The electric shock behind Europe’s stuttering EV future – and how China has leapfrogged major car-exporting nations
Across Europe, car companies are cutting jobs and shutting factories – to the extent that some question their very existence. So it’s worth asking the question: what’s gone wrong with Europe (and for that matter America’s) car industry?
While some will reach for their own pet conclusions (Brexit! Electric vehicle deadlines! Government regulations!) in practice there’s something bigger, deeper and less parochial going on here. As the world shifts from petrol and diesel cars to their electric counterparts, a seismic shift is taking place in the global motor industry.
It is a shift which threatens to cause even more pain and disruption at carmakers in developed economies. And given most of these countries’ high-skilled and highly-paid manufacturing jobs are to be found in or around the car-making sector, this is no trivial matter.
A Chinese-made BYD Seagull electric car on display in Bangkok. Pic: Anusak Laowilas/NurPhoto/Shutterstock
Look at a chart of global car exports and you see a very striking sight indeed.
The lines for the traditional car-making countries – Japan, Germany, South Korea – are more or less flat, save 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 car trade with barely 250,000 car exports each year, has suddenly launched into the stratosphere. In the space of barely two years, it has leapfrogged all the other major car-exporting nations to become the world’s biggest car exporter – in terms of the sheer number of cars.
This arresting chart might give you the impression that Chinese dominance is a very recent thing – a sudden and unexpected spurt. Except that that’s somewhat misleading, because this shift has been a long time coming. To see why, it helps (strange as this will sound) to ponder the innards of a typical car.
A conventional petrol or diesel car is an assembly of lots of different components. There’s the radiator, the exhaust pipe, the wheels and the brakes, but most of all, there is the engine. An internal combustion engine is – even in 2024 – an extraordinary piece of machinery. We take these things for granted (and, given their carbon emissions, some sneer at them). But the ability to take fuel and explode it in a controlled way that turns wheels remains a great mechanical achievement.
To be able to make these engines – contraptions of many different parts, each of which undergoes enormous stresses – at a low cost and in a way that ensures their long-term reliability is all the more impressing an achievement.
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Indeed, making reliable engines was such an enormous industrial challenge that it defied China for most of the past century. Part of the reason Chinese car exports were so low for so long was because China struggled to make decent engines.
So it won’t surprise you to learn that the engine is comfortably the most expensive component in a typical car – accounting for more than a fifth of the total value of a car. Much of Britain and Europe’s car industry is focused on this 21% of the car value – because that’s where our expertise has been built up over decades.
Taking bits of steel and combining them into this complex contraption is part of the industrial story of Europe (and America). Millions of people are employed across Europe working either at carmakers or their suppliers making these engines. This is where some of the best-paid, highest-skilled manufacturing jobs are to be found, even today in 2024.
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But here’s the critical thing. 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 to making an engine. It’s chemical engineering – not mechanical engineering. The skills built up by European carmakers over decades are simply not directly transferrable. Even if Europe was the only continent in the world making cars, it would still be an almighty challenge to shift from one industrial model to a very different one, without having a rollercoaster ride along the way.
But Europe’s problem (and America’s and South Korea and Japan’s too) is that it’s not alone in making cars. China, which struggled to compete on those car engines decades ago, has been investing in electric carmaking for some time.
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In doing so, it has been helped by subsidies far more generous than those their Western competitors tend to receive (nearly all carmakers get subsidies – one way or another). Beijing has long been determined both to dominate this next phase of car production and reduce its reliance on Middle Eastern oil imports – both of which point towards mass electrification of road transport.
And those subsidies – alongside cheap energy costs helped by China’s relaxed attitude towards coal-fired power – are one part of the explanation for why China has been able to produce cars with far cheaper costs than their Western competitors. Analysts from Swiss bank UBS recently tried to break down the costs of a German-produced VW ID3 compared with the component costs of a Chinese car, the BYD Seal.
They found that the BYD was cheaper to produce – not just overall, but for every single component part. And since it was far cheaper to produce, that meant it could be sold at far cheaper rates.
Some of that is explained by state aid but, even more so, it’s a consequence of something else. China’s interest in batteries is not a recent trend. It has been investing in their production for many, many years. It has been attempting to dominate not just the production of cells but also of the cathodes and anodes that go inside them – not to mention the chemicals used to make those electrodes. It has been firming up the entire supply chain – all the way down to the mines. And while you can find only so much lithium and cobalt in China, Chinese firms have been buying up mines in Africa and elsewhere for years.
The upshot is that China is the dominant country not just in the production of EVs and the cells inside them but in nearly every component that goes inside those cells. If you want to make a battery today you will be hard pressed not to use at least some Chinese technology or products. It’s that dominant.
The late business writer Clay Christensen coined the term “disruptive innovation” to describe moments like this. When a new technology comes along that completely changes the industrial structure in a sector, it’s incredibly difficult for the incumbent businesses to respond and adapt. They simply aren’t set up for it. Think about how digital photography displaced traditional film, or how smartphones have displaced traditional computers.
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What makes this moment so tricky for European carmakers is that they are trying to compete with a disruptive innovation which has been supercharged by Chinese industrial strategy. The upshot is that China is so far ahead on battery production – particularly of low-cost batteries – that it’s hard to see how Europe and America – and, to some extent, South Korea and Japan, can catch up.
All of which is why so many countries are reaching for the most drastic of all economic remedies: large, expensive tariffs on imports of Chinese EVs. The US and Canada have imposed 100% tariffs, India is following suit with similar rates. Europe has introduced a sliding range of extra tariffs. Japan has yet to do so, but is protected to some extent by the fact that their consumers habitually typically buy Japanese.
The main outlier here is the UK. This country has not yet imposed any extra tariffs on Chinese imports. The upshot is that this is one of the most attractive places in the world for Chinese producers to market their cars right now – and one of the cheapest places to buy a Chinese car. But that has profound consequences for domestic car producers.
With energy costs having risen so much, it is getting harder, rather than easier, to compete with Chinese production domestically. It raises profound questions about the ability of this country’s car industry to survive or compete.
The logic of these transitions is that they often move in slow motion but become quite self-fulfilling. Britain and Europe had opportunities to invest in batteries in years gone by; they have been spectacularly slow-moving in setting up new supply chains. But the cards were always stacked against them. The coming years will probably get tougher, as the 2035 EV deadline approaches, pushing consumers towards a market which is becoming ever more dominated by one country.
Did the chancellor mislead the public, and her own cabinet, before the budget?
It’s a good question, and we’ll come to it in a second, but let’s begin with an even bigger one: is the prime minister continuing to mislead the public over the budget?
The details are a bit complex but ultimately this all comes back to a rather simple question: why did the government raise taxes in last week’s budget? To judge from the prime minister’s responses at a news conference just this morning, you might have judged that the answer is: “because we had to”.
“There was an OBR productivity review,” he explained to one journalist. “The result of that was there was £16bn less than we might otherwise have had. That’s a difficult starting point for any budget.”
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Beth Rigby asks Keir Starmer if he misled the public
Time and time again throughout the news conference, he repeated the same point: the Office for Budget Responsibility had revised its forecasts for the UK economy and the upshot of that was that the government had a £16bn hole in its accounts. Keep that figure in your head for a bit, because it’s not without significance.
But for the time being, let’s take a step back and recall that budgets are mostly about the difference between two numbers: revenues and expenditure; tax and spending. This government has set itself a fiscal rule – that it needs, within a few years, to ensure that, after netting out investment, the tax bar needs to be higher than the spending bar.
At the time of the last budget, taxes were indeed higher than current spending, once the economic cycle is taken account of or, to put it in economists’ language, there was a surplus in the cyclically adjusted current budget. The chancellor had met her fiscal rule, by £9.9bn.
Pic: Reuters
This, it’s worth saying, is not a very large margin by which to meet your fiscal rule. A typical budget can see revisions and changes that would swamp that in one fell swoop. And part of the explanation for why there has been so much speculation about tax rises over the summer is that the chancellor left herself so little “headroom” against the rule. And since everyone could see debt interest costs were going up, it seemed quite plausible that the government would have to raise taxes.
Then, over the summer, the OBR, whose job it is to make the official government forecasts, and to mark its fiscal homework, told the government it was also doing something else: reviewing the state of Britain’s productivity. This set alarm bells ringing in Downing Street – and understandably. The weaker productivity growth is, the less income we’re all earning, and the less income we’re earning, the less tax revenues there are going into the exchequer.
The early signs were that the productivity review would knock tens of billions of pounds off the chancellor’s “headroom” – that it could, in one fell swoop, wipe off that £9.9bn and send it into the red.
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That is why stories began to brew through the summer that the chancellor was considering raising taxes. The Treasury was preparing itself for some grisly news. But here’s the interesting thing: when the bad news (that productivity review) did eventually arrive, it was far less grisly than expected.
True: the one-off productivity “hit” to the public finances was £16bn. But – and this is crucial – that was offset by a lot of other, much better news (at least from the exchequer’s perspective). Higher wage inflation meant higher expected tax revenues, not to mention a host of other impacts. All told, when everything was totted up, the hit to the public finances wasn’t £16bn but somewhere between £5bn and £6bn.
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Budget winners and losers
Why is that number significant? Because it’s short of the chancellor’s existing £9.9bn headroom. Or, to put it another way, the OBR’s forecasting exercise was not enough to force her to raise taxes.
The decision to raise taxes, in other words, came down to something else. It came down to the fact that the government U-turned on a number of its welfare reforms over the summer. It came down to the fact that they wanted to axe the two-child benefits cap. And, on top of this, it came down to the fact that they wanted to raise their “headroom” against the fiscal rules from £9.9bn to over £20bn.
These are all perfectly logical reasons to raise tax – though some will disagree on their wisdom. But here’s the key thing: they are the chancellor and prime minister’s decisions. They are not knee-jerk responses to someone else’s bad news.
Yet when the prime minister explained his budget decisions, he focused mostly on that OBR report. In fact, worse, he selectively quoted the £16bn number from the productivity review without acknowledging that it was only one part of the story. That seems pretty misleading to me.
Sir Keir Starmer has denied he and the chancellor misled the public and the cabinet over the state of the UK’s public finances ahead of the budget.
The prime minister told Sky News’ political editor Beth Rigby “there was no misleading”, following claims he and Rachel Reeves deliberately said public finances were in a dire state, when they were not.
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He said a productivity review by the Office for Budget Responsibility (OBR), which provides fiscal forecasts to the government, meant there would be £16bn less available so the government had to take that into account.
“To suggest that a government that is saying that’s not a good starting point is misleading is wrong, in my view,” Sir Keir said.
Cabinet ministers have said they felt misled by the chancellor and prime minister, who warned public finances were in a worse state than they thought, so they would have to raise taxes, including income tax, which they had promised not to in the manifesto.
At last Wednesday’s budget, Ms Reeves unveiled a record-breaking £26bn in tax rises.
The OBR published the forecasts it provided to the chancellor in the two months before the budget, which showed there was a £4.2bn headroom on 31 October – ahead of that warning about possible income tax rises on 4 November.
The OBR’s timings and outcomes of the fiscal forecasts reported to the Treasury
Sir Keir added: “There was a point at which we did think we would have to breach the manifesto in order to achieve what we wanted to achieve.
“Late on, it became possible to do it without the manifesto breach. And that’s why we came to the decisions that we did.”
Sir Keir said a productivity review had not taken place in 15 years and questioned why it was not done at the end of the last government, as he blamed the Conservatives for the OBR downgrading medium-term productivity growth by 0.3 percentage points to 1% at the end of the five-year forecast.
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‘Of course I didn’t lie about budget forecasts, says chancellor
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Reeves: I didn’t lie about ‘tax hikes’
The prime minister added: “I wanted to more than double the headroom, and to bear down on the cost of living, because I know that for families and communities across the country, that is the single most important issue, I wanted to achieve all those things.
“Starting that exercise with £16 billion less than we might otherwise have had. Of course, there are other figures in this, but there’s no pretending that that’s a good starting point for a government.”
On Sunday, when asked by Sky’s Trevor Phillips if she lied, Ms Reeves said: “Of course I didn’t.”
She also said the OBR’s downgrade of productivity meant the forecast for tax receipts was £16bn lower than expected, so she needed to increase taxes to create fiscal headroom.
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