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As Chinese EVs get ready, Western public & automakers weigh in

A few days ago at CES, the biggest consumer tech event held annually in Las Vegas, there wasn’t much fanfare. Its updates were perceived as nothing but incremental: lots of health tech (sleep quantification, AI-powered assistants), improvements in OLED displays and VR headsets, and little else.

Xpeng thinks the company can start commercializing its electric cars with eVTOL capabilities (“flying cars”) in 2025

There were some exceptions, among them some news by Xpeng, a Chinese electric vehicle manufacturer virtually unknown to Western consumers. The company unveiled a “modular flying car,” a concept of a van-like EV “ground module” carrying on its belly an eVTOL, or electric aircraft that can take off and land vertically:

“The ground module carries the air module. The air module and ground module automatically separate and combine. The ground module can recharge the air module.”

The eVTOL resembles a sleek, oversized manned drone. It includes a 270-degree panoramic two-seater cockpit, offering “an expansive flight view.” Some Chinese automakers want to start commercializing “flying cars” as soon as 2025; at CES, Xpeng led by example, accepting pre-orders. On the realistic side, Brian Gu, Xpeng’s president, acknowledged that the future car/eVTOL sector depends on regulatory approvals, both in China and abroad.

Real vs. perceived value and why it matters

We wanted flying cars, the saying goes, but perhaps we should first make sure we want electric cars, considering the relative EV adoption slowdown. According to the data analyst company S&P Global Mobility, 86% of US car buyers were considering an electric car in 2021, though this number shrunk to 67% in 2023.

With smaller-than-expected demand, supply could also outpace demand, which could further erode the perceived value of used EV cars, and a faster depreciation is already hurting companies that bought battery electric vehicles (BEV) in bulk, like Hertz, which is selling 20K electric vehicles to buy gasoline cars for their rental fleet instead. EVs cost less to maintain but hold higher damage-repair costs.

BYD is evolving fast; Japanese, South Korean, European and American manufacturers are paying attention

As a consequence, the average five-year depreciation rate for EVs is almost 50%: the typical electric car loses half of its perceived value in just five years. Fully electric cars don’t hold their value, but hybrids do. Could Toyota, criticized for its slow transition to electric cars despite leading the hybrid sector, vindicate now an industrial hesitation broadly perceived as a sign of weakness and obsolescence?

EV adoption slowdown or temporary inflation impasse?

To any San Francisco Bay Area or Norwegian resident, electric cars are a tangible, pervasive reality. Not so for other US or European markets. Some consumers are waiting to make the transition to EVs. What is causing this skepticism? Are EVs still perceived as too expensive despite the consumer subsidies in most of the main car markets?

Inflation and concerns about short-term costs of non-essential purchases may have played a part in slower-than-expected EV sales growth, which increased 51% in the first half of 2023, compared to a 71% growth in the same period of 2022.

Other demand cooldown factors mentioned by analysts and consumer surveys are the perception of charging as a challenge, especially to those lacking the means and time to charge overnight at home or at work safely; and considering EVs as a supplementary vehicle to combustion models, and not a replacement.

If EV adoption in the US and in most European countries is growing steadily, albeit underperforming, China’s internal car market, the world’s biggest, has seen EV sales double the global average. Chinese companies are targetting global exports to sustain the sector’s steady growth and help the country’s lagging growth after decades of overperformance.

Chinese electric cars and protectionism in the US/EU

China’s grander plans for its EV sector are international: the country just overtook Japan as the world’s top car exporter and its bigger EV carmaker, BYD (backed from the beginning by Warren Buffet’s Berkshire Hathaway), now sells more cars than Tesla. No wonder American and European regulators are growing wary, and nobody avoids the word “protectionism” anymore. The US market already holds high import tariffs on Chinese cars, and European regulators have criticized the influx of heavily subsidized cars, which reminds us of the antidumping measures of other eras.

Polestar, a subsidiary of Volvo, benefits from the easy regulatory agreements USA-EU to enter the American market (Volvo is a subsidiary of the Chinese manufacturer Geely)

The “anti-subsidy investigation” launched by the European Commission could argue that dumping practices harm competition instead of stimulating it, and protectionism could only make cars, more expensive, ultimately slowing innovation down. According to The Economist:

“The threat to industry from cheap imports is usually overblown. The lesson from the rise of Japanese and South Korean carmakers in the 1980s is that competition spurs local firms to shift up a gear, while the entrants eventually move production closer to consumers.”

The automobile industry claimed incremental changes over a century but the simplicity of electric drivetrains compared to their combustion counterparts is rapidly transforming the sector: just 5 years ago, Japan exported four times as many cars as China; a few days ago, the Chinese industry announced it had exported over 5 million cars in 2023, becoming the world’s top exporter. With no regulatory measures, China could double its share by 2030, according to analysts.

European automakers face an influx of Chinese cars

The European Commission has launched an investigation to find out which subsidies are getting battery electric vehicles in China. This action manifests the fears of the EU’s main economy, overall exporter and car producer, Germany. The country was the worst-performing major economy in 2023 and its GDP shrank 0.3%: until now, Europe had resisted heavy import tariffs on Chinese cars, although, with the German chancellor Olaf Scholz under pressure, this could change.

No Chinese EVs are sold in the US since the Inflation Reduction Act established rules excluding batteries and other components produced by Chinese manufacturers; in Europe, no rules against China’s EV subsidies (yet) will show a stark price difference between EV equivalents: the BYD Dolphin starts at €28,990 in Britain and the EU, a third of the cost of a model of its category, the VW ID.3. And, while the cheapest BYD electric car sold in the Chinese market costs around $12,000, the cheapest Tesla sold in the US is just under $40,000.

The rise of the Chinese electric sector has sent a shock to the global car sector, and Chinese companies are profiting from a more vertically integrated sector that doesn’t rely on faraway supply chains to make the cars and their parts —especially the battery: the Asian country controls the lithium and graphite supply for the sector, essential materials to produce batteries at the necessary scale and plans to take advantage of it.

During the concept presentation at CES (Las Vegas, early January 2024) Xpeng’s CEO acknowledged that eVTOLs’ success will depend not only of the technology’s feasibility but also on aircraft regulation

BYD, the biggest Chinese EV car maker by sales, sold 530,000 cars in 2023’s fourth quarter, beating Tesla’s 485,000 and becoming the world’s top seller, though other Chinese EV makers (Geely, SAIC, NIO, or Great Wall Motors) are close behind and could soon sell more cars than the company that became synonymous with the sector’s transition. That said, only Tesla seems capable of keeping pace with Chinese automakers by EV sales volume.

BYD goes to Brazil

Chinese automakers are wary of the risks of future regulation in Europe, which could emulate America’s high tariffs and supply chain protectionist barriers. In the first seven months of 2023, only 189,000 Chinese cars were sold in Europe, only 2.8% of the total, but the market share is growing fast, especially in EVs, already accounting for 8% of total sales. The European success of Polestar and MG could extend to BYD, Aiways, Nio, Ora, Xpeng, or Leapmotor.

Chinese companies want to diversify to avoid a protectionist blockade by rich countries, which could represent a black swan event for a sector that has achieved vertical integration and affordable prices. BYD wants to grow aggressively in middle-income countries, from South America’s biggest markets, as well as in Eastern Europe, the Middle East, and other emerging markets.

The company is interested in a takeover of Sigma, a Brazilian lithium producer, to create a vertically integrated supply chain in the country to serve its future factory in Brazil, first outside China.

BYD also plans to build a factory in Hungary and another in Mexico, although EV frenzy that China wants to export to middle-income countries could be stalling in the US: according to Pew Research, only two-fifths of Americans would consider buying an EV: fewer than 1 million pure electric vehicles were sold in the US in 2023, slightly over half the sales of the segment in Europe, whereas Chinese drivers bought four times as many.

Why EVs are rare outside 3 states

Buying a car is one of the most defining purchases among people in contemporary culture, along with their homes, especially in car-driven American culture. Despite a wider range of offers, Americans aren’t ditching combustion engine cars yet:

“Outside California, Florida and Texas, which together account for over half of American EV registrations, electric cars mostly remain a curiosity.”

Tesla’s lead and Rivian’s relative success in the luxury pickup truck and SUV segments, culturally idiosyncratic to the country, aren’t enough, and most of the public remains priced out of EVs despite heavy discounts by automakers (currently, Ford is losing $62,000 for every vehicle it sells). So far, legacy manufacturers have focused on higher-margin premium models instead of betting on mass-market BYD counterparts.

Sea-to-sky vehicle tech: Xpeng’s AeroHT Land Aircraft Carrier concept, a “two-part design, seamlessly switching between a terrestrial and aerial mode”

According to Cox Automotive, the average electric car sold in the US sells for $52,000, slightly over the $48,000 Americans pay for combustion cars, though it’s still more expensive and time-consuming to deal with electric car issues:

“Total costs of ownership, which combine the sales price and running costs for five years, vary more widely. At $65,000, the typical EV is $9,000 more expensive to own than a petrol car (owing to factors like pricey home chargers, dearer insurance and, compared with Europe and China, inexpensive gas). On Ford’s latest earnings call executives grumbled that Americans were stubbornly “unwilling to pay premiums” for EVs.”

Cost, opportunity and perception

Cost isn’t the only issue deterring Americans from switching en masse to EVs, according to The Economist, production quality problems: a part of the public is waiting for an improvement in quality problems: 70% of reported vehicle quality concerns, from door handles that break too often to sub-par panel gaps.

Another source of controversy is the discrepancy between the battery range reported by automakers and the range that owners deal with in real-life conditions. The range will decrease on demanding steep terrains and also amid extremely cold weather. As Jenny Gross explains in the New York Times, in freezing temperatures, batteries can be less efficient and have a shorter range. They also may take much longer to recharge, as EV owners from the Midwest are learning as the Arctic blast spreads and subzero temperatures settle in.

In the early 80s, the American car industry produced less innovative and efficient cars than their Japanese counterparts. As Japanese and South Korean carmakers entered the US market, they stimulated innovation in local companies too, which had to fight for their survival with improvements in design, safety, efficiency, and overall quality. In contrast, preventing Chinese electric cars from entering the US market could affect EV adoption.

Xpeng AeroHT modular flying car (ground module + manned aircraft): “The ground module carries the air module. The air module and ground module automatically separate and combine. The ground module can recharge the air module.”

Only Polestar, a subsidiary of the Swedish Volvo (owned by Geely), has so far made a little dent in the American market. Thanks to its Nordic connection, Polestar could avoid the negative perception by regulators and consumers deterring Chinese carmakers in America. According to Lili Pike from Foreign Policy:

“Polestar’s ties to Volvo have also allowed it to set up production at Volvo’s existing factory in South Carolina—a significant advantage. The Biden administration has encouraged such foreign investments under the IRA, but for other Chinese companies in the EV industry, opening up a factory in the US has been far more of a headache.”

Supplement vs. replacement

That said, Polestar sells luxury EVs, competing against Tesla and not against its Chinese counterparts.

The 2024 Polestar 2 is just under $50,000, though the longer range and more powerful models are as expensive as the most exclusive luxury sedans with combustion engines. The consumers’ skepticism may be more rational than what some analysts suggest: why rush to get an EV and assume a bigger ownership cost when their relative value decreases faster than that of hybrids and combustion-engine cars, and their potential quality issues are much higher than in more mature platforms?

The environmental and local air quality advantages may not be enough of a reason for individuals and families still concerned by inflation and high interest rates for consumer loans. As Tesla faces more competition in the luxury segments from American, European, and Asian automakers, and only three States drive overall EV sales, the American electric sector could be losing part of its edge.

As EVs go past an early-adopter-fueled first phase of popularity, the next leap forward will happen when consumer perception in the US and EU morphs from considering electric cars as a supplement of combustion or hybrid models to a viable replacement for all circumstances, including old trips (which will demand pervasive fast charging).