Natto Thoughts Explainer: China’s Great Leap Forward into a Brand-new Electric Vehicle Industry
China’s top-down approach to building its EV industry, a key element of a post-carbon future, has led it to dominate the market, increasing the country’s influence in global economic competition.
As the world’s largest market for new energy vehicle production and sales for eight consecutive years, China has worked for over 30 years on the development of electric vehicles (EVs), with three distinct stages. Pressures to safeguard the environment, reduce reliance on imported oil, and use emerging technology to develop the economy have driven the rapid growth of the Chinese EV industry. The government’s approach to this emerging industry utilized a top-down design planning strategy with financial incentives to form a brand-new industry quickly, then adapted it to a market-oriented system to increase competition once the industry had a considerable number of players. The thriving of China’s EV industry likely increases the country’s influence in global economic competition.
The Road to a Brand-new EV Industry: Three Stages
China’s development of the EV industry has had three distinct stages:
The research and development (R&D) stage (1991-2000)during which the Chinese government took a top-down design approach by investing in related technology through key science and technology projects in successive iterations of the Five-Year Plan for National Economic and Social Development (FYP)(国民经济和社会发展五年规划), the country’s highest-level economic blueprint.
In 1991, the 8th FYP (1991-1995) included the R&D of electric vehicles.
In 1996, the 9th FYP (1996 -2000) and the Cross-century National Major Science and Technology Industrial Projects(跨世纪国家重大科技工程) included research on key technologies of electric vehicles.
In 2000, the 10th FYP (2001-2005) included research on scaling up the industrial production of electric vehicles.
The commercialization stage (2001 – 2010), when the Chinese government launched special program support, policy development and pilot programs to bring EVs to market during the commercialization stage.
In 2001, the “863 program”, a state high-tech development plan, implemented the development of electric vehicle major special projects. It confirmed the “Three-by-Three Research and Development” (or “three vertical and three horizontal” “三纵三横”研发布局) approach, centering around three types of new energy vehicle technologies–battery electric vehicles (BEVs), plug-in hybrid electric vehicles (PHEVs; extended-range electric vehicles included), and fuel cell electric vehicles (FCVs)--and three component technologies: batteries and management systems, driving motors and power electronics, and intelligent and connected vehicle technologies.
In 2009, China’s Ministry of Industry and Information Technology (MIIT) issued a set of standards for new energy vehicle manufacturing enterprises and products (新能源汽车生产企业及产品准人管理规则) to standardize the production of new energy vehicles and promote R&D and manufacture of electric and other new energy vehicles.
In 2009, the MIIT and Ministry of Finance launched the “Ten Cities, Thousand Vehicles” program(“十城千辆”项目), using large subsidies to promote using EVs in public transportation systems.
The industrialization stage (2011 – 2022) EVs evolve from concepts and products to an entire industry. To promote this industrialization stage, the Chinese government offered subsidy programs, tax breaks, procurement contracts and vehicle license application benefits. The government spent over 200 billion RMB ($29 billion) on relevant EV subsidies and tax breaks, according to the MIT Technology Review.
Current Status: Market Expansion and Fast Growth with Market-oriented “Dual-credit” System
Since 2016, China gradually phased out many EV subsidy programs at both the national and local level. In 2017, the government launched a “dual credit” policy to standardize incentives by offering credit for hitting EV production targets and achieving fuel efficiency. As of the end of 2022, the dual credit policy has replaced the subsidy programs.
In early 2023, a top official of the MIIT claimed China’s new energy vehicles have entered “a comprehensive market expansion period” and that the industry will likely “maintain a relatively fast growth trend.” To continue that expansion and growth, the MIIT will ensure relevant policy support, optimizing the development environment for the industry such as expanding the charging infrastructure, and supporting the integration of innovation to promote the development of “vehicle, road and cloud,” a phrase referring to the integration of new energy vehicles, transportation infrastructure, and information and communications.
Meanwhile, the current Chinese EV industry has achieved breakthroughs in key technologies, improved the market dominance of domestic brands, and optimized supporting infrastructure and facilities such as the charging infrastructure, according to Chinese official data.
China’s EV makers are estimated to deliver a total of 8.4 million EVs in 2023, according to the China Passenger Car Association (CPCA). This is an increase of about 30 percent from 2022 but is much less than the year-on-year growth of 114 percent in 2022. Despite the fact Chinese consumers need to rebuild sustained spending confidence from the COVID pandemic recovery, China’s EV industry is still on an upward trend.
Implications: Increasing Competition, Leveraging Industry Alliance, and Influencing Policies
It has taken more than 30 years for China to build a brand-new EV industry from a mere concept to the world-leading supplier and consumer market for EV products. The current status and future trends of China’s EV industry have profound implications domestically and internationally. The following are three major implications:
The dominance of China’s EV industry can boost China’s global dominance in other relevant areas such as climate policy. This could further expand China’s global influence. China’s goal of achieving carbon neutrality by 2060 has been a major driving force for the EV market. A top leader of the European Union considered China’s carbon neutrality goal “could become a tipping point in the fight against climate change.” China has been taking an important role in global climate action such as being a party to the United Nations Framework Convention on Climate Change (UNFCC) and the Kyoto Protocol, and created the South-South Climate Cooperation Fund in 2015.
The maturity of China’s EV industry can lead China to build an industry alliance globally by reaching out to foreign industry leaders, particularly in Europe, defying the restrictions the US imposed on technology exports to China. The booming of the EV industry in China attracts foreign industry leaders. Foreign firms are willing to remain in China for access to the country’s fast-growing markets, extensive infrastructure and ecosystems of suppliers. In November 2022, eight chief executives from leading German firms advocated continued economic integration and announced major new investments and partnerships in China, highlighting the attractiveness of the Chinese market.
Competition among EV makers in China will likely increase substantially as the Chinese government adapts its policies to push a more market-based EV industry. Since the dual-credit system focused on raising quality and fuel efficiency, the EV makers have to be more innovative than before and increase their R&D investment to stay in the competition. If any of these EV makers lag behind on innovation, they could be forced out the market. This includes foreign EV makers in China’s automotive ecosystem, who have had to adapt to the Chinese government’s EV industry policies.