The electric shock behind Europe’s faltering future of electric vehicles – and how China has leapfrogged major car exporting countries | Money News Aitrend

Across Europe, carmakers are cutting jobs and closing factories – to the point where some are questioning their very existence. So it’s worth asking the question: what’s wrong with the European (and for that matter American) auto industry?

While some will draw their own conclusions (Brexit! Electric vehicle time limit ! Government regulations!) in practice, there is something bigger, deeper and less parochial going on here. As the world abandons gasoline and diesel cars in favor of their electric counterparts, a seismic shift is occurring in the global automotive industry.

It’s a change that threatens to cause even more pain and disruption for automakers in developed economies. And given that most of these countries’ high-skilled, well-paid manufacturing jobs are in or around the auto manufacturing sector, that’s no small feat.

Look at a graph of global car exports and you will see a very striking sight.

The queues for traditional car-making countries – Japan, Germany, South Korea – are more or less flat, except for the period around the pandemic. But now look at the line for China. This country which, only a few years ago, was one of the minnows of the global automobile trade with barely 250,000 cars exported each year, has suddenly launched itself into the stratosphere. In just two years, it has overtaken all other major car exporting countries to become the world’s largest car exporter – in terms of number of cars.

This striking graphic might give you the impression that Chinese dominance is a very recent thing – a sudden and unexpected surge. Except that’s a bit misleading, because this change took a while to happen. To understand why, it helps (strange as it may sound) to think about the innards of a typical car.

A classic gasoline or diesel car is an assembly of many different components. There’s the radiator, the exhaust, the wheels and the brakes, but above all there’s the engine. An internal combustion engine is – even in 2024 – an extraordinary machine. We take these things for granted (and, given their carbon emissions, some don’t care). But the ability to take fuel and detonate it in a controlled manner, thereby turning the wheels, remains a great mechanical achievement.

Being able to manufacture these engines – contraptions made up of many different parts, each of which is subject to enormous stresses – at low cost and in a way that ensures their long-term reliability is an even more impressive achievement.

Indeed, making reliable engines represented an industrial challenge so enormous that it challenged China for most of the last century. Part of the reason Chinese car exports were so low for so long was because China struggled to make decent engines.

So you won’t be surprised to learn that the engine is by far the most expensive component of a typical car – accounting for more than a fifth of a car’s total value. Much of the UK and European car industry focuses on this 21% of car values ​​– because this is where our expertise has developed over decades.

Taking pieces of steel and combining them into this complex contraption is part of Europe’s (and America’s) industrial history. Millions of people are employed across Europe, working either for car manufacturers or their suppliers who make these engines. This is where some of the highest paying and highest skilled manufacturing jobs are located, even today in 2024.

But here is the critical point. In an electric car, there is no engine. Instead, the vast majority of the value lies in something else: the battery.

Making a battery is very, very different from making a motor. This is chemical engineering, not mechanical engineering. The skills acquired by European car manufacturers over decades are simply not directly transferable. Even if Europe were the only continent in the world to manufacture cars, moving from one industrial model to another very different one, without experiencing a roller coaster along the way, would still be a significant challenge.

But the problem for Europe (and America, South Korea and Japan too) is that it is not the only one making cars. China, which struggled to compete with these car engines decades ago, has been investing in building electric cars for some time.

In doing so, it has been aided by far more generous subsidies than their Western competitors tend to receive (nearly all automakers receive subsidies – in one way or another). Beijing has long been determined to dominate this next phase of auto production and reduce its reliance on oil imports from the Middle East – leading to the prospect of mass electrification of road transport.

And those subsidies — along with cheap energy costs fostered by China’s relaxed attitude toward coal-fired power plants — are part of the reason China has been able to produce cars at far lower costs than its Western competitors. Analysts from the Swiss bank UBS recently tried to compare the costs of a German-made VW ID3 with the component costs of a Chinese car, the BYD Seal.

They found that BYD was cheaper to produce – not just as a whole, but also for each component. And because it was much cheaper to produce, that meant it could be sold at much lower rates.

This is partly explained by state aid but, even more, it is the consequence of something else. China’s interest in batteries is not a recent trend. She has been investing in their production for many years. It has attempted to dominate not only the production of cells, but also that of the cathodes and anodes that make them up – not to mention the chemicals used to make those electrodes. This strengthened the entire supply chain, all the way to the mines. And although only limited quantities of lithium and cobalt are found in China, Chinese companies have been buying up mines in Africa and elsewhere for years.

The result is that China is the dominant country not only in the production of electric vehicles and the cells that make them up, but also in almost every component that goes into those cells. If you want to make a battery today, you’ll be hard-pressed not to use at least some Chinese technology or products. It’s so dominant.

The late economics writer Clay Christensen coined the term “disruptive innovation” to describe moments like this. When a new technology emerges and completely changes the industrial structure of an industry, it is incredibly difficult for incumbent companies to respond and adapt. They are simply not prepared for this. Think about how digital photography replaced traditional film or how smartphones replaced traditional computers.

Learn more: The UK electric vehicle market is doing better than you think

What makes this period so delicate for European automakers is that they are trying to compete with disruptive innovation that has been boosted by China’s industrial strategy. The result is that China is so far ahead in battery production – especially low-cost batteries – that it is hard to imagine how Europe and America – and, to some extent, the South Korea and Japan could catch up.

This is why so many countries are opting for the most drastic economic remedy: large and costly tariffs on imports of Chinese electric vehicles. The United States and Canada have imposed 100% tariffs, with India following suit with similar rates. Europe has introduced a sliding range of additional customs duties. Japan has not yet done so, but it is protected to some extent by the fact that its consumers usually buy Japanese products.

The main exception here is the United Kingdom. This country has not yet imposed additional customs duties on Chinese imports. The result is that it is currently one of the most attractive places in the world for Chinese manufacturers to market their cars – and one of the cheapest places to buy a Chinese car. But it has profound consequences for domestic automakers.

With energy costs rising dramatically, it is becoming increasingly difficult, rather than easy, to compete with Chinese production domestically. This raises deep questions about the ability of this country’s auto industry to survive or compete.

The logic of these transitions is that they often happen in slow motion but instead become self-fulfilling. Britain and Europe have had the opportunity to invest in batteries in the past; they have been incredibly slow to set up new supply chains. But the cards were still stacked against them. The coming years are likely to be tougher as the 2035 deadline for electric vehicles approaches, pushing consumers into a market increasingly dominated by a single country.