Chinese electric vehicles can be sold so cheaply because of subsidies, manufacturing innovation and cheap labor. American companies are taking notice.
Chinese electric vehicles have recently gained global attention, offering a range of models that challenge conventional market leaders. Just as Japanese automakers revolutionized the industry in the 1970s, Chinese manufacturers are now positioning themselves to reshape the automotive landscape with competitively priced, high-performance electric vehicles aimed at global consumers.
This time things are different. When Japanese automakers entered the American market, the two countries got along quite well. Today, tensions over shortages and islands complicate importing Chinese electric vehicles. U.S. politicians on both sides have pledged to protect U.S. automakers from the threat of cheap Chinese electric vehicles.
Why are they so cheap?
There are many Chinese EV companies, so competition is aggressive. That’s the natural part. The unnatural thing is that for a while the country has subsidized the various technologies related to the production of these vehicles.
According to a recent report from MarketplaceThere are some concrete arguments emerging about how these Chinese electric cars can be sold for less than $20,000, while the cheapest American electric car costs around $29,000.
An investigation by the European Commission found that Chinese EV brands received preferential financing, direct subsidies, cheap land and below-market rates for raw materials essential for batteries and tax breaks.
Preferential financing
The following excerpts are from the aforementioned report. They are about SAIC Motors, a state-owned manufacturer. It’s pretty damning, but it serves as an example of what kinds of tricks are being pulled to make these companies competitive.
In addition, the Commission found that SAIC made loans for the specific purpose of replacing loans. The existence of revolving loans is considered an indication of additional risks associated with liquidity problems.
The Commission noted that SAIC Motor Corporation Limited has been awarded a AAA rating by a Chinese rating agency. In light of the general distortions in the Chinese credit ratings mentioned in section 3.4.1.9, and the financial situation of the group described above, the Commission concluded that this rating is not reliable.
The Commission considered that the group’s overall financial situation corresponds to a B rating. According to Standard & Poor’s credit rating definitions, an obligor rated ‘B’ is more vulnerable than an obligor rated ‘BB’, but still has the current capacity to meet its financial obligations.
“The Commission found that all sampled groups of exporting producers benefited from preferential financing through loans during the investigation period.”
Cheap labor (big surprise)
According to the same Marktplaats article, it is clear that the working conditions for these BYD employees are no different than what is expected in China.
In the central Chinese province of Hunan, in the city of Changsha, a steady stream of people pass through the gates of the BYD recruitment center. They’re all carrying suitcases because they’re from out of town. If they are hired, which many do, they can stay in the company dorm and start work the next day.
“I can earn about 7,000 yuan ($990) a month,” said a BYD auto mechanic, who gave only his surname as Wu.
That’s a decent salary for factory work in China these days, especially in a cheaper city like Changsha. However, Wu has to work a lot of overtime to earn a living wage.
“I work 270 to 280 hours a month and get one or two days off,” Wu said.
For context, American auto factory workers earned nearly $30 an hour last year, compared to their Chinese counterparts, who earned $3.60 an hour.
Vertically integrated
According to Electric.co, a recent one breakdown of a BYD Dolphin shows that BYD builds all Dolphin components except windows and tires. This is so different from their competition in the West (except maybe Tesla). Usually cars have parts from hundreds of suppliers.
In Japan, the BYD Dolphin competes with Toyota’s best-selling Prius and the Nissan LEAF. The car is selling very well. As you can see in the photo below, it looks fine. Doesn’t look like something that would sell for $14,000.
Exhibit A: BYD produces a part called the 8-in-1 E-Axle. This part includes (among others) the motor, inverter and reducer to reduce costs. This was shocking for the Japanese auto industry, which had long prided itself on being the most efficient car manufacturer.
The Central Japan Economic and Trade Bureau held a seminar (via Nikkei) to examine trends in battery electric vehicles (BEVs). About 70 auto parts companies from Japan attended the event, which featured more than 90,000 parts from 16 foreign electric vehicles.
Standardized parts
Another strategy the Chinese use is to standardize the more boring and user-friendly parts found in their cars. Things like windshield wiper motors and other things that consumers would never see or care about are used across the entire range and made by just one or two suppliers.
It is difficult to determine how much of the success of Chinese electric vehicles is due to cheap labor, subsidies or innovative manufacturing. It’s all three, but if it is mainly due to government subsidies, that is a good thing for Western manufacturers. Cheap loans cannot continue indefinitely.
I leave you with this from the European Commission’s report on the role the government plays in the BEV industry in China.
In conclusion, government guidelines, advisories and regulations regarding the BEV industry demonstrate that the government is steering the industry towards its development and improvement through cost reduction and a stable supply of key inputs. In addition, the government has established a system for clear and constant control and monitoring of the pricing of batteries and their inputs to ensure that the BEV industry can source them at cheap prices and in sufficient quantities.
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