China's EV success isn't all about subsidies, it's time rivals compete

By David Fickling

 

There’s an old joke about running into an old man on a bus. The man’s tearing pages out of a magazine, scrunching them up, and throwing them out the window.

 

“Why are you doing that?” he is asked. “To keep the elephants away,” the man replies. “There’s no elephants around here, though.” “Exactly,” the man says. “That’s how you can tell it’s working.”

 

Something similar happens whenever the world starts talking about Chinese clean energy subsidies. It’s treated as such an established fact that these are the sole explanation for China’s competitive advantages, that little evidence is presented to demonstrate their existence.

 

 

Indeed, given the nationalistic and secretive nature of Beijing’s government, the absence of confirmation can serve as further proof of just how devious its industrial policy is. If we can’t see many signs of it, that’s because it’s being hidden so well. Faced with such distortions, other nations have no choice but to retaliate — for instance, with the 45 per cent tariffs on Chinese electric vehicles that the European Union imposed last week.

 

That’s been buttressed by work from economists, analysts and think tanks in recent years. These are high-quality studies that have helped delineate the outlines of China’s absolutely genuine systems of state support. At the same time, though, a hasty reading of their conclusions has helped contribute to a sort of folk mythology now common among executives, analysts and policymakers: that China’s manufacturing prowess is purely a matter of rubbery state money.

 

Look through the accounts of the major export-oriented Chinese carmakers, and you can see how little the narrative matches reality. The main support that’s typically pointed to comes in three key areas: direct subsidies, generous tax treatment, and artificially cheap credit. Right now, there’s very little sign these are making a difference.  

 

Take direct subsidies. Listed Chinese companies disclose the value of these payments in their accounts, making it easy to do a rough comparison with breakdowns of spending in other countries, such as the Good Jobs First database in the US. There’s no question that the likes of BYD Co. and MG-owner SAIC Motor Corp. are receiving substantial benefits from the government to support their shift to electrification, but it’s not out of line with what is being paid out elsewhere, even after adjusting for the fact that money goes further in China.

 

For instance, the value of subsidies signed up by Volkswagen’s North America in 2023, per Good Jobs First, was greater than every cent declared by Chinese carmakers in the same fiscal year. Ford Motor Co. also received more than any single Chinese rival.

 

How about tax? It’s certainly the case that China offers generous concessional rates for companies whose businesses fulfil national objectives. Operate in a favored high-tech sector (such as electric cars) or base your factory in certain special investment zones, and you can cut your corporate income tax to 15 per cent, from the standard 25 per cent.  

 

It’s hard to jump through all the hoops necessary to take advantage of this, however — and accountants have some pretty slick ways of reducing the tax bills of their overseas rivals, too. Compare the actual taxes paid to their overseas competitors, and the Chinese often wind up paying more.

 

Perhaps, then, they’re taking advantage of soft loans? There’s plenty of these sloshing around in the Chinese economy, but that doesn’t mean they’re going to carmakers. Just 6 per cent of lending from the China Development Bank went to the entire manufacturing sector, as of 2020.

 

At the very least, cheap lending should leave some fingerprints on the balance sheets of the companies receiving it — but again, the evidence is missing. BYD, in particular, has some of the highest capital costs among major carmakers, likely because (in common with Tesla Inc.) it has spurned the advantages of tax-preferred debt, and funds itself largely through costlier equity:  

 

By supposing that the success of companies like BYD, SAIC and Geely Automobile Holdings Ltd. is entirely due to government support, we risk assuming the challenge they present is both easier, and harder to solve than it really is. If subsidies are the whole issue, there’s an easy solution: Western governments need to browbeat Beijing with tariffs until it zeroes them out. At the same time, it suggests they’re a harder-to-solve problem, too. Unless China drops the imagined subsidies, there’s nothing US and European carmakers can do to win back their lost competitiveness.

 

Auto executives, at least, show signs of resisting that defeatist narrative. In Europe, carmakers showed a dazzling range of affordable, interesting electric vehicle designs at the Paris auto show last month. In the US, Ford’s new mid-sized electric pickup is a game-changer that “matches the cost structure of any Chinese auto manufacturer building in Mexico in the future,” Chief Executive Officer Jim Farley told investors on an earnings call last week.

 

It would be good to see more of that spirit. China is a formidable competitor in the clean technology race, matching the net-zero commitment of the European Union to the fiscal power of the US, combined with a level of centralized policy direction and sheer economic scale that neither market can quite match. It’s not impregnable, however, and its rivals will be best-placed for the long term if they try to compete, rather than shutting themselves away behind tariff walls.

 

In its start-up stage, China’s EV industry certainly benefited from the support that every large economy has been (rightly) offering to clean technology as the world attempts to head off climate change. That world, however, has largely vanished. Pretending that it hasn’t badly misdiagnoses the problem.

 

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Disclaimer: This is a Bloomberg Opinion piece, and these are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper