The future for cars is Chinese

Europe, Japan and the US have dominated car manufacturing for decades. China has become a mass producer of cheaper cars – and cheaper does not mean lower qualityThe rise of Chinese car manufacturers is one of the most significant business developments of the early 21st Century. An industry long dominated by firms from Europe, North America and Japan is being transformed, as Chinese cars of comparable quality and lower cost enter global markets at increasing volumes.Some statistics to illustrate the case are: In the final quarter of 2023 BYD, the Chinese firm, overtook Tesla to become the world’s biggest manufacturer of EVs, selling 526,000 to the US firm’s 484,000. Also last year, China became the world’s biggest exporter of cars, surpassing Japan. China is the world’s largest car market, with 22mn vehicles sold in 2022, compared with fewer than 13mn each in the US and Europe. Some 70% of the world’s lithium-ion batteries are made in China.The quality of the product is comparable and in terms of some features, superior. Many Chinese EV manufacturers, like Tesla, are essentially tech firms that happen to manufacture cars, and the place a high priority on the latest in-car software and infotainment systems, which appeal to younger drivers.The situation facing the West has been described as a ‘trilemma’: The West wants free trade, clean technology and low inflation. The only way to secure all three is to tolerate Chinese manufacturers enjoying a growing market share in major manufacturing sectors, resulting in redundancies and restructuring of traditional firms.Of the three priorities, free trade is the least precious to western governments. This year the Biden administration announced an increase in the tariff rate on Chinese imported EVs from 25% to 100%. In October 2023, the European Commission began an investigation into whether Chinese subsidies of car manufacture constitute unfair trade, and higher tariffs by the European Union may follow.Protectionist measures will be justified by reference to overcapacity, dumping and state subsidies, and there is substance to the claims, but such features are not unique to China. Additional tariffs are likely only to slow down, rather than halt, the growth of the Chinese car manufacturing industry’s global sales.In addition, cars manufactured locally are not affected. Last December BYD announced plans for a production centre in Hungary, and Chinese manufacturers are reportedly looking at potential sites in Mexico, which lies inside the North American free trade area.Outside of Europe, the US and Japan, there are no domestic car manufacturers to protect, and Chinese vehicles are welcomed as a way of boosting mobility and living standards while keeping inflation low. In the Middle East, a Chinese-made saloon or SUV will be of equivalent performance, engineering quality and comfort to a German or Japanese vehicle, at around a quarter of the price, and often with a five-year warranty. Customers are starting to notice.The Chinese car industry is relatively young, but some firms are established, such as Geely and BYD. The industry grew initially by supplying the large internal market as China developed economically. Geely was founded in 1986, has owned the Swedish car firm Volvo since 2010, and is majority owner of the British high-performance car manufacturer Lotus. The Indian company Tata has owned the British Jaguar and Land Rover marques for a similar period, but Indian manufacturers have not expanded globally at scale in the same way as Chinese rivals.Western manufacturers may have to respond to the competition by enhancing the cachet attached to a distinguished brand, similar to the way in which traditional Swiss watchmakers, which were disrupted by electronic watches in the late 20th century, reinvented their products as luxury brands, more than utilitarian timepieces.The exporting is not all in one direction. German car manufacturers have long had a strong presence in the Chinese market and, while their market share is falling, they have localised research and development centres and brand recognition. The US marque Tesla has manufacturing capacity and sales in China.Some western manufacturers do not favour tariffs, fearing it could lead to trade wars and affect their sales in China. Also BMW, for example, earns revenues by importing Chinese cars.The scale and sophistication of the Chinese car manufacturing capability is an economic fact of life. The effects are global, and they are only beginning to be felt.The author is a Qatari banker, with many years of experience in the banking sector in senior positions.