China’s electric vehicle (EV) industry, a sector that has been expanding at an impressive pace, may struggle to replicate the global success of Japan’s automotive giants, according to a prominent expert. Alicia Garcia-Herrero, a senior research fellow at Bruegel and chief economist for Asia-Pacific at Natixis, suggests that the offshoring strategy that fueled the rise of Toyota Motor Corp ($TM) and Honda Motor Co Ltd ($HMC) may not be the right playbook for China’s EV makers.
Key Insights:
Garcia-Herrero, in a recent Nikkei Asia article, highlighted several reasons why China’s EV industry might not follow the same trajectory as Japan’s automakers in the 1980s. While Japan leveraged offshoring to combat rising labor costs, stimulate growth, and gain global market share, China faces a different set of challenges and opportunities in today’s economic landscape.
China’s EV success has primarily been driven by a combination of aggressive industrial policy, state-backed innovation, and technology transfers from foreign firms. However, this model is facing headwinds as protectionist policies and decarbonization uncertainties cloud the future.
Risks and Headwinds:
Garcia-Herrero pointed out a major risk facing China’s EV sector: global protectionism. Chinese EV manufacturers are increasingly encountering barriers to setting up production facilities overseas, particularly in key markets such as the European Union. This protectionist stance complicates the offshoring argument and limits potential market opportunities.
Adding to these challenges, the shift away from generous government subsidies post-COVID and China’s sluggish economic recovery have intensified the industry’s focus on exports. In fact, Chinese EV exports surged 22% in 2023, a notable jump from the 2.7% growth recorded in 2019. However, these gains are fragile, especially in the face of new tariffs and countervailing duties imposed by China’s key trading partners.
Why Offshoring Faces Resistance:
Garcia-Herrero highlighted several reasons why the offshoring strategy that worked for Japanese automakers may falter for Chinese EV companies:
- Labor Costs: In the 1980s, Japan’s automakers sought to offshore production due to prohibitively high domestic labor costs. In contrast, China currently benefits from lower labor costs, making offshoring less urgent from a financial perspective.
- Employment Conditions: While Japan’s labor market was overheated during its automotive offshoring boom, China faces high youth unemployment and surplus labor. This contrast creates a different economic environment, with fewer incentives for China to aggressively pursue offshoring.
- Export-Friendly Ecosystem: China’s well-developed supplier networks, trade infrastructure, and trade agreements provide strong support for export-driven growth, a critical advantage not available to Japan’s automakers in the 1980s.
- Geopolitical Constraints: China’s geopolitical standing complicates its ability to set up overseas manufacturing operations. Rising global tensions and protectionist policies prevent Chinese automakers from establishing plants in key markets, stifling offshoring ambitions.
“China would find it cheaper and more efficient to produce overseas, but geopolitical reasons push against the offshoring argument,” Garcia-Herrero noted. In other words, China’s “flying geese” model—patterned after Japan’s—may not take flight at the same speed, at least in the near term.
Implications for Investors:
Investors should keep an eye on the growing tension between China’s global ambitions for its EV sector and the barriers being erected by its trading partners. The European Union, a key destination for Chinese EV exports, recently imposed countervailing duties on Chinese electric vehicles, citing unfair state subsidies. This has escalated trade frictions, with China vowing retaliatory measures to protect its interests.
Interestingly, the EU has taken a more lenient approach towards Tesla Inc. ($TSLA), reducing tariffs on the company’s China-made EVs. This move has the potential to reshape competitive dynamics in Europe, giving Tesla a pricing edge over other manufacturers, including local European and Chinese rivals.
Meanwhile, Japanese automakers Toyota and Nissan have been collaborating with Chinese tech giants Tencent and Baidu to bolster their AI capabilities in the EV space. However, these partnerships have not been without complications. Earlier this year, a certification scandal involving other Japanese automakers cast a shadow over these developments, raising further questions about how China’s regulatory environment will impact global partnerships.
Conclusion:
China’s electric vehicle industry, while a rising force, faces complex challenges in replicating the global success of Japan’s automakers from decades past. Global protectionism, coupled with a rapidly changing economic environment and shifting geopolitical landscapes, could slow China’s momentum in offshore production and global market penetration.
For investors, the takeaway is clear: while China’s EV sector still holds long-term growth potential, the path to global dominance is fraught with obstacles. Monitoring the evolving trade policies, geopolitical shifts, and the actions of global competitors will be critical in assessing the sector’s trajectory.
