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HONG KONG – When China allowed Elon Musk to set up the Tesla Gigafactory in Shanghai in 2018, it was as if a large catfish had just fallen into a placid pond. Homegrown electric vehicle manufacturers were suddenly in mortal danger. The introduction of the industry’s apex predator marked an existential challenge.
To make matters worse, Tesla had taken advantage of a new policy that allowed foreign automakers to establish wholly-owned operations in China, meaning it was not obligated to share technology and manage relationships with a Chinese partner. Additionally, cars produced by the $ 2 billion factory would be eligible for subsidies, as would those produced by native Chinese companies.
Some Chinese competitors were puzzled. One, William Li, often referred to as “Elon Musk of China,” was forced to inform investors in March this year that his company, Nio, might not have enough capital for another 12 months. To be sure, many of Nio’s problems were self-inflicted, but the challenge posed by Tesla had helped drive Nio’s stock price to a low of $ 1.19 in October of last year.
The extraordinary revival of Nio’s share price to $ 18.8 on Monday, coupled with renewed optimism around other local EV makers, speaks volumes about the way business is running in China.
The crucial information comes down to what is called the “catfish effect” in Chinese. Beijing calculated that by introducing a predator into the Chinese market, it would force its domestic companies to become stronger in order to compete. In their eyes, Tesla would become the “Apple of the auto industry.”
Apple’s commitment to China, where it makes many of its smartphones, has expanded the Chinese supply chain due to the imperative that Apple source key components locally. It has also created side effects in which technologies originally intended for Apple phones have been adapted by vendors and used by domestic competitors.
One of the reasons that Chinese smartphone makers like Huawei, Xiaomi, Oppo, Vivo, and others have grown so rapidly in the past decade is because Apple has continually seeded its Chinese supply chain of around 380 companies with the latest intellectual property. The emergence of Luxshare-ICT, a Chinese supplier to Apple, to become a formidable competitor to Taiwanese contract manufacturing giant Foxconn provides an example of the power of this influence.
It is the hope of this spillover effect that makes Tesla love among Chinese officials. They realize that regardless of the short-term pain suffered by competitors such as Nio, WM Motor, Li Auto, Xpeng Motors, BYD and others, the long-term advantages that stem from the deepening of the electric vehicle supply chain Chinese will surpass them.
The Tesla example is already attracting other foreign giants to participate. Volkswagen said this week that, together with its Chinese partners, it will invest 15 billion euros (17.6 billion dollars) in the manufacture of electric vehicles in the country over the next four years.
Volkswagen’s calculations are revealing of the entire industry. You know your electric vehicle business will be crucial in a time of global transition away from fuel burning engines. He also knows that China, as the world’s largest auto market, will be crucial for any automaker wanting to lead global sales.
Therefore, the pressures on companies like Tesla and Volkswagen to nurture their Chinese supply chains will intensify. Any electric vehicle manufacturer in China that feeds on the most efficient and high-tech supply chain has a better chance of producing market-leading cars.
With all of this as a backdrop, Beijing won’t worry about the latest statistics showing that Tesla is far ahead of its local rivals in terms of monthly sales in China. In a sense, this was all part of the plan. Tesla’s best-selling Model 3 has energized the domestic market to such an extent that owning an electric vehicle has become a status symbol for the urban elite.
Consulting firm McKinsey predicts a bright new dawn. It says that by 2022, some 3.5 million electric cars will be sold in China, up from 1.2 million last year. The economies of scale that come from such strong sales will allow manufacturers to lower prices over time, unleashing a massive market momentum.
The promise of such a market is the main reason regional governments have supported local manufacturers in recent months. The most striking example of this came from electric vehicle startup WM Motor, which managed to raise $ 1.47 billion in a single funding round in September. The fundraiser was led by SAIC Motor, one of China’s largest state-owned auto companies, and also attracted the government of Hubei Province and the cities of Suzhou, Hengyang, Hefei and Guangzhou.
It seems that faith in China’s electric vehicle market runs deep.
James Kynge is editor of Tech Scroll Asia, an Asia technology newsletter combining the best reports from Nikkei and the Financial Times. He is also the editor of FT Global China, writes about China’s growing presence in the world and won the Wincott Foundation award for UK Financial Journalist of the Year in 2016. His award-winning book, “China Shakes the World”, has been translated into 19 languages.
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