SCHUMPETER IS NOT a car owner. He bought his last, a diesel-powered Volkswagen, in 2015, days before the emissions cheating scandal broke. He was so dismayed that when the car’s engine caught fire, he swore never to buy another and took a bicycle instead. Since then, he has lived in emission-free sufficiency. At least it did, until a growing number of electric vehicles (VEs) began to scroll, signaling even more virtue. Now his car urge has returned, but with a dilemma. Some of the most attractive VEs in Europe are either made in China (Tesla) or by Chinese companies (MG). Given concerns about the decoupling of trade into ideological blocs, should this be a dieselgate-sized concern?
To answer that question, let’s first look at what’s known in China as the “catfish effect,” the idea that a predator makes weaker rivals swim faster. For years, China has dominated the world in the production and purchase of VEs. However, the cars were heavily subsidized and of poor quality. They were a response to the government’s desire to clean the air and skip the internal combustion engine, a technology in which China was lagging behind. Delighting customers was an afterthought. no chinese VE-maker was as global as Huawei became in smartphones, before America blackballed it in 2019.
That same year, Tesla moved to Shanghai and began rolling Model 3s off the production line. It has become, says Gregor Sebastian of the Mercator Institute for Chinese Studies in Berlin, the epitome of catfish. The effect was similar to the advantage that Apple’s iPhone production in China brought to the country’s smartphone market, where local vendors had to up their game to meet international standards. The ambitions of Chinese manufacturers have also increased. The result has been an accelerated transition to electrification. BYDa battery manufacturer that has become the biggest seller of VEs and hybrids, said on April 4 that it had stopped manufacturing full-combustion engine vehicles. As with Tesla, its sales are exploding.
So far, no Chinese VE-maker is an export powerhouse. Stock analysts are playing on the potential, hoping it will bring valuations similar to Tesla’s, says Tu Le of Sino Auto Insights, a consultancy. But most of China VE exports are made by entirely foreign brands, such as Tesla, or those with Chinese partners, such as BMW. Foreign brands account for most of the 296,000 made in China VEs and plug-in hybrids sold overseas last year, more than quadrupling in 2020. Due to high US tariffs, preferred destinations are Europe and Southeast Asia.
the largest in China VE companies are adopting various export strategies to catch up. SAICa public automaker, is making inroads in Europe under the guise of MGa classic British sports car marque it bought in 2007. It keeps its Chinese identity hidden behind the alluring octagonal nameplate, which may explain why sales hit over 52,000 in Europe last year , double the previous year, many of which were EVS. BYDas well as Nio, who hopes to tackle luxury brands like Mercedes, have made VE-friendly Norway the springboard for their forays into Europe. In Southeast Asia, the strategy is to “attack the villages to encircle the cities”, says Scott Kennedy of the Center for Strategic and International Studies, a think tank in Washington. It means to sell at a low price VEs where Western companies do not venture, in order to strengthen supply chains. Taxi fleets are a popular target for companies like BYD.
Until recently, it was considered unlikely that these low-cost brands would be able to penetrate developed as well as developing markets. the VE The market in China includes dozens of companies as well and needs to be consolidated. Companies lack the overseas sales networks of their global competitors. Yet they have their own built-in advantages, including access to the best battery power in the world and, in some cases, more sophisticated software than their European rivals. China is also taking international safety standards more seriously.
If it’s VE– manufacturers are prospering, it would be good for more than the car market. The more high-quality Chinese products attract international consumers, the more China has a stake in safeguarding global trade. VEs encompass many of the strategic tensions that plague the trading system. They rely heavily on semiconductors, which have become a sore point in China, and batteries, whose Chinese dominance is a bane for the West. They are heavily subsidized. Collecting personal information to improve traffic lanes, charging, and self-driving technology raises thorny questions about privacy, data storage, and cybersecurity. the VE the industry is also exposed to trade wars: since 2018, America has imposed 25% tariffs on battery cells, electric motors and others VE Components. The European Union, with its green program, is for once less openly protectionist.
Most Western automakers have enough of a stake in keeping supply chains open and maintaining access to the Chinese market not to erect more trade barriers. They know, however, that China uses them as catfish to improve its own industry. At any time, he could decide that they did their job. This could disrupt the entire global market, including China’s.
Complete the circuit
Yet the catfish effect can work both ways. Last month, Bloomberg reported that CATL, the Chinese battery giant, was planning to build a $5 billion factory in North America. In response, Jim Greenberger of NAATBatt International, a trade organization specializing in batteries, said it would appreciate this as long as CATL provided battery manufacturing technology and know-how to facilitate technology transfer to US companies.
This is of course the magic of globalization. Over time, competition and cooperation lead to the exchange of ideas, to the benefit of all. It won’t last if geopolitical tensions, exacerbated by Russia’s hammering of Ukraine, shatter the global economy into competing blocs. If buying a Chinese car sounds unfamiliar to you, remember that you support globalization. Not bad for benefits. ■
Learn more from Schumpeter, our global trade columnist:
Is Cancellation Culture Happening to Free Trade? (April 2)
Why Saudi Aramco could be overshadowed by its Qatari enemy (March 26)
Has Silicon Valley lost its monopoly on global technology? (March 19)
For more expert analysis of the biggest stories in economics, business and markets, sign up for Money Talks, our weekly newsletter.
This article appeared in the Business section of the print edition under the headline “The Catfish Effect”