Unlike commodities such as steel, which are largely interchangeable, cars are highly differentiated products. Despite their high quality, older Chinese car models did not pose a significant threat to premium brands like BMW. However, the latest EV models from China are both technologically impressive and affordable, and as EVs gain popularity, petrol cars may face global overcapacities.
Around 18 million EVs are projected to be produced next year, up from 10.5 million in 2021. However, increased capacity alone does not equate to overcapacity. Unlike the solar industry a decade ago, the dynamics for the EV industry are more complex. With high-cost producers in a high-priced market, the US faces more severe challenges within its own EV sector.
Most new industries experience stages of growth, proliferation, and consolidation, and the EV industry is no exception. China has already begun consolidating its EV industry. From a peak of around 500 EV assemblers in 2018, there are now an estimated 140 car companies in China – a third of which may exit this year. In the US, Lordstown went bust last year, and Faraday Future and Fisker may soon follow suit. Other US EV start-ups like Lucid and Rivian have struggled with low sales volumes despite respectable growth.
The proliferation of EV start-ups is driven by global capitalism rather than government support. Venture capitalists are attracted by the trillion-dollar market potential and sky-high valuations of market leaders like Tesla and BYD. Rivian hit a valuation of US$150 billion, far exceeding Ford’s, before falling to US$10 billion. Since Tesla, the US’ market economy has yet to produce another success of its kind. Meanwhile, GM and Ford have scaled back their EV ambitions.
Production capacity is only half the equation in supply-demand balance. Overcapacity is a result of unrealized market demand as much as industry proliferation. While European and Korean-made EVs can make use of US tax credits, Chinese EVs are largely locked out. If EV pricing in the US can approach the level of China’s, demand will mushroom, absorbing much of the expanding capacity. Trade restrictions imposed by the US are arguably just as responsible for any unfolding EV overcapacities as China’s industrial output.
Like South Korea, Japan, and the US, China has adopted industrial policies to promote certain industries in their early stages. Local governments in China have been particularly supportive. However, relatively mature industries like solar and EVs are no longer dependent on government support in China. They have entered virtuous cycles of evolution, improving technologies and reducing costs.
If China were to use state intervention to accelerate industry rationalization, it would only make Chinese market leaders stronger. Culling marginal players will boost the profitability of industry champions, making them more formidable rivals. The issue is not the quantity of green tech capacities in China, but the quality of its highly competitive capabilities.
The rapidly evolving green technology landscape represents an ecosystem straddling economic ambitions, environmental imperatives, and escalating geopolitical rivalries. US-China duels over techno-industrial strategies are pulling their green tech ecosystems apart. Balkanization into fragmenting spheres is distorting resource flows, suffocating entrepreneurship, and deterring cross-border synergy that is vital for green innovation. These complex challenges demand enlightened self-interest and cooperative competition to foster synergy and advancement in the green industry ecosystems of both the US and China.
