vehicles per 1,000 people. These countries and regions have large populations and still have significant room for improvement in per capita vehicle ownership, and they lack domestic new energy vehicle manufacturing capabilities. Furthermore, countries such as Thailand, Indonesia, and Vietnam have implemented policies such as import tax incentives for new energy vehicles, purchase subsidies and consumption tax reductions, and foreign investment subsidies, providing excellent opportunities for the export of our products, technologies, and industrial chains.

Developing markets in Southern countries also brings new challenges to China's automotive industry. Firstly, the new energy vehicle industry involves mandatory regulations in many aspects such as infrastructure, environmental protection, and safety. For instance, China has not joined the '1958 Agreement', which means that currently, when Chinese new energy vehicles are exported abroad, they still need to undergo separate testing and certification procedures in overseas markets, which carries certain risks and increases export costs. At present, China has developed a testing and certification alliance in the process of exporting new energy vehicles through cooperation with governments of some developing countries. In the future, opportunities and challenges will continue to coexist in promoting related products and testing standards abroad.

More importantly, to successfully promote the internationalization of Chinese new energy vehicles, China must explore a path of 'new globalization'. Logically, the globalization model shaped by traditional multinational companies has inherent limitations in terms of value creation and distribution. They have built a pyramid-like structure on a global scale: Western countries at the top possess core technologies, exporting management, capital, and some production equipment, exercising control layer by layer downwards, and obtaining high profits in the value chain; developing countries at the bottom mostly provide cheap resources and labor, can only obtain relatively meager benefits, and have to bear the cost of environmental pollution. The inherent flaw that this model cannot solve is that cheap labor that can only obtain meager income cannot become consumers of the complex technological products they produce. Ordinary workers from developing countries, who make up the majority of the population, can consume clothing, shoes, and daily necessities produced by this world system, but generally do not have the ability to consume complex technologies or products such as new energy vehicles, smart grids, and cloud computing services. In fact, in the 1990s when China implemented the 'three-plus-one' or 'market for technology' development model, most of China's population could not afford complex products produced locally in China.

The realistic expectations of international competition and China's population size both determine that China must take the path of 'new globalization'. Firstly, developed countries still have advantages in scientific and technological strength and capital accumulation and are competitive opponents. China cannot rely solely on new energy vehicles to completely replace their share in the global automotive industry landscape. Assuming a world where China completely replaces the G7 is unrealistic. Secondly, China's population size is almost twice that of the total G7 population, which means that China cannot drive its large-scale population to progress from middle to upper-middle and high-income by simply replicating the existing globalization logic or only hoping to replace the market share of developed countries. This means that China's industrial practitioners must substantially promote the industrialization process of Southern countries, transforming local emerging wage earners into consumers of complex industrial products in the process of exporting new energy vehicle production capacity and promoting infrastructure construction. At the same time, China needs to vigorously promote an innovation inner circulation based on its own land, forming local advantages in product innovation and frontier technology development agendas so that innovation activities centered on China's local technology agenda and local market demands can radiate to a larger international scope, incorporating the industrialization activities of Southern countries into value chains related to China, thereby ensuring China's competitive advantage in the process of exporting technology, industry, and standards.

It should be emphasized that the industrialization process of Southern countries is not unilaterally determined by China or other developed countries. As China's rise gradually broke the control of the American system over China, we also broke the possibility of replicating another American system. The 'once-in-a-century changes' not only altered China's relationship with the global system but also promoted the rise of economic autonomy awareness in some developing countries. For the new energy vehicle industry, there is currently a separation between raw material supply and production manufacturing of critical metals such as lithium, nickel, and cobalt on a global scale. Some major mining countries that possess key metal resources have increasingly strengthened their sense of autonomy. They hope to gain more benefits using their ecological niche and have begun to attempt to form 'metal OPEC' organizations in related fields. This, in fact, requires us to take a longer-term view of the relationship between China's development and global Southern countries. Under the same external conditions, economic cooperation between countries achieved through complex industrial collaboration is more secure than relationships shaped solely by trade in goods or simple industrial collaboration. Therefore, promoting the industrialization process of more Southern countries while ensuring the safe and efficient operation of China's new energy vehicle and other industrial systems globally, and cultivating consumers with purchasing power for our products and industries going abroad, is not only an important issue concerning how China builds long-term competitive advantages in industry, but also a proposition of the times concerning the construction of a community with a shared future for mankind.