How did China come to dominate the world of electric cars?

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Before most people could realize the extent of what was happening, China became a world leader in making and buying EVs. And the momentum hasn’t slowed: In just the past two years, the number of EVs sold annually in the country grew from 1.3 million to a whopping 6.8 million, making the eighth consecutive year in which China was the world’s largest market for EVs. For comparison, the US only sold about 800,000 EVs in . 

The industry is growing at a speed that has surprised even the most experienced observers: “The forecasts are always too low,” says Tu Le, managing director of Sino Auto Insights, a business consulting firm that specializes in transportation. This dominance in the EV sector has not only given China’s auto industry sustained growth during the pandemic but boosted China in its quest to become one of the world’s leaders in climate policy.

How exactly did China manage to pull this off? Several experts tell MIT Technology Review that the government has long played an important role—propping up both the supply of EVs and the demand for them. As a result of generous government subsidies, tax breaks, procurement contracts, and other policy incentives, a slew of homegrown EV brands have emerged and continued to optimize new technologies so they can meet the real-life needs of Chinese consumers. This in turn has cultivated a large group of young car buyers.

But the story of how the sector got here is about more than just Chinese state policy; it also includes Tesla, Chinese battery tech researchers, and consumers across the rest of Asia. 

When did China start investing in EVs and why?

In the early s, before it fully ventured into the field of EVs, China’s car industry was in an awkward position. It was a powerhouse in manufacturing traditional internal-combustion cars, but there were no domestic brands that could one day rival the foreign makers dominating this market. 

“They realized … that they would never overtake the US, German, and Japanese legacy automakers on internal-combustion engine innovation,” says Tu. And research on hybrid vehicles, whose batteries in the early years served a secondary role relative to the gas engine, was already being led by countries like Japan, meaning China also couldn’t really compete there either. 

This pushed the Chinese government to break away from the established technology and invest in completely new territory: cars powered entirely by batteries. 

The risks were extremely high; at this point, EVs were only niche experiments made by brands like General Motors or Toyota, which usually discontinued them after just a few years. But the potential reward was a big one: an edge for China in what could be a significant slice of the auto industry. 

Plus, for China, EVs also had the potential to solve several other major problems, like curbing its severe air pollution, reducing its reliance on imported oil, and helping to rebuild the economy after the financial crisis. It seemed like a win-win for Beijing.

China already had some structural advantages in place. While EV manufacturing involves a different technology, it still requires the cooperation of the existing auto supply chain, and China had a relatively good one. The manufacturing capabilities and cheap commodities that sustained its gas-car factories could also be shifted to support a nascent EV industry.

So the Chinese government took steps to invest in related technologies as early as ; that year, EV technology was introduced as a priority science research project in China’s Five-Year Plan, the country’s highest-level economic blueprint. 

Then, in , the industry got a significant boost when Wan Gang, an auto engineer who had worked for Audi in Germany for a decade, became China’s minister of science and technology. Wan had been a big fan of EVs and tested Tesla’s first EV model, the Roadster, in , the year it was released. People now credit Wan with making the national decision to go all-in on electric vehicles. Since then, EV development has been consistently prioritized in China’s national economic planning. 

So what exactly did the government do?

It’s ingrained in the nature of the country’s economic system: the Chinese government is very good at focusing resources on the industries it wants to grow. It has been doing the same for semiconductors recently. 

Starting in , the country began handing out financial subsidies to EV companies for producing buses, taxis, or cars for individual consumers. That year, fewer than 500 EVs were sold in China. But more money meant companies could keep spending to improve their models. It also meant consumers could spend less to get an EV of their own. 

From to , the government poured over 200 billion RMB ($29 billion) into relevant subsidies and tax breaks. While the subsidy policy officially ended at the end of last year and was replaced by a more market-oriented system called “dual credits,” it had already had its intended effect: the more than 6 million EVs sold in China in accounted for over half of global EV sales. 

The government also helped domestic EV companies stay afloat in their early years by handing out procurement contracts. Around , before the consumer market accepted EVs, the first ones in China were part of its vast public transportation system. 

“China has millions of public transits, buses, taxis, etc. They provided reliable contracts for lots of vehicles, so that kind of provided a revenue stream,” says Ilaria Mazzocco, a senior fellow in Chinese business and economics at the Center for Strategic and International Studies. “In addition to the financial element, it also provided a lot of [road test] data for these companies.”

But subsidies and tax breaks are still not the whole picture; there were yet other state policies that encouraged individuals to purchase EVs. In populous cities like Beijing, car license plates have been rationed for more than a decade, and it can still take years or thousands of dollars to get one for a gas car. But the process was basically waived for people who decided to purchase an EV. 

Finally, local governments have also sometimes worked closely with EV companies to customize policies that can help the latter grow. For example, BYD, the Chinese company currently challenging Tesla’s dominance in EVs, rose up by keeping a close relationship with the southern city of Shenzhen and making it the first city in the world to completely electrify its public bus fleet. 

Okay, so China is the global EV leader. But how does Tesla, the most popular individual producer of EVs, fit in? 

The development of China’s EV industry has actually been deeply intertwined with Tesla’s rise as the biggest EV company. 

When the Chinese government handed out subsidies, it didn’t limit them to domestic companies. “In my opinion, this was very smart,” says Alicia García-Herrero, chief economist for Asia Pacific at Natixis, an investment management firm. “Rather than pissing off the foreigners by not offering the subsidies that everybody else [gets], if you want to create the ecosystem, give these subsidies to everybody, because then they are stuck. They are already part of that ecosystem, and they cannot leave it anymore.” 

Beyond financial incentives, local Chinese governments have been actively courting Tesla to build production facilities in the country. Its Gigafactory in Shanghai was built extremely quickly in thanks to the favorable local policies. “To go from effectively a dirt field to job one in about a year is unprecedented,” says Tu. “It points to the central government, and particularly the Shanghai government, breaking down any barriers or roadblocks to get Tesla to that point.”

Today, China is an indispensable part of Tesla’s supply chain. The Shanghai Gigafactory is currently Tesla’s most productive manufacturing hub and accounts for over half of Tesla cars delivered in . 

But the benefits have been mutual; China has gained a lot from Tesla as well. The company has been responsible for imposing the “catfish effect” on the Chinese EV industry—meaning it’s forced Chinese brands to innovate and try to catch up with Tesla in everything from technology advancement to affordability. And now, even Tesla needs to figure out how to continue being competitive in China because domestic brands are coming at it hard. 

LFP batteries are safer and cheaper, but initially they weren’t the top choice in cars because they used to have much lower energy density and perform poorly in low temperatures. But while others were ditching LFP technology, a few Chinese battery companies, like Contemporary Amperex Technology Co. Limited (CATL), spent a decade researching them and managed to narrow the energy density gap. 

Today, the EV industry is again recognizing the benefits of LFP batteries, which made up one third of all EV batteries as of September . “That shows you how far LFP has come, and that’s purely down to the innovation within Chinese cell makers. And that has brought Chinese EV battery [companies] to the front line, the tier-one companies,” says Reid.

China has also had one key advantage in battery manufacturing: it controls a lot of the necessary materials. While the country doesn’t necessarily have the most natural resources for battery materials, it has the majority of the refinery capacity in the world when it comes to critical components like cobalt, nickel sulfate, lithium hydroxide, and graphite. García-Herrero sees China’s control of the chemical materials as “the ultimate control of the sector, which China has clearly pursued for years well before others even figured that this was something important.” 

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By now, other countries have indeed realized the importance of battery materials and are signing deals with Chile and Australia to gain control of mines for rare-earth metals. But China’s head start has given domestic companies a longstanding stable supply chain.

“Chinese-made EV batteries … not only come at a discount but also are available in much higher quantities because the manufacturing capacity has been built out in China and continues to be built out,” says Reid. 

What does China’s EV market look like now?

As a result of all this, China now has an outsize domestic demand for EVs: according to a survey from the US consulting company AlixPartners, over 50% of Chinese respondents were considering battery-electric vehicles as their next car in , the highest proportion in the world and two times the global average. 

There are a slew of Chinese-built options for these customers—including BYD, SAIC-GM-Wuling, Geely, Nio, Xpeng, and LiAuto. While the first three are examples of gas-car companies that successfully made the switch to EVs early on, the last three are pure-EV startups that grew from nothing to household names in less than a decade. 

And the rise of these companies (and other Chinese tech behemoths) coincided with the rise of a new generation of car buyers who don’t see Chinese brands as less prestigious or worse in quality than foreign brands. “Because they’ve grown up with Alibaba, because they’ve grown up with Tencent, they effectively were born into a digital environment, and they’re much more comfortable with Chinese brands versus their parents, who would still rather likely buy a German brand or a Japanese brand,” says Tu. The fact that these Chinese brands have sprinkled a little bit of nationalism into their marketing strategy also helps, Tu says.

Can other countries replicate China’s success?

Many countries are almost certainly now looking at China’s EV experience and feeling jealous. But it may not be that easy for them to achieve the same success, even if they copy China’s playbook.

While the US and some countries in Europe meet the objective requirements to supercharge their own EV industries, like technological capability and established supply chains, ICCT’s He notes that they also have different political systems. “Is this country willing to invest in this sector? Is it willing to give special protection to this industry and let it enjoy an extremely high level of policy priority for a long time?” she asks. “That’s hard to say.”

“I think the interesting question is, would a country like India or Brazil be able to replicate this?” Mazzocco asks. These countries don’t have a traditional auto industry as strong as China’s, and they also don’t have the Chinese government’s sophisticated background in handling massive industrial policies through a diverse set of policy tools, including credits, subsidies, land use agreements, tax breaks, and public procurements. But China’s experience suggests that EVs can be an opportunity for developing countries to leapfrog developed countries.

“It’s not that you can't replicate it, but China has had decades of experience in leveraging these [systems],” says Mazzocco.

Chinese brands are now looking to other markets. What challenges are they facing?

For the first time ever, Chinese EV companies feel they have a chance to expand outside of China and become global brands. Some of them are already entering the European market and even considering coming to the US, despite its saturated market and the sensitive political situation. Chinese gas cars could never have dreamed of that.

Nevertheless, their marketing language and strategies may have to change for other markets. They will need to adapt to the different technical standards and preferred software services. And they will have to learn to accommodate different consumption habits and customer service requests. 

“I think we take for granted that a company like Toyota or Honda is comfortable navigating different markets, but that’s taken decades of experience to build up for these companies, and it didn’t always look pretty for them,” Mazzocco says.

In the current geopolitical environment, these companies are also making themselves vulnerable by entering more countries that aren’t exactly maintaining good relations with China. Some of them may want to protect their own homegrown auto industries, and others may even see the entrance of Chinese brands as a national security risk. 

For these and other reasons, the most growth potential will likely come from “emerging Asia,” García-Herrero says. That region will continue to need more EVs for its energy transition even after China’s domestic market becomes saturated. 

This is why the benefits from China’s focus on EV supply are twofold: it both reduces China’s need for car imports from Western countries and creates another long-lasting export industry. Some countries, like Indonesia, are already courting Chinese investment to build EV factories there. 

In , China exported 679,000 EVs, a 120% increase from the year before. There’s little reason to doubt the numbers will only grow from here. 

Electric Vehicles Are Key to Winning China’s Climate Fight

China's rapid adoption of new energy vehicles is helping to accelerate the global energy transition.

Every summer is a reminder of the urgency of climate change. Last July, the global average temperature rose to a record high. This summer, floods, hurricanes, and extreme high temperatures again ring warning bells about the most imminent and grave threat to humanity. Accordingly, the most effective way to limit global warming should be a top priority for the global agenda. And from that imperative, we can celebrate the progress of global electric vehicle (EV) industry, especially the new milestone China recently hit — an EV adoption rate of more than 35 percent.

To transition away from fossil fuels, as announced and reaffirmed last year at COP28 in Dubai, the world needs to use clean electricity as its major power source, and also electrify end uses. This means electrifying transportation.

The development of China’s EV industry

Transportation accounts for about 10 percent of China’s national carbon emissions. That number is decreasing with China’s growing use of EVs. China’s EV sales have experienced super-fast growth in the past decade, since its first climate commitment in in Copenhagen, and the country has become the world’s largest EV market. In , China accounted for 63.5 percent of the world’s new energy vehicle sales. EVs took off around , with a rapid growth in sales. There were 1.37 million new energy vehicles (primarily EVs) sold in . In , the number had soared to 9.50 million, even though purchasing subsidies were starting to be phased out in and were completely done by .The high penetration rate of new energy vehicles in China stems from its large production capacity and cost effectiveness, which functions as a solid foundation for serving the country’s 1.4 billion consumers.

However, another critical concern is supplying enough clean electricity to every EV. Fortunately, China is moving fast to realize its renewable power target. In its Nationally Determined Contributions, China pledged to reach at least 1,200 gigawatts of installed solar and wind capacity by . According to projections by the China Electricity Council, China will have more than 1,300 gigawatts of installed wind and solar capacity by the end of , meeting its NDC target six years ahead of schedule. China is marching toward its goal to primarily establish a new power system around . More EVs on the road backed by a green power system dominated by renewable energy would then be a significant contribution to China’s decarbonization.

It is even more exciting to see that efficiency is continuing to improve in all energy-related sectors as the wave of digitalization and distribution mutually supports each sector’s energy transition. EVs can play a larger role than just transportation in the new energy system. For example, “grid-building-EV” interaction and integration technology has become an important practice for demand-side response, in which EVs and batteries have great potential to serve as energy storage and load-shifting measures for a renewable-rich power system, where energy supply can be intermittent.

Lowering the carbon footprint of EVs

Beyond the adoption and utilization of EVs, the automobile industry has been actively involving upstream suppliers’ carbon emissions into the whole vehicle life-cycle carbon footprint management scope. Such action helps a lot to clarify “who is dirtier,” when comparing carbon emissions between EVs and traditional internal-combustion engine (ICE) vehicles. According to an evaluation of 13 car models by the China Automotive Technology and Research Center (CATARC), the life-cycle carbon footprint of an EV is significantly lower — 37.8 percent less carbon emissions — than that of an ICE vehicle in China.

Driven by the whole life-cycle carbon footprint control exercise, major emissions resources of EVs are further being identified and the first movers are taking actions to calculate and mitigate their emissions. According to CATARC, 42.6 percent of an EV’s emissions come from materials and components, especially carbon-intensive parts such as steel, aluminum, and lithium batteries. Leading automakers such as Geely and Great Wall Motor have committed to so-called Scope 3 decarbonization actions.

With an increasingly lower-emissions automotive value chain, upstream and downstream changes can be further mobilized to achieve cross-sector triple wins. China’s first low-emissions steel produced by direct reduced iron technologies from Hebei Iron and Steel were provided to BMW for car manufacturing in , an exciting example of using low-emissions materials in cars.

Scaling the market

To further strengthen the whole supply chain and neutralize the green premium, consumers are playing a much more critical role by sending the correct market signals. Utilizing the vehicle life-cycle carbon footprint evaluation tool, CATARC launched the Automobile Leader Program to offer incentives on the consumer side where car models with the lowest life-cycle emissions are rewarded with better market exposure. This is a great example of consumer-focused actions with positive impacts in both the near term and longer term.

And the impacts can be huge. So far market scale has been the key factor effectively driving the growth of China’s EV industry, and it will still be a major driving force to bolster it in the future. There are more than 400 million middle-income people in China and they represent the scale of potential EV consumers. In , China consumed almost all its EV production, which demonstrates a high confidence to fully utilize its EV manufacturing capacity, clearly illustrating that “overcapacity” is not issue.

The policy signal on full life-cycle carbon footprint control is also a big milestone. The Chinese government issued an implementation plan to accelerate product-level emissions management in May, aiming at finishing the development of 100 green accounting methods for major products (including new energy vehicles) by and promoting them to international standards. The plan also recommends the application of carbon labels for vehicles to differentiate the low-carbon product market.

The urgency of combating climate change needs the world to move faster to advance the energy transition in all sectors, and calls for more clean power and more EVs on the road. China’s highly efficient and solid performing EVs bring good news to the world where strong alignment on this urgency exists. China can provide the world with cleaner, high-quality and affordable vehicles, which are essential for the global energy transition, to help the world achieve the climate goals at a faster pace.

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