Long dubbed “the world’s factory,” China is no longer satisfied with exporting only low-end manufacturing products. With its exports of electric vehicles (EVs), solar panels and lithium batteries, China is now in the process of conquering the American and European green markets. This is why the European Union and the United States, in particular, have begun criticizing China for its “industrial overcapacity.”
China immediately retorted: “Globally, green capacity is not in excess, it is in short supply. The problem is not overcapacity but excessive anxiety.” But that doesn’t change the problem of Chinese overcapacity. So, beyond this rhetorical battle, what is it about China’s manufacturing industry that worries the European Union and the United States?
In my work as a doctoral candidate in political science at the Université de Montréal, I am studying the relationship between China and the countries of Southeast Asia and working on a comparison of the European Union (EU) and the Association of Southeast Asian Nations (ASEAN).
Abundant subsidies
In so far as it concerns Europeans and Americans, China’s overcapacity can be summed up by two main elements: massive Chinese government subsidies, and very small demand in the domestic market. These two factors mean that the supply stimulated by public funding in China far exceeds the demand of local markets. The result is that Chinese products are flooding international markets, where, with their very competitive prices, they threaten the survival of domestic manufacturers.
Chinese government subsidies are particularly prevalent throughout the green production chain. China’s strategy includes cheap loans, low-cost access to land, huge investments in infrastructure and consumer premiums. Chinese subsidies in the green industry are three to nine times higher than those of countries in the Organization for Economic Co-operation and Development (OECD).
By 2023, China will control an average of 71 per cent of global production in the EV, solar panel and lithium battery industries (EV 60 per cent, solar panels 80 per cent and lithium batteries 74 per cent) and on average accounts for 66 per cent of global sales (EV 60 per cent, solar panels 80 per cent and lithium batteries 60 per cent).
However, these figures need to be taken with a grain of salt. Although China is now the world’s largest producer and seller of green products, the domestic Chinese market accounts for the lion’s share of consumption: almost 90 per cent of Chinese production of EVs and lithium batteries, and 60 per cent of solar panels, according to the China Chamber of Commerce report for the import and export of machinery and electronic products.
State funding also means that, for the same model, the price of an EV sold in China is half that on the European market. Funding aside, Chinese EVs cost almost as much as European EVs to produce. And European EVs still account for the lion’s share of the European market.
A change on the horizon?
However, a recent factor could change things. The Chinese government ended all subsidies for solar panels and EVs at the end of 2022. This could have a negative impact on the domestic market and lead to even greater exports to the international market.
So the EU was right to sanction Chinese EVs. However, Chinese companies will very likely find ways to get around the sanctions. For example, they could team up with European manufacturers. This is the case for XPeng Motors and Leapmotor, two Chinese groups that in 2024 signed collaboration agreements, respectively, with Volkswagen and Stellantis, the two leading EV manufacturers in Europe.
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Factory of the world, top-of-the-range version?
The problem Chinese industry represents in the eyes of its economic competitors is not so much its “overcapacity” in terms of production, but rather the change in its economic model, which is now focusing on top-of-the-range products with its famous “made in China 2025” project. In less than 20 years, this paradigm shift resulted in the rise of a Chinese green industry before Western governments had time to prepare for it.
When China joined the World Trade Organization (WTO) in 2001, the Western market was in for an initial shock. Originally, the famous “made in China” label was almost a joke, given the poor quality of the products, but since then, low prices for Chinese goods have turned out to be a tenacious strategy.
The second shock has just begun, and is likely to have far more severe consequences than the first. This time, China has an exceptional combination of four strengths; (1) It accounts for 30 per cent of global manufacturing; (2) its labour force remains relatively cheap; (3) it has advanced technological capabilities; (4) its state subsidies are abundant.
So the challenge posed by China to the Western green industry is significant. In addition to state subsidies and China’s “industrial overcapacity,” the comparative advantages of Chinese companies in this industry also play a part.
Take the example of the EV, where 30-40 per cent of the price comes from the battery. BYD, the largest EV manufacturer in China, is almost self-sufficient throughout the production chain, since it produces not only most of the car’s critical parts, but above all, its battery.
After the sanctions, a better future for local manufacturers?
Green industry is the key to achieving climate goals. However, it is not always easy to convince stakeholders to change their orientation, especially when the cost of the transition is significant.
Europe and the United States are right in accusing China of providing massive subsidies. However, for a new industry to prosper and win its market share in increasingly fierce global competition, closing its market to external competition is only the first step.
Europe and the United States must review their industrial policies, and the state must intervene where and how it can.
Yaxin Zhou is a member of the Jean Monnet Centre in Montreal.
This article was originally published on The Conversation. Read the original article.
