At first, it happens slowly, the saying goes; and then, suddenly. A market’s dynamism, scale, and/or integration can speed changes, so the transformation grows logarithmically.
In China, market transformations can fill a graph like a meme —or a virus— would expand. In contrast, downturns can also be as dramatic, as exposed by the troubles of Evergrande, China’s most indebted and exposed developer, with over 300 billion dollars in liabilities, a sign of a broader debt crisis in the country’s real estate industry. Bad debt in Chinese banks is mounting.
Consider, for example, the current growth in electric vehicle sales as a percentage of total sales: for years, Chinese and Indian automakers set up their offer to appeal to the emerging middle classes in the world’s most populated countries. In China, BYD led the local development of electric drivetrains, followed by several competitors, also promoted by local governments.
What causes big changes to happen “suddenly”
It took a critical emergency and unbearable, sustained pollution in the country’s urban centers for China’s administration to kickstart several mitigation measures with mixed success, from investing in research to alter the weather and “manufacture” rain, promoting cleaner methods of mass transportation (bullet trains, electric buses, interconnected metro and train networks), or working on serious alternatives for the country’s reliance in coal-produced energy.
The speed of change can also suffer unintended consequences from old societal habits: bicycles and electric bikes don’t conform to a uniformly perceived single market in China. Inspired by pioneering cities in Europe, all Chinese metros developed docking and dockless bike- and scooter-sharing programs, many of which failed and fueled conviviality tensions. Maybe —as some analysts speculate— China’s bike-dependent past, when the country’s reliance on bicycles as an almost exclusive method of personal transportation, was too close in time to its population’s collective unconscious.
Perceived as low-range personal transportation alternatives, the production of electric bicycles (also mopeds and all sorts of personal vehicles with accelerometers) fuels not only the vast internal market but also its boom all over the world, accelerated since the beginning of the coronavirus pandemic and its ripple effects.
But it’s cars and mass-manufactured single-family houses that became both the new symbols of a country that has experienced booming prosperity at a much bigger scale than in any other moment and place in recorded history and the main recipient of the population’s lifetime investments. Despite the country’s push to lead the electrification of the automobile industry, EVs accounted for merely 3.5% of all of China’s car sales in the first quarter of 2020, just when the coronavirus pandemic was finally considered by Western media.
EV sales in China: from 3.5% to 26% in 24 months
Just one year later, the EV’s market share had climbed to 10% of all sales. Despite stringent lockdowns, total car sales in China rose 7% in 2021 to over 21 million units; by contrast, sales in the world’s second market, the United States, rose 3% to just under 15 million units sold. But the increase in car sales was just starting its acceleration: from just 3.5% of all sales at the beginning of 2020, EVs represented 26% of the market at the beginning of 2022.
EV sales in China are forecast to hit 6 million units in 2022, more than double the 2.99 million in 2021. To put it in perspective, the third biggest market by car sales, Japan, registered slightly over 4.4 million total units sold in 2021.
Before associating the exponential growth exclusively to the “Tesla effect,” it’s worth looking at the main manufacturers leading the shift: Tesla is just one of the several automakers consolidating a market share shooting up, but there’s a big caveat that Tesla fandom should consider: local companies retain 73% of all EV sales in the country, with BYD, SGMW and Geely on top, followed by Tesla, GAC Aion, Chery, Chang’an, SAIC PC, and, finally, one subsidiary of European automakers, SAIC-VW.
Local company Hozon closes the top 10 of Chinese EV sales: 8 Chinese companies, one American, and one European, with no Japanese nor South-Korean counterparts represented on top. This is no temporary glitch, we should learn: that when over three decades ago, OECD companies started relying on Chinese suppliers to reduce production costs, they assumed Chinese manufacturing would remain a gigantic sweatshop subjugated to American, European, or Japanese intellectual, technological, and legacy superiority.
First, make your own cars; then, planes and much more
As it happenned first with the clothing industry and then with entire branches of the high-tech sector, from microprocessors to mobile phones, to drones, Chinese manufacturers are using the huge Chinese internal market to outstrip OECD companies, intellectual property, and legacy soft power. And as the car industry transforms its powertrain to go electric, Chinese companies are learning to compete in all segments, while at the same time, local companies also take the lead in the EV battery market by installed capacity: CATL, a local company, is the first manufacturer, followed by South-Korea’s LG Chemical and Japanese Panasonic. Chinese BYD (also, first in EV car sales) is fourth in batteries. South Korean Samsung SDI closes the top 5 as of now.
More strategically, China also took the pain —and vision— to control many of the key elements of the EV battery supply chain, from mining priority rights to material processing and manufacturing of cell components.
China’s sudden electrification of new autos sold raises several uncomfortable questions linked to new EVs embodied energy (the total energy needed to produce and run a car from the collection of raw materials to its disposal) to the energy mix in China: EVs may guarantee cleaner air in congested cities, but the electricity used to charge their batteries comes mainly from coal-fired power stations. According to a report by Capgemini Research Institute, the shift to electric vehicles would cut the overall lifetime Greenhouse Gas (GHG) footprint by about 37% for passenger vehicles, while reducing the operating footprint by 75%.
China’s sudden EV boom faces bigger challenges than in California or high-adoption northern European countries, from the challenges of infrastructure clotting in high-density areas to potential scalability issues to meet charging demand during warmer months and heatwaves.
California, the fifth world economy if it were a country, gets ready with a plan to invest in aggressive measures to mitigate the impact of extreme climate events in the coming decades, including a ban on the sale of new internal-combustion cars by 2035. The measures California adopted could influence the rest of the country, as has usually been the case since World War II when a population and economic dynamics shift transformed the US.
China’s market from Europe and North America
Back in Europe, governments and public opinion are getting more receptive to measures to mitigate the impact of climate in their lives. An IBM study concludes that 57% of consumers are willing to change their purchasing habits to reduce their impact (while saving money).
Perception of EVs is also changing swiftly, but Europeans share some of the concerns American polls have shown regarding EVs mass adoption, like infrastructure challenges and the lack of convenience or ease that early adopters of one technology may face for some time, from higher prices of comparable models to hassles with charging or servicing their vehicles. According to British automobile marketplace Autotrader, the UK will need 6.99 million charge points by 2030 – 1.66 million of which will need to be public.
One car company that seemed aware of what was happening behind the scenes in the auto industry, with a fast transformation of the world’s biggest market, was Tesla, which invested heavily not only in a fully integrated manufacturing process but also insisted on controlling and fully owning as many components as possible, while at the same time pioneering the transformation of automobiles into remotely updated proprietary software repositories, opening the door for a future in which optional features such as full autopilot could turn out to be more profitable as cars themselves.
Giga Shangai, Tesla’s third “gigafactory,” aimed at meeting the potential demand now unleashed, Volkswagen, first foreign car maker by sales in the country, plays now catch up by trying to boost production of its EV models.
Tesla aside, the automobile industry relied on a legacy model of manufacturing that hardly kept pace with the speed and scale of change in China. But how did OECD countries lose the upper hand in the innovation race? For one, company executives ended up buying into their own lingo, thinking that non-tangible value and intellectual property would remain in the hands of brands headquartered in high-income countries.
Going by the book of the best business schools
Not long ago, the idea of taking back control of the manufacturing process while turning China and India into colossal subordinate cheap factories for Western transnational companies to control wasn’t perceived as naïve. Then, terms such as “reverse innovation” became stellar conceptual milestones in The Economist, and The Wall Street Journal: less wealthy countries could come up with more affordable innovations that ended up making it to consumer markets in wealthy countries.
What wasn’t expected was having Chinese companies outcompeting their “developed” counterparts, as it became apparent when DJI took over the drone consumer market, one market that, for one, the company itself had created with their stable, affordable filming drones for the masses.
Terms such as “Reverse innovation” now sound far from innocent, and leading Western publications such as The Economist, the Financial Times, or the WSJ should help business schools shift from their obsolete vision of the world (one that still thinks that China is manageable from legacy networks based in Hong Kong, Taiwan, or Singapur) into one that acknowledges reality and learns from past mistakes. The current global supply chain mess could be an opportunity to shift this mentality and prompt European or American companies to rely less on short-term gains that depend entirely on what gets produced overseas.
How did the world end up relying on just one country to manufacture the entire consumer and industrial goods the world depends on, a situation not even China envisioned or is even interested in? Geopolitics, and what happened in the world after Mikhail Gorbachev (dead a few days ago at 91) embarked on a radical reform that accelerated the collapse of the Soviet Union and opened the world’s economy.
The tale of when old factories turned into mausoleums
After some pioneers took the risk of repurposing old industrial carcasses on their own (think Ricardo Bofill and his cement factory turned into a stunning home studio, La Fábrica), deconstructivist architects learn to convince old industrial cities to keep some of the landmarks of their manufacturing era.
Examples abound, but such reclaimed old textile or car factories, energy plants, or heavy industry landscapes, seldom regained their lost local importance as tenets of the simpler, more integrated productive economy with access to a massive, non-specialized working force.
Former factories and workshops became artist studios or highly subsidized investments to display “knowledge economy” jobs, becoming office space, aspiring fab labs, or “business incubators.” Yuppy culture experienced a similar transformation as the lavish, testosteronic finance workers flying from New York to London or Paris aboard the Concorde like the protagonist of Money, Martin Amis’ novel, got also disrupted by tech bros.
During the golden era of neocon management, marked by some peregrine quotes of books nobody quoting them felt having the time to actually read (Fukuyama’s The End of History? Peter Drucker’s Management series? Daniel Kahneman’s Thinking, Fast and Slow? Clayton Christensen’s The Innovator’s Dilemma? Check, check, check, check), top business schools acted as if coordinating the teaching of one same memo: produce cheaply overseas, and keep your valuables home.
A shortsighted vision of the new post-Cold War geopolitics brought managerial leaders to think corporations would be able to have their cake and eat it, too: a one-superpower world promised the stability needed by international agreements to deliver their potential, and the evolution of supply chains and logistics had proven unstoppable, thanks to digital interconnection and shipping container handling.
When skilled scavengers are celebrated as they butcher industrial carcasses
The Warren Buffet-Charlie Munger formula accelerated the colossal offshoring shift, as public companies in production or competition distress could be bought or absorbed, then dismantled for “optimization.” The social and economic cost of such transformation, with jobs and economic activity lost in cities that had relied on manufacturing, didn’t slow down the trend.
Then came the narrative of the technological disruption, which Clay Christensen had adapted to the Internet era from philosopher Leo Strauss and, among all, from economist Joseph Schumpeter, who coined the theory of creative destruction. Energy companies, big banks, the auto industry, retail, and other traditional blue-chip companies gave way to a new era of computing and Internet dominance. Software seemed to be “eating the world,” according to the software engineer turned investor Marc Andreessen.
In parallel, the overall stagnation of the sectors that had fueled the so-called productive economy after World War II, didn’t seem to bother much, as it became evident that the booming sectors relying on the Internet, automation, and other trends would not create as many entry-level jobs as traditional industries.
The Times They Are a-Changin’
Some things can change fast in Europe and North America, too, given the adequate contingencies. In the United States, California’s challenges represent a barrier (and also an opportunity) for speeding change if some of the State’s promises on transportation, housing, and extreme climate mitigation trickle down to actual policies that represent an impact measurable by the population.
In Europe, the conflict in Ukraine is the biggest call to action the European Union has faced since its ambitious expansion to the East: Germany has learned the hard way that playing the long game of intermingled interests with Russia could jeopardize its regional interests —and its own energy security.
After a particularly scorching summer, Central and Northern Europe get ready for the coming months amid the scalation with its main energy provider, Russia, which has unilaterally shutdown the Nordstream pipeline for “technical issues.” Berlin is proactively planning ahead and is quickly expanding its bus fleet with as many electric buses as it can purchase.
Maybe a war in Eastern Europe will do more to shift mentalities regarding clean transportation adoption and energy production via renewable energy sources than feel-good PR stunts that end up being inconsequential when it comes to actual transformation.