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Why are electric cars taking off in China?

Why are electric cars taking off in China?

The growth of the electric car market is one of the most intriguing and important stories around at the moment. Are we finally on the road to breaking our addiction to petrol?

Headlines about the electric car market tend to be dominated by two types of company. The first are the traditional car giants finally getting serious about electric vehicles and putting real money into research and development. Following decades of under-investment it is now clear that every major car company has seen the writing on the wall and is heading towards an electric future. Whether you want a supercar or a more normal, useful car you can now get an electric version which is often superior to the old petrol versions.

The second type of company in the news is the smaller firms aiming to revolutionise the industry from the ground up. Obviously the most famous of these – for good or ill – is Tesla which has a full range of electric cars and is also developing other products such as trucks. Even though the company seems to go from crisis to crisis, and is headed by controversy-magnet Elon Musk, its stated goal is to accelerate the emergence of an all-electric future for the good of the planet. Given the moves being made by the major players in response to Tesla’s success, it is clearly succeeding at that.

However, one part of the market you don’t often hear about involves Chinese car manufacturers. This is understandable on the one hand because Chinese cars tend to stay in China so outside experience of them is limited. On the other hand, China is by far the biggest electric car market so it bears further consideration.

There are more than 1.2 million electric cars on the road in China currently, including almost 600,000 which were purchased in 2017. This complements a whole suite of electric buses which operate in major cities. The Chinese government has stated its aim to have a further seven million new electric vehicles on the roads by 2025.

Conversely, in America – where Tesla has been achieving so much success – fewer than 200,000 electric cars were bought last year and the total number on the road is only just over 700,000.

With this in mind be prepared to hear a lot more in the coming years about the Chinese car companies which are set to dominate the global market. Tesla is at the top of the tree in the West, but in China it barely registers. The fact that Tesla is investing US$2bn in a new factory in Shanghai to try and play catch up in the world’s largest electric car market tells its own story.

Companies like BYD, Zhidou, Byton and Kandi are far from household names around the world, but they are taking on companies like Tesla and winning – and investors are starting to pay attention. BYD in particular is attracting a lot of investment money as it already builds and sells more cars in China alone than Tesla does in the whole world.

The reason that the Chinese are dominating the global electric car market comes in four parts.

Firstly, several of the big Chinese players are state-owned companies which receive considerable backing in a way that both traditional car makers and upstarts like Tesla simply cannot match.

Second, China is currently the world’s largest market as mentioned previously, and it is set to keep going. In a country where pollution is such a prominent daily hazard an affordable electric car is always going to be tempting.

Third, the Chinese government is pro-electric to a greater degree than any other large economy in the world and has put in place a comprehensive strategic network of incentives for those who build the cars and those who buy them. By actively promoting the market they are speeding ahead of their rivals.

Finally, China is essentially the heart of the modern global battery industry. Lithium is the all-important ingredient in the most advanced modern batteries and China, and Chinese companies, control a majority of it around the world. Whether this is lithium reserves within the boundaries of China or having controlling stakes in foreign lithium mines, Chinese companies have access to the best materials and the best technologies. For instance, BYD has recently launched the world’s biggest battery factory which will produce enough electricity to power 570,000 new cars every year.

At the moment this state of affairs is not a huge problem for Tesla or any of the other major car companies investing in electric vehicles, but Tesla’s move into China points to a potential danger. What is there to stop Chinese companies from moving outside China with their low cost, proven car models and taking over other markets? After all, by the time they make these moves they will have had the benefit of perfecting their model in the world’s largest and fastest-growing market. It is hard to see why other markets might prove problematic.

Investors are bombarded with schemes for investing in companies like Tesla, but it might be the smarter move to look East at opportunities with companies like BYD and get involved before they start to expand outwards.

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