Countries around the world have set high targets for emission reductions, leaving them no choice but to start phasing out internal combustion engine vehicles (ICE). In response to this shift, the global automotive industry is turning to a more sustainable form of transportation: electric vehicles (EV). As the most aggressive developer of EV technology, China is leading the EV frenzy, leaving legacy automakers scrambling to catch up.
As EV adoption rates increase, it’s increasingly clear that we are witnessing a transformation of the auto industry. Legacy automakers (e.g. General Motors, Ford, Volkswagen, Toyota, and Nissan) need to adapt; if they do not, they will be left behind as China shapes the future of this industry.
Due to public demand for cleaner modes of transportation and a desire to meet emission-reduction targets, China began heavily investing in EV development over hydrogen alternatives starting in 2009. Established vehicle manufacturers have long argued that EV technology isn’t mature enough to pursue at scale. At a 2022 roundtable in New York, for example, BMW’s CEO warned “against an electric-only strategy” on the grounds that such an approach would be unsustainable in the long-run.
However, China is finding success with the very strategy U.S. manufacturers have rejected. The Chinese EV market is now the second largest in the world, accounting for 60% of global EV purchases.
With no international tariffs on vehicles and a domestic market that has eagerly adopted EVs, Chinese automakers are reporting healthy profits. Legacy automakers, which once held the majority of market share in China, are now either pulling out or struggling to compete with Chinese companies. China is also expanding into international markets, setting a rapid pace for the future of the automotive industry.
Some of China’s biggest selling points are that it offers lower prices, advanced technology, and rapid vehicle updates. Companies like BYD, Nio, Xpeng, and Zeekr are already producing affordable high-tech models. The Xpeng M03 costs $16,000 yet offers features comparable to Tesla’s Model 3 (which retails around $40,000).
This competitive pricing is obtained through a structure called vertical integration, which allows Chinese automakers to manufacture up to 75% of vehicle components in-house, compared with 40-50% for Western automakers like Volkswagen. This approach reduces costs and speeds up innovation. For example, Volkswagen found that BYD’s model was €10,000 cheaper to produce than its own equivalent.
Chinese companies like CATL drive China’s more efficient battery technology, giving them an edge over U.S manufacturers.
Software development is another area where Chinese automakers excel, offering intricate digital features that appeal to customers and compete effectively against Western alternatives.
These factors are allowing Chinese automakers to disrupt the modern auto industry. The efficient supply chain Chinese EV manufacturers have mastered allows them to undercut Western competitors.
Traditional automakers are struggling. Volkswagen is currently considering shutting down factories in Germany for the first time in the company’s history. BMW has released profit warnings, and Toyota expects to see a drop in sales of up to 1 million vehicles this year. Even luxury brands like Porsche have released reports describing declining sales in China.
Ford, a company that relies on China and regards it as its second most important market, is also facing challenges. CEO Jim Farley said that it is becoming increasingly difficult to register internal combustion engine cars in China due to the government’s regulations favoring EVs. He acknowledged that Chinese EV manufacturers are “moving at lightspeed,” producing cars more efficiently and at lower costs. Ford is exploring ways to adopt Chinese manufacturing techniques to stay competitive.
As legacy automakers struggle to respond, Chinese EV makers are pulling further ahead, setting a new standard for the global auto industry.
U.S. automakers must figure out how to lower manufacturing costs in order to compete when it comes to EV vehicles or close down EV departments and innovate in other areas like hydrogen cars.
