The Race to a Perfect EV: Investigating Chinese Development and the Road Ahead
Throughout the 21st century, there has been a growing consensus that the pinnacle of human transportation lies beyond the fuel tanks of gas-powered vehicles. Groundbreaking technological developments continue to demonstrate that the answer may be electricity. Government agendas across the globe align on some level that a change needs to be made. The Canadian parliament has set a goal of achieving 100 percent zero-emission vehicle sales by 2035. As the world moves away from gas-powered cars, a new race towards more affordable, efficient and accessible EVs has emerged. Government support has launched China into the forefront of EV development. However, due to high tariffs and duties, questionable manufacturing practices have prevented them from effectively penetrating the global market.
The Chinese electric vehicle industry has grown significantly faster than the Western industry in recent years. The International Energy Agency indicates that by the end of the year, China is projected to have 45 percent of all its vehicles powered by electricity. In contrast, the same study projected that the United States of America would only reach 11 percent in the same time frame. The unlocked potential of the Chinese EV industry can be attributed to large government subsidies in a push for green transportation, Chinese manufacturers controlling large portions of the supply chain and a unique design philosophy.
From 2009 to 2023, China invested 230.9 billion USD in the domestic electric vehicle industry. The Chinese government has supported the sector through rebates, tax exemptions, infrastructure support, research and development funding, and government procurement. Over the past decade, the Chinese government has implemented a unique funding strategy. Before 2017, most government support came in the form of rebates. After 2017, the Chinese government changed directions to emphasize tax exemptions and foster research and development by sending more than 20 percent of all funding to R&D. 2021 marked another significant shift in the government's support as the government doubled down on supporting the consumer side of the transaction through sales tax exemptions. By 2023, Sales tax exemptions comprised 87.4 percent of all government funding provided to the EV industry. The shift in focus towards supporting manufacturers through research and development was a game changer for the industry. Streamlining research and development for Chinese manufacturers has enabled them to capture large portions of the EV supply chain through vertical integration. For example, BYD, a prominent player in the EV industry, also manufactures batteries that are developed in-house. This strategy provides companies such as BYD with a tremendous competitive advantage in terms of cost efficiency and overall product quality.
Furthermore, the Chinese government's investment in EV manufacturing processes has been far more effective than North American markets because of how that money is being used. The Western market is composed of established auto manufacturers who focus on redeveloping manufacturing processes to switch from gas-powered vehicle manufacturing to electric counterparts. On the other hand, new Chinese manufacturers design vehicles from the ground up, allowing them to focus solely on developing the most effective systems rather than trying to redesign old models. Chinese design philosophy will enable manufacturers to design cars more effectively and for a fraction of the cost.
China's rapid growth in the EV sector has been a topic of speculation around the world. Xinjiang, a region of northern China, produces 10 percent of global aluminum, a key material in the production of modern electric vehicles. However, China is under heavy scrutiny from the global community surrounding discriminatory violence and abuse in forced labour camps within the region. As such, Western markets have placed an emphasis on limiting the export of Chinese electric vehicles. In May, President Biden of the United States of America drastically increased import tariffs on Chinese EVs from 25 percent to 100 percent. These tariff hikes extended to other industry essential resources such as steel, batteries and semiconductors. The white house justified the tariffs on the grounds of "protecting American workers from China's unfair trade practices." This drastic move by the United States caught the attention of governing bodies worldwide and put a spotlight on the ethics of Chinese EV development.
After Washington announced the tariffs, Ontario Premier Doug Ford and Prime Minister Justin Trudeau joined forces to align themselves with the United States publicly. While no official changes have been made to the current tariff scheme, the government has announced an increase: "Provisional duties ranging from 17.4 percent to 38.1 percent may be imposed on imports of Chinese-produced EVs starting July 4, 2024". On the other side of the Atlantic, the European Union also increased tariffs on Chinese EVs from 17.4 percent to 36.5 percent, alongside an additional 10 percent duty that had already been placed on Chinese imported EVs. Many major markets remain hostile towards China's rapidly developing electric vehicle industry. In a move to protect domestic development and crack down on ethical business practices, these tariffs will drastically reduce the impact of China's EV development in the global market. While the sizable tariffs will stop Chinese EVs from being competitive in North America and Europe, they fail to attack the root of the major problem surrounding the Western EV industry.
The reality is that pushing away foreign competition is not enough to build a sustainable EV industry in North America. The industry's future is heavily reliant on electricity prices and a reliable power grid in the wake of an impending electricity demand boom. As battery technology progresses and EV production stabilizes, Western manufacturers will eventually match China's EV production levels in the long run. The issue remains convincing consumers to make the switch.
An investigation completed by Goldman Sachs found that EV sales dropped sharply by almost 42 percent from the end of 2023 to the start of 2024. Sachs suggests that such a drastic change in demand is due to high capital costs due to decreased used car prices, uncertain political support with upcoming elections, and charging station infrastructure. However, the question remains whether their findings were merely a bump in the road or if there are more severe underlying issues within the industry.
The recent artificial intelligence boom and advances in quantum computing have come at the cost of a considerable strain on the electrical grid. AI chip developer NVIDIA is projected to ship out 1.5 million AI server units in the year 2027; analysts estimate that the electricity consumption from NVIDIA's chips alone will be "At least 85.4 terawatt-hours annually, which is more than what many small countries use in a year".As AI and quantum computing become increasingly important parts of the economy, the economy will depend more on the price of electricity. Higher demand will drive prices to increase, taking away one of the key reasons many consumers purchase an electric vehicle: the cost of electricity compared to gas. A 2020 report found that consumers of electric cars saved 60 percent more than those who owned gas vehicles on fuel costs over the year.
Given the direction that the economy is headed, the prospect of owning an electric vehicle becomes less attractive to consumers; the same advantages that convinced consumers to purchase EVs historically, such as cheap fuel, may not be the case in the near future. Goldman Sachs' findings signify a lack of confidence within the Western consumer base, and increasing electricity prices will only exacerbate the problem. Additionally, an uncertain future surrounding EV charging infrastructure deters hesitant consumers from taking the leap to electric vehicles. Tesla recently disbanded its entire EV charging team, halting all progress on developing America's charging grid. Given the vulnerable state of EV demand, Tesla's decision to put infrastructure development on hold is a telling sign of doubt from the EV-producing giant surrounding the industry's immediate future.
The economy thrives on confident consumers and unstable electricity prices, and without the necessary infrastructure in development to support an EV industry in growing freely, the jump to electric vehicles is far scarier for the working class. The lack of growth that we are witnessing in North America is highly predicated on uncertainty fueled by a lack of sustainable government support. While political figures enjoy making promises and lofty goals about an emission-free future, they fail to develop support structures that allow the industry to grow sustainably. Chinese innovation is far from perfect, but there are lessons to learn about developmental strategy, design philosophy and the government's role in building a strong EV industry. As long as the West continues to play defence, no real significant progress can be made toward EV goals and, most importantly, emission-free transportation.