Tesla brought electrification into the mainstream, and the Chinese government's obsessive pursuit of the cause got the lead.
By Liam Denning, Bloomberg, April 11, 2024
The U.S. is the world's most valuable producer of electric vehicles, but it is also a laggard in the electric vehicle race. How did this happen?
As recently as 2016, the number of electric vehicles in the United States surpassed that of China. Now, China is far ahead.
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Chart: Electric passenger car ownership in the U.S. and China (including plug-in hybrids)
Although Tesla's sales soared by 44% last year, sales are expected to slow significantly in 2024, and not only Detroit, but also Tesla itself is showing signs of backing down. In the fourth quarter of 2023, Tesla once ceded its position as the world's largest producer of battery electric vehicles to BYD Co., Ltd., and it is likely that it will win the championship again. Tesla CEO Elon Musk has publicly stated that without trade barriers, Chinese manufacturers "will almost destroy most other car companies in the world." Tesla's massive valuation today is less of a leader in the electric vehicle industry than a vision of a robotic axis.
It is an indisputable fact that China is ahead of the United States in the field of electric vehicles. China not only accounts for six-seven-tenths of global EV sales, but also dominates the supply chain for a key EV technology: lithium-ion batteries. According to Bloomberg NEF, China has 85% to 95% of the production capacity of each major cell module, and about 70% of the world's lithium refining capacity.
None of this is accidental. Entering the 2000s, about a century after the age of automobiles, the Chinese government rightly recognized that building a world-class export industry around the internal combustion engine, replacing existing industries in the United States, Germany, Japan, and other countries, was an unlikely prospect. In 2001, the Chinese government launched a research and development program to develop batteries, motors, and other technologies related to electric vehicles. This industrial policy was strongly supported by domestic banks, and about a decade later, the government introduced generous subsidies to encourage Chinese drivers to buy electric vehicles. Importantly, imported electric vehicles are not eligible for subsidies and are subject to customs duties, and production subsidies are also conditional on local content requirements.
In fact, the green industrial policy of the US Inflation Reduction Act (IRA) largely borrows from the same approach, subsidizing the production and purchase of electric vehicles and their various components, on the condition that the proportion of domestic content in these products increases. Imported products, especially those from China, are subject to customs duties.
The lesson here is not as one might think, that free-market capitalism in the United States is somehow incapable of delivering electric vehicles in the same way that Chinese command and control does. When it comes to vehicles and fuels, U.S. capitalism is heavily distorted by the lack of a carbon price: U.S. passenger cars and light trucks, for example, equate to nearly $60 billion a year in real subsidies at $51 per tonne of nominal emissions. If it is not advisable to tax what is undesirable, then the alternative is to subsidize technologies that may solve the problem.
The bigger difference is in the intent and the existing system. There are strategic reasons for China's pursuit of vehicle electrification, not just to boost its export industry. The spread of electric vehicles is helping to purify the air in China's cities and mitigate climate change. Of course, it would be even better if China reduced its high dependence on coal-fired power generation. Electric vehicles can also hedge against China's dependence on imported oil, which accounts for about three-quarters of China's oil consumption, a higher proportion than the United States, even at its peak in the early 2000s.
Washington, on the other hand, has only recently coalesced to a greater extent on the idea of industrial protectionism. According to regular polls, while the fight against climate change has the support of a majority of Americans, the Republican Party has either little support or is openly hostile. Not unrelatedly, the shale boom has provided support for another way to hedge against import dependence: drilling, baby, drilling. California, like China, began implementing programs to encourage electric vehicles decades ago, providing a salutary contrast to what can be achieved when a state makes strategic decisions that favor electrification.
Chart: Electric vehicles as a percentage of new passenger car sales
California's differentiation in this regard is also reflected in the confusion inherent in the United States' industrial and climate policies. While the federal government can struggle to pass green legislation and issue subsidies, much of the implementation depends on the varying interests and capabilities of each state. For example, there is a lack of reliable EV chargers on highways in the United States. Other political risks include the Supreme Court's current crackdown on federal pollution regulation.
In addition to the existing political structure, electrification in the United States must contend with traditional industrial practices (including labor factors) and consumer habits. In short, the domestic auto industry in the U.S. is pursuing heavy-duty SUVs and trucks in order to maintain profit margins, and the driving public has been paying more attention to these vehicles for a generation or two. Thanks to relatively cheap, no carbon tax on gasoline. These cars are difficult to electrify and require expensive, large batteries to solve range anxiety. The latter itself stems from the practical challenges associated with driving long distances, especially in rural areas. But it also reflects the psychological barriers in a country where the average daily driving range is well below 300 miles, as well as a relative lack of commitment to good public transportation.
Despite its mediocrity, China's leading position in the field of electric vehicles owes much to China's single-minded pursuit of electric vehicles and, without hesitation, subsidizing them. The United States has moved closer to this model at different internal speeds, in part because China has taken the lead in doing so. This is also one of the main risks to the global development of electric vehicle projects: China wants to achieve its export ambitions, while the United States is determined to thwart it.