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Lessons from China’s EV success

It is another example of a familiar pattern of economic development in that country: business and government working in tandem, but with the discipline of competition

As of the fourth quarter of 2023, the Chinese automaker BYD had sold more electric vehicles than Tesla had in the entire world. Although BYD has been around since 2003, the most of its expansion has occurred in the past several years due to rising demand and an improvement in technology brought about by the effects of climate change. Similar moves are being made by other Chinese automakers, positioning China to take the lead in the shift to electric cars (EVs).


BYD has been successfully expanding into new export markets, especially in Europe, since it started producing electric vehicles more than ten years ago. Cars made in China face higher tariffs in the US, which slows down exports. Imports from China are a concern for Europe, which may impose trade restrictions. However, BYD is prepared to follow Japan's lead and establish manufacturing facilities in the United States and Europe.


India, on the other hand, is a major player in the conventional-technology vehicle market but is just now beginning the shift to electric vehicles—a move that must be part of the international effort to combat climate change. India is well behind China in comparison to its more visible areas of weakness, such as its infrastructure, domestic market size and quality, capital availability, and technological innovation.


Although these drawbacks can be diminished with time, the rate of change pushed by the market is not always quick. Dissatisfaction with China stems, in part, from Western nations' claims that the Chinese government provides subsidies at a subsidised rate. However, even in industrialized nations, subsidies can take numerous forms. When it comes to China, those subsidies are typically given by the local governments in the shape of land and other resources. Like in the United States, national consumer subsidies have been utilized for electric vehicles in China.


Chinese e-commerce has been a smashing success, following a well-established pattern of government and private sector collaboration fostered by healthy rivalry. Export orientation is one source of competitiveness, which is beneficial to market economies because of the incentive effects it produces. Like Japan, South Korea, and Taiwan, China has realized that in order to compete with developed-country enterprises at home, it is necessary to focus on quality rather than price alone. A key component of China's development has been rivalry among local governments, here meaning governments of big urban areas rather than the prevalent Indian concept of village self-rule.


Inefficient and unstable competition is one of the issues China is facing, along with an oversupply of real estate and excessive local government debt. That occurs when there are insufficient checks and balances in place to encourage dynamic approaches to attracting and constructing factories and industries. Although India had an unsustainable investment boom in the time following the global financial crisis, the country's problem has typically been over-caution rather than overreach.


A portion of the investment in such circumstances must be grounded in knowledge and cold, hard math. Berkshire Hathaway, Warren Buffet's financial holding firm, was an early investor in BYD. It is possible that the shifting risk climate surrounding China is to blame for their recent decision to cash out their shareholding. However, when it comes to luring foreign investment into manufacturing, India has historically fared worse.


There is a dearth of capital and a lack of experience in domestic financial intermediation when it comes to big, hazardous enterprises in India. knowledge is a byproduct of experience, yet scaling up investment is difficult due to a lack of knowledge, creating a vicious cycle. Distrust in the government's capacity to articulate and reliably back long-term industrial strategy is another obstacle. A new supply chain, incorporating several semiconductors, is necessary for EVs.


The Indian government is pushing for homegrown semiconductor production, but an industry veteran told me that high-ranking bureaucrats lack an understanding of the myriad moving parts required for such a costly and intricate endeavor as microprocessor production. In a broader sense, creating high-tech supply chains necessitates extensive expertise and close collaboration.


When compared to India, China's local governments are more competitive. Decentralization of power and finance, as well as incentive systems, are closely related to this. Government agencies in India are notoriously risk-averse and resistant to bringing in outside experts. Promoting industrial development is not the same criterion as advancement.


Some might say that governments shouldn't operate like businesses but rather provide essential services like healthcare and education to their citizens. However, despite the most simplistic assumptions, the government has always had a role in economic development. Prioritizing economic development while instituting accountability systems, such as strong electoral competition, can help curb cronyism and corruption. A more strategic industrial policy is becoming the norm in India. Important test cases will be provided by industries like semiconductors and electric vehicles. Learning from China's mistakes and successes on these fronts is essential.


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