The Race for Electric Vehicle Dominance

THE STORY SIMPLIFIED

CRITICAL CONTEXT:

Climate Change and The Shift to Electric Vehicles:

The threat of climate change, a consequence of fossil fuel emissions, has created a global movement towards the electrification of transportation pushing the world to adopt EVs.

• The UN’s Intergovernmental Panel on Climate Change reported that aggressive emissions slashing of the transportation sector could reduce emissions by more than 80% compared to 2015 levels. 

• The U.S. government has set a target for achieving net zero emissions by 2050 and in 2021 set a target to achieve 50% of new car sales being EVs.

• Both the European Union (EU) and China have publicly touted the importance of transitioning to electric vehicles, setting their own targets.

CHINESE GOVERNMENT SUPPORT OF THE EV SECTOR

Since 2009, the Chinese government has implemented extensive policies to support and accelerate the growth of its electric vehicle (EV) industry. This support has helped China become the world’s largest EV market.

• Consumer Incentives:

  • Launched the ‘National Buyer Rebate’ program in 2009 to make EV and hybrid cars more affordable; ended in 2022.

  • Provided $39.6 billion in sales tax exemptions for EV purchases in 2023 alone.

• Producer Incentives:

  • Over $25 billion invested in EV-related research and development since 2009, resulting in advancements in battery and manufacturing technology.

  • Extensive monetary support to EV producers to help them reach economies of scale.

• Government Mandates:

  • Set quotas mandating that a specific percentage of cars sold must be battery-powered

  • Policies requiring intellectual property transfer from foreign EV companies operating in China.

• Infrastructure:

  • Established the world’s largest network of EV charging stations to support widespread adoption.

With over $230 billion dedicated to building a competitive EV market, China has leveraged infrastructure, incentives, and regulatory mandates to create an ecosystem where domestic EV companies can lead on a global scale.

WESTERN GOVERNMENTS’ SUPPORT OF THE EV INDUSTRY

Western countries have begun implementing significant support measures for domestic EV production and consumption, albeit much later than China.

• United States – Inflation Reduction Act of 2022:

  • $7,500 credit for qualifying EV purchases, with eligibility changes in 2025 to exclude vehicles using Chinese suppliers.

  • $40 billion allocated to strengthening U.S. battery supply chains.

  • $2 billion in grants to boost ‘advanced vehicle production’ including EVs.

• Canada’s Moves:

  • Committed $52.5 billion CAD ($37.8 billion USD) in investment and tax benefits to EV battery manufacturing in Ontario and Quebec by 2033.

  • Established major deals with EV and battery producers, including Honda, Volkswagen, Stellantis, and Northvolt.

  • Offers a $5,000 federal tax credit for qualifying battery-electric vehicles as of 2019, with additional regional incentives.

• EU Initiatives:

  • Invested Є20 billion ($21.6 billion USD) in building European battery supply chains, as reported by Transport and Environment.

  • Many member countries, including France, Spain, Italy, and the Netherlands, offer tax credits for EVs.

Collectively, these measures aim to build a competitive EV market across North America and Europe, but they still lag behind China’s early and extensive support.

WESTERN TARIFFS ON CHINA’S EV INDUSTRY

In response to what are perceived as unfair advantages provided to the Chinese EV sector, several Western nations have implemented tariffs on Chinese-made EVs.

• U.S. Tariffs:

  • In 2018, a 25% tariff was imposed on Chinese EVs under President Trump.

  • In 2024, the Biden administration raised the tariff to 100%.

• Canadian Tariffs:

  • Canada followed suit shortly after the U.S. 2024 tariff increase, matching it with a 100% tariff.

  • Prior to this, Chinese EVs faced a 6.1% import tariff.

• EU Tariffs:

  • Following an investigation into Chinese government support of the EV sector, the EU imposed tariffs on Chinese EVs in October 2023, ranging from 17.4% to 38.1%.

  • Tariffs were also imposed on Tesla vehicles exported from China, though at lower rates than Chinese brands.

China has criticized these tariffs as discriminatory and protectionist, responding with counter-tariffs and a legal complaint to the World Trade Organization (WTO). In 2020, the WTO ruled that the U.S. tariffs were illegal, and China is currently challenging EU tariffs.

CHINESE BATTERY INNOVATION

China has become a world leader in battery research and development, advancing technology that powers the global electric vehicle (EV) industry.

• Research Leadership:

  • Chinese researchers contribute a significant portion of high-impact research publications in electric battery science.

  • Chinese companies are outpacing Western counterparts in patent filings and approvals.

• Technological Breakthroughs:

  • Major companies, including CATL and BYD, were early pioneers in developing lithium iron phosphate (LFP) batteries. This battery type requires fewer critical minerals, making it more affordable and sustainable.

THE STATE OF THE CHINESE EV INDUSTRY

China’s electric vehicle (EV) industry stands out globally, leveraging strategic supply chain control, foreign investments, and competitive market outcomes to secure a dominant position.

• Supply Chain Dominance:

  • China has systematically acquired control across key segments of the EV supply chain.

  • Chinese firms command approximately 33% of global lithium production (both current and in-progress projects).

  • They control over 90% of battery-grade graphite supply and hold significant stakes in Indonesian nickel and Congolese cobalt production.

  • The International Energy Agency (IEA) forecasts that China will supply 77% of the world’s rare earth metals by 2030.

  • China processes most battery materials domestically, accounting for nearly 90% of global cathode material capacity and over 97% of anode material capacity.

  • SAIC Motors formed a “Roll-on/Roll-off” (RORO) shipping subsidiary in 2021 for vehicle exports.

• Foreign Production and Investment:

  • Major Chinese companies are establishing a network of joint ventures and facilities abroad to expand their global reach.

  • CATL has invested more than $1.8 billion in a battery plant in Hungary and operates another in Germany.

  • BYD has set up production facilities in Thailand, Brazil, Hungary, Indonesia, Spain, Uzbekistan, and Slovakia. Its CEO in the Americas hinted at a potential plant in Mexico, which could mitigate tariff impacts under NAFTA, though BYD denies any intention to sell to the U.S. market.

  • Significant acquisitions include LK Technology’s purchase of Italian manufacturer IDRA SLR and SAIC Motors’ acquisition of British brand MG.

• Sector Performance:

  • Despite international tariff pressures, the Chinese EV market shows strong growth and market penetration in part due to its ability to produce unmatched affordable cars. For example, BYD offers a model for $10,000 and boasts a profit of $5000 per car on some models in Europe despite the tariffs. 

  • BYD has surpassed Tesla in both unit sales and revenue to become the world’s largest EV producer.

  • Li Auto saw revenues of $10.2 billion in the 12 months leading up to March 2024, a 182% increase year-over-year.

  • XPeng and Nio reached record deliveries in October 2024, with 23,917 and 20,976 vehicles sold, respectively. Moreover, SAIC Motors exported 1.2 million vehicles in 2023.

With strategic control over supply chains, investments in international markets, and strong sector performance, China’s EV industry continues to grow, challenging Western manufacturers on multiple fronts.

THE STATE OF THE WEST’S EV INDUSTRY

Supply Chain Decoupling and Domestic Investments

Many electric automakers, including Tesla, have historically sourced parts and manufactured EVs in China due to its dominant control over the EV supply chain. Recently, however, Western countries have made substantial moves toward decoupling, aiming to build a more self-sufficient and resilient EV supply chain:

• Battery producers from South Korea, Norway, Israel, and even China are now investing in U.S.-based production for lithium iron phosphate (LFP) battery materials, components, and full batteries.

• Ford has partnered with Chinese battery giant CATL to establish a battery facility in Michigan, though U.S. officials have scrutinized the deal to limit foreign influence.

• Significant investments in North American EV manufacturing continue, including Toyota’s $1.3 billion commitment to an EV plant in Kentucky and Volkswagen's $7.1 billion investment in R&D and production capacity in North America, alongside $800 million to electrify a Tennessee factory. However, Volkswagen has simultaneously announced the closure of three German plants and the layoff of thousands of workers.

• Stellantis has invested $235 million to establish an EV truck factory in North America at its Sterling Heights Assembly line in Michigan.

Slowdown in EV Demand and Production Adjustments

Despite these investments, demand for EVs in the U.S. has recently slowed, with inventories reaching a 136-day supply. This shift has led to production cutbacks and delays across the industry:

• Tesla reported a 9% revenue drop in Q1 and has since reduced vehicle prices to encourage sales.

• Ford has postponed the release of its next-generation F-150 Lightning electric truck to 2027 and lowered the price of its electric Mustang by $8,100 to stimulate demand.

• Toyota canceled plans for an electric Lexus production plant in the U.S.

• In 2021, General Motors outlined plans to electrify its entire lineup by 2035 but has already phased out the Chevy Volt as of 2019.

• Stellantis announced a four-week halt on production of the all-electric Fiat 500 due to sluggish demand.

• Other automakers, including Mercedes, Aston Martin, Volkswagen, Audi, and Jaguar, have scaled back or delayed their EV production plans.

As Western nations push for an electric vehicle (EV) transition, the ambition isn’t just about reducing emissions—it’s about winning the race to dominate the EV market. However, while the West is just beginning to scale up, China has been strategically building a competitive advantage since 2009. Can the West catch up in time to shape the future of the electric vehicle market?