Is China's New Energy Vehicle (NEV) Production Really in Excess?
2024.11.07
On May 21, U.S. Treasury Secretary Janet Yellen, in a speech in Frankfurt, Germany, claimed that China's production capacity in electric vehicles, batteries, and solar panels significantly exceeds global demand. She urged the EU and the U.S. to address China's "excess capacity" in a "strategic and united manner" and called for enhanced cooperation in critical minerals. This is the third time in less than two months that the U.S. Treasury Secretary has criticized China's new energy vehicle production capacity as excessive, following her visit to China in early April and an interview with CNN on May 14.
In a rare occurrence, the U.S. Treasury Secretary has thrice accused China of having an excess in new energy vehicle production capacity. Additionally, on May 25, the G7 Finance Ministers' meeting concluded in Italy. The finance ministers of the seven countries expressed their intention to take measures against "China's excess capacity" to ensure fair competition. Italy called for the EU to respond to the U.S.'s call for increased tariffs on China, but France and Germany opposed a trade war with China.
From the overall performance of China's new energy vehicle market, in 2024, the outstanding companies in China's new energy vehicle industry include BYD, Geely, Hongmeng Zhixing, Li Auto, etc. BYD's sales exceeded 310,000 units in April, showing strong performance. In addition, Tesla's sales in the Chinese market reached 62,000 units, while the delivery volumes of Aion, Li Auto, and NIO also exceeded 20,000 units respectively. Zeekr and NIO saw significant monthly growth in April, reaching 24% and 32% respectively. Xiaomi Auto also released order data for the Xiaomi SU7, demonstrating its competitiveness in the market. Meanwhile, CATL, as a battery supplier, plays a significant role in the industry chain. The company plans to build 10,000 supercharging stations in the next two years to support the development of the new energy vehicle market. Furthermore, the internationalization of China's new energy vehicle industry is a highlight. Many Chinese car brands, such as Chery, have begun to layout in overseas markets and establish cooperation with companies in other countries to jointly develop new products.
So, we must ask, is China's new energy vehicle production capacity really excessive? Why, when China's new triad (electric vehicles, lithium batteries, solar panels) is becoming a new growth pole for China's exports, and when China's emerging sectors, represented by the new energy industry, are forming a strong competitive advantage over the West, are Western officials and politicians tirelessly hyping the "China's excess capacity theory"?
Firstly, after comprehensive analysis and judgment, China's new energy vehicle production capacity is not excessive. In the first quarter of 2024, China's new energy vehicle production and sales increased by 28.2% and 31.8% year-on-year, respectively, with a market share reaching 31.1%, showing the market's continuous expansion, presenting a "one-third of the world" situation. Moreover, in April, the wholesale and retail penetration rates of China's new energy passenger car market both exceeded 50%, surpassing fuel vehicles for the first time. This follows the two major breakthroughs in 2023: China's automobile exports surpassing Japan to become the champion and the market share of local brands surpassing that of joint ventures.
Data from the China Association of Automobile Manufacturers shows that, according to the general rules of the global automotive industry, a capacity utilization rate of 70% to 90% is reasonable, and China's automotive industry's capacity utilization rate has not significantly fallen below this range.
In addition, the technological innovation and cost advantages of China's new energy vehicle industry have also promoted competition and progress in the global new energy vehicle market. For example, China has formed a complete industrial ecosystem, which is driving the restructuring of the global automotive industry chain. Zhu Min, Vice Chairman of the China Center for International Economic Exchanges, pointed out that China's new energy vehicles show strong competitiveness and market demand in terms of technological innovation, market potential, and international trade.
At the same time, calculations by the International Energy Agency (IEA) show that to achieve the carbon-neutral goal, the global sales volume of new energy vehicles needs to reach about 45 million units by 2030, which is 4.5 times that of 2022. This means that the global demand for new energy vehicles will grow significantly, and the current production capacity is far from meeting market demand.
Overall, China's new energy vehicle industry is experiencing a stage of rapid development and fierce competition, with major companies actively deploying to increase their market share and competitiveness. With technological progress and market expansion, it is expected that there will be more innovation and breakthroughs in this field in the next few years.
Secondly, the continuous fabrication of the "China's new energy vehicle production capacity excess theory" by Western officials like Yellen, what is the reason behind it? Yellen's concern mainly lies in the fact that subsidies from the Chinese government for industries such as new energy vehicles may lead to an excess of low-priced products in the global market, thereby harming enterprises and workers in the U.S. and other countries. She also pointed out that this excess capacity may lead to the concentration of the global supply chain and a reduction in the global economic recovery capability.
If we understand the market economy, we know that Yellen's concerns may not be entirely based on economic principles and are an irrational act of "unilateralism." The rapid development of China's new energy vehicle industry is based on technological innovation and market demand, not just government subsidies. Moreover, the global demand for new energy vehicles is growing, and the current production capacity is far from being excessive. Data from the research institution EVTank shows that in 2023, global new energy vehicle sales reached 14.653 million units, a year-on-year increase of 35.4%, of which China's new energy vehicle sales reached 9.495 million units, accounting for 64.8% of global sales. The U.S. and Europe's new energy vehicle sales for the whole year in 2023 were 2.948 million units and 1.468 million units, respectively, with year-on-year growth rates of 18.3% and 48.0%. In 2023, China's new energy vehicle exports reached 1.203 million units, accounting for 23.3% of the sales outside of China.
Additionally, it can be seen from the side that Yellen's remarks may reflect the competitive pressure of the U.S. in the field of new energy vehicles. The U.S. government's subsidies for the domestic new energy industry are also huge, but the U.S. position seems to be that only the U.S. can do this, and China cannot. This is a typical example of double standards and protectionism.
Thirdly, the rapid development of China's new energy vehicle industry is mainly due to market competition, technological innovation, and government policies moving in the same direction, not just government subsidies. The fact that China's new energy vehicles have become what they are today may have surprised many people. This is the charm of market competition. When the new energy vehicle industry started, there were not many market access restrictions in this new track, and there was no serious ownership discrimination, achieving relatively full equal market competition among various ownerships, from which a group of new domestic car forces emerged. The most typical are "Wei, Xiao, Li" (NIO, XPeng, Li Auto). These private car companies have many common characteristics, including enterprising entrepreneurial spirit, efficient decision-making mechanisms, flexible employment mechanisms and compensation systems, and strong scientific and technological innovation capabilities. These elements combined highlight the willingness to take risks and be good at seizing opportunities.
The new energy vehicle business generally needs to go through a loss period, such as Tesla, which was established in 2003 and did not achieve full-year profitability until 2020. Facing the emerging field with huge risks and a long investment payback period, it is BYD and others who have seized the opportunity and achieved leapfrog development. In the second half of 2019, China's fiscal subsidies for new energy vehicles began to decline and completely exited at the end of 2022. Since then, market competition has become more intense, and the industry has also reached a new level. China's automotive industry "changing lanes to overtake" has achieved some promising progress.
In the rise of China's new energy vehicles, policy support has also played a significant role. China began planning and deploying new energy vehicles from 2001 and introduced subsidies for new energy vehicles in 2009. Initially, the subsidies were aimed at public transportation vehicles in demonstration cities, which were expanded to private cars the following year. Starting from 2014, the purchase tax for new energy vehicles was exempted. The exemption period for the purchase tax on new energy vehicles has been extended several times and is currently extended until the end of 2027.
Furthermore, in the final analysis, overcapacity is a phenomenon associated with the market economy, and moderate overcapacity just proves the market attribute of China's economy. Market competition is the core and charm of the market economy. The current fact is that the competition in China's new energy vehicle industry is becoming increasingly fierce. Many companies have joined the "price war" to attract consumers by cutting prices or introducing limited-time discounts. This competition is not only reflected in price, but also in the implementation of new technologies and the launch of new models. Behind the fierce market competition is the rapid ups and downs of technological innovation. China's new energy vehicle industry is developing in the direction of high-end, intelligent and autonomy. New product cycles and technological advancements will push the industry into a more diversified development stage.
As mentioned above, in 2023, the export of new energy vehicles reached 1.203 million, an increase of 77.6% year-on-year, showing the competitiveness of China's new energy vehicles in the international market. It is expected that China's new energy passenger vehicle sales will reach 11.19 million in 2024, an increase of 27% year-on-year, and the market penetration rate is expec
ted to reach 42.7%. This shows that China's new energy vehicle market still maintains a high growth rate.
In the face of the concerns of European and American countries, China's best response is still to respect the results of market competition. Only by allowing market forces to fully play their role, achieving the survival of the fittest, and promoting the bankruptcy of "zombie enterprises" and the clearance of outdated production capacity can China's new energy automobile industry develop more healthily. Naturally, the "countervailing investigation" against China by European and American countries with protectionist colors is also more unreasonable.
Fourth, we would also like to know how the US government's subsidies compare to the Chinese government's subsidies for domestic new energy vehicles. The US government's subsidies for new energy vehicles are mainly reflected in tax credits. Under the Inflation Reduction Act (IRA), which took effect on January 1, 2024, US citizens can apply for a federal tax credit of up to $7,500 for the purchase of electric vehicles. However, this policy sets some restrictions. For example, if the electric vehicle contains battery components manufactured or assembled by "foreign entities of concern" companies, the eligibility for tax credits will be restricted or even cancelled. These "foreign entities of concern" usually refer to countries such as China and Russia. In addition, starting from 2024, at least 50% of the components in electric vehicle batteries will need to come from the United States, Canada, or Mexico, and this proportion will rise to 100% by 2028.
The US government's move is aimed at reducing reliance on foreign supply chains, particularly China's dominance in the supply chain for batteries and materials for electric vehicles, and encouraging car manufacturing in North America. However, it also means that many electric vehicles, such as the Nissan Leaf, Tesla Cybertruck all-wheel drive and Chevrolet Blazer EV, lose their eligibility for tax credits of up to $7,500.
In addition, tax subsidies for electric vehicles in the US have been in place since 2009, but the Inflation Cuts Act has increased restrictions on the recipients of subsidies. For example, 70% of the 72 models that were previously eligible for subsidies will not meet the new conditions. If the additional battery origin restrictions take effect, no model will be eligible for the full subsidy.
In comparison, China's subsidies for new energy vehicles are mainly a 10% reduction in vehicle purchase tax. According to the average selling price of new energy vehicles 200,000 yuan, 10% is equivalent to 20,000 yuan, equivalent to about 3,000 US dollars, far below the US subsidy ceiling of 7,500 US dollars.
China's new energy vehicle sector is growing rapidly. The industry anticipates that by 2025-2026, new energy vehicles will account for over 50% of new car sales, becoming the primary choice for consumers. Despite an early lead in electric vehicle transformation, China faces stiff competition in the intelligent era due to strong European and American automotive and tech industries. To truly become an automotive powerhouse, China must overcome this challenge.
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