China, a nation once synonymous with the bicycle, has fundamentally transformed into the world’s undisputed leader in electric vehicles (EVs). This transition has not been gradual; for China, the future of driving is not pending; it has already arrived.
Thanks to heavy government subsidies and strategic planning, the country now leads globally in manufacturing, technological innovation, and market volume. However, this explosive growth has created a domestic environment defined by hyper-competition and cut-throat price wars, leading to an unpredictable market where only the fittest brands survive.
Fueled by Strategy and State Support
China’s current dominance stems from a massive bet placed by Beijing on EV technology in the 2000s, declaring it a strategic sector by the early 2010s. The government lavished the industry with financial incentives and other support, enabling dozens of Silicon Valley-type startups to emerge across the country.
Whether an entity is buying the car, building the car, providing the electricity, or assembling the battery, everyone in China has been entitled to government money and assistance. One of the most prominent beneficiaries of this support is BYD (Build Your Dreams), estimated to have received approximately $4.3 billion in state support between 2015 and 2020.
This investment paid off. In 2023 alone, BYD produced over 3 million New Energy Vehicles (which include plug-in hybrids and battery electrics), outpacing Tesla’s production of 1.84 million cars. With 2.4 million new car insurance registrations in 2023, BYD secured an 11% market share, solidifying its position as the top brand in the Chinese market. Indeed, BYD is so far ahead of Tesla in China that the gap is described as “almost ridiculous”.
Beyond sheer volume, Chinese brands are redefining what consumers expect from a vehicle. Young buyers are increasingly turning away from Western car brands, which traditionally provided social status for their parents, and prioritizing modern features offered by trendy domestic marques.
These vehicles are packed with advanced technology, such as Xpeng models featuring voice activation, in-built entertainment systems (including video streaming), and genuinely impressive self-driving capabilities. Furthermore, innovation is extending beyond the vehicle itself into the infrastructure.
Companies like Neo are deploying state-of-the-art battery swapping stations, allowing drivers to replace a depleted battery in about three to three-and-a-half minutes. This hands-off automated process ensures the car is precisely parked and the battery is automatically unbolted and replaced.
The Price War and the Specter of “Involution”
Despite the technological leaps and governmental backing, the domestic EV market in China has become a “bloodbath”. The early financial support led to extensive overcapacity, creating a brutal race to the bottom where hundreds of brands have gone under in the past few years. This relentless price war has depleted profits and severely strained both carmakers and suppliers.
The rapid collapse of startups is not uncommon. The downfall of Ji Yue, a joint venture between Baidu and Geely, within half a year, despite having deep-pocketed backers and growing sales, exemplifies the fierce market competition. This atmosphere of extreme, self-defeating competition is labeled “involution,” or “neijuan” in Chinese.
The consequence of this brutal competition is a supply chain trapped in a vicious cycle of squeezed margins, declining quality, and payment delays. Automakers, in their quest to make cost-cutting the core of operations, often pressure suppliers to deliver annual discounts of at least 10%.
Suppliers are left with little choice but to accept unfavorable terms, resulting in an undeniable decline in the overall quality of car components. One coating materials supplier even reported being forced to lower prices by over 40% simply to stay in business, leading to wage cuts and increased reliance on temporary workers.
Recognizing that this “disorderly” competition is weighing down an already embattled economy, Chinese leader Xi Jinping has called for cracking down on chaotic, cut-throat price wars. Authorities have issued warnings, released rules on shortening payment cycles (forcing payment within 60 days), and urged local governments to scale back subsidies and eliminate overcapacity.
However, experts remain skeptical that these measures will deliver a quick fix. Eliminating excess capacity could trigger significant job losses, creating a “social stability problem,” which is the cornerstone of Communist Party rule, given that the auto manufacturing industry employs more than 4.8 million people.
The consensus among industry experts is that price competition will continue until most brands go the way of Ji Yue, leaving perhaps only a handful standing. He Xiaopeng, CEO of Xpeng, predicted in late August that the “knock-out rounds in China’s auto industry will go on for another five years,” likely leaving only five major companies left.
The Global Expansion and Protectionist Walls
Faced with domestic overcapacity and hyper-competition, Chinese automakers, including giants like BYD, Xpeng, Geely, Chery, and Changan, are setting their sights globally. Chinese auto exports surged to nearly 6 million last year, surpassing every other country.
BYD, leveraging its core strength in battery technology, it designs and develops its own batteries, including the highly touted lithium iron phosphate (LFP) Blade battery, is leading the charge. LFP batteries cost 30 to 40% less per kilowatt-hour to manufacture and are extremely durable. This technological advantage allows BYD to aggressively undercut the competition; for example, they launched the Seagull model priced at just $11,500.
BYD’s exports grew 334% in 2023, shipping 242,765 vehicles across 70 countries. It has already become a major player in Southeast Asia, holding 43% of the EV market share and leading sales in Thailand, Brazil, Colombia, and Israel. The company is building its presence in Europe, even dispatching its own massive cargo ships capable of carrying 7,000 vehicles to ensure control over costs.
This flood of affordable, high-quality Chinese EVs has triggered alarm abroad. Western countries are worried and are responding by slapping tariffs on Chinese-made EVs, desperate to catch up in the green tech race. The EU has announced an investigation into the subsidies that supported Chinese EV production, questioning whether their competitive pricing results from illegal “dumping”.
The biggest potential battleground, however, is the United States. Current tariffs make made-in-China EVs expensive, with a 25% tax imposed on top of the standard 2.5% imported car tariff. To bypass these barriers, Chinese automakers are strategically planning to build manufacturing plants in Mexico, hoping to leverage NAFTA agreements that eliminate US tariffs. Experts predict that within the next five to six years, several Chinese automakers will begin final assembly in Mexico.
US lawmakers have expressed concern that Chinese automakers could “flood the market” and threaten domestic manufacturers. However, the affordability of Chinese vehicles is a powerful motivator for consumers. Ultimately, China’s automotive powerhouse has the capacity to deliver half of the world’s demand for vehicles. Given their low cost, improved quality, and appealing designs, the rest of the global auto industry has reason to be scared, as it is becoming increasingly difficult to stop this burgeoning juggernaut.