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.
For the most part, when people think about the Bank of England and what it does to control the economy, they think about interest rates.
And that’s quite understandable. After all, influencing inflation by raising or lowering the prevailing borrowing costs across the UK has been the Bank’s main tool for the vast majority of its history. There are data series on interest rates in the Bank’s archives that go all the way back to its foundation in 1694.
But depicting the Bank of England as being mostly about interest rates is no longer entirely true. For one thing, these days it is also in charge of regulating the financial system. And, even more relevant for the wider economy, it is engaged in another policy with enormous consequences – both for the markets and for the public purse. But since this policy is pretty complex, few outside of the financial world are even aware of it.
Money latest: What interest rate hold means for you
That project is quantitative easing (QE) or, as it’s better known these days, quantitative tightening (QT).
You might recall QE from the financial crisis. It was, in short, what the Bank did when interest rates went down to zero and it needed an extra tool to inject some oomph into the economy.
That tool was QE. Essentially it involved creating money (printing it electronically) to buy up assets. The idea was twofold: first, it means you have more money sloshing around the economy – an important concept given the Great Depression of the 1930s had been associated with a sudden shortage of money. Second, it was designed to try to bring down the interest rates prevailing in financial markets – in other words, not the interest rate set by the Bank of England but the yields on long-dated bonds like the ones issued by the government.
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Bank of England’s decision in 90 seconds
So the Bank printed a lot of money – hundreds of billions of pounds – and bought hundreds of billions worth of assets. It could theoretically have spent that money on anything: stocks, shares, debt, housing. I calculated a few years ago that with the sums it forked out, it could theoretically have bought every home in Scotland.
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Did Oasis cause a spike in inflation?
But the assets it chose to buy were not Scottish homes but government bonds, mostly, it said back at the time (this was 2009) because they were the most available liquid asset out there. That had a couple of profound consequences. The first was that from the very beginning QE was a technical policy most people didn’t entirely understand. It was all happening under the radar in financial markets. No one, save for the banks and funds selling government bonds (gilts, as they’re known) ever saw the money. The second consequence is that we’re starting to reckon with today.
Roll on a decade-and-a-half and the Bank of England had about £895bn worth of bonds sitting on its balance sheet, bought during the various spurts of QE – a couple of spurts during the financial crisis, another in the wake of the EU referendum and more during COVID. Some of those bonds were bought at low prices but, especially during the pandemic, they were bought for far higher prices (or, since the yield on these bonds moves in opposite directions to the price, at lower yields).
Then, three years ago, the Bank began to reverse QE. That meant selling off those bonds. And while it bought many of those bonds at high prices, it has been selling them at low prices. In some cases it has been losing astounding amounts on each sale.
Take the 2061 gilt. It bought a slug of them for £101 a go, and has sold them for £28 a piece. Hence realising a staggering 73% loss.
Tot it all up and you’re talking about losses, as a result of the reversal of QE, of many billions of pounds. At this point it’s worth calibrating your sense of these big numbers. Broadly speaking, £10bn is a lot of money – equivalent to around an extra penny on income tax. The fiscal “black hole” Rachel Reeves is facing at the forthcoming budget is, depending on who you ask, maybe £20bn.
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UK long-term borrowing costs hit 27-year high
Well, the total losses expected on the Bank of England’s Quantitative Tightening programme (“tightening” because it’s the opposite of easing) is a whopping £134bn, according to the Office for Budget Responsibility.
Now it’s worth saying first off that, as things stand at least, not all of those losses have been crystallised. But over time it is expected to lose what are, to put it lightly, staggering sums. And they are sums that are being, and will be paid, by British taxpayers in the coming years and decades.
Now, if you’re the Bank of England, you argue that the cost was justifiable given the scale of economic emergency faced in 2008 and onwards. Looking at it purely in terms of fiscal losses is to miss the point, they say, because the alternative was that the Bank didn’t intervene and the UK economy would have faced hideous levels of recession and unemployment in those periods.
However, there’s another, more subtle, critique, voiced recently by economists like Christopher Mahon at Columbia Threadneedle Investments, which is that the Bank has been imprudent in its strategy of selling off these assets. They could, he argues, have sold off these bonds less quickly. They could, for that matter, have been more careful when buying assets not to invest too wholeheartedly in a single class of asset (in this case government bonds) that might be sensitive in future to changes in interest rates.
Most obviously, there are other central banks – most notably the Federal Reserve and European Central Bank – that have refrained from actively selling the bonds in their QE portfolios. And, coincidentally or not, these other central banks have incurred far smaller losses than the Bank of England. Or at least it looks like they have – trying to calculate these things is fiendishly hard.
But there’s another consequence to all of this as well. Because if you’re selling off a load of long-dated government bonds then, all else equal, that would have the tendency to push up the yields on those bonds. And this brings us back to the big issue so many people are fixated with right now: really high gilt yields. And it so happens that the very moment Britain’s long-term gilt yields began to lurch higher than most other central banks was the moment the Bank embarked on quantitative tightening.
But (the plot thickens) that moment was also the precise moment Liz Truss’s mini-budget took place. In other words, it’s very hard to unpick precisely how much of the divergence in British borrowing costs in recent years was down to Liz Truss and how much was down to the Bank of England.
Either way, perhaps by now you see the issue. This incredibly technical and esoteric economic policy might just have had enormous consequences. All of which brings us to the Bank’s decision today. By reducing the rate at which it’s selling those bonds into the market and – equally importantly – reducing the proportion of long-dated (eg 30 year or so) bonds it’s selling, the Bank seems to be tacitly acknowledging (without actually quite acknowledging it formally) that the plan wasn’t working – and it needs to change track.
However, the extent of the change is smaller than many would have hoped for. So questions about whether the Bank’s QT strategy was an expensive mistake are likely to get louder in the coming months.
For the most part, when people think about the Bank of England and what it does to control the economy, they think about interest rates.
And that’s quite understandable. After all, influencing inflation by raising or lowering the prevailing borrowing costs across the UK has been the Bank’s main tool for the vast majority of its history. There are data series on interest rates in the Bank’s archives that go all the way back to its foundation in 1694.
But depicting the Bank of England as being mostly about interest rates is no longer entirely true. For one thing, these days it is also in charge of regulating the financial system. And, even more relevant for the wider economy, it is engaged in another policy with enormous consequences – both for the markets and for the public purse. But since this policy is pretty complex, few outside of the financial world are even aware of it.
Money latest: What interest rate hold means for you
That project is quantitative easing (QE) or, as it’s better known these days, quantitative tightening (QT).
You might recall QE from the financial crisis. It was, in short, what the Bank did when interest rates went down to zero and it needed an extra tool to inject some oomph into the economy.
That tool was QE. Essentially it involved creating money (printing it electronically) to buy up assets. The idea was twofold: first, it means you have more money sloshing around the economy – an important concept given the Great Depression of the 1930s had been associated with a sudden shortage of money. Second, it was designed to try to bring down the interest rates prevailing in financial markets – in other words, not the interest rate set by the Bank of England but the yields on long-dated bonds like the ones issued by the government.
So the Bank printed a lot of money – hundreds of billions of pounds – and bought hundreds of billions worth of assets. It could theoretically have spent that money on anything: stocks, shares, debt, housing. I calculated a few years ago that with the sums it forked out, it could theoretically have bought every home in Scotland.
Please use Chrome browser for a more accessible video player
Did Oasis cause a spike in inflation?
But the assets it chose to buy were not Scottish homes but government bonds, mostly, it said back at the time (this was 2009) because they were the most available liquid asset out there. That had a couple of profound consequences. The first was that from the very beginning QE was a technical policy most people didn’t entirely understand. It was all happening under the radar in financial markets. No one, save for the banks and funds selling government bonds (gilts, as they’re known) ever saw the money. The second consequence is that we’re starting to reckon with today.
Roll on a decade-and-a-half and the Bank of England had about £895bn worth of bonds sitting on its balance sheet, bought during the various spurts of QE – a couple of spurts during the financial crisis, another in the wake of the EU referendum and more during COVID. Some of those bonds were bought at low prices but, especially during the pandemic, they were bought for far higher prices (or, since the yield on these bonds moves in opposite directions to the price, at lower yields).
Then, three years ago, the Bank began to reverse QE. That meant selling off those bonds. And while it bought many of those bonds at high prices, it has been selling them at low prices. In some cases it has been losing astounding amounts on each sale.
Take the 2061 gilt. It bought a slug of them for £101 a go, and has sold them for £28 a piece. Hence realising a staggering 73% loss.
Tot it all up and you’re talking about losses, as a result of the reversal of QE, of many billions of pounds. At this point it’s worth calibrating your sense of these big numbers. Broadly speaking, £10bn is a lot of money – equivalent to around an extra penny on income tax. The fiscal “black hole” Rachel Reeves is facing at the forthcoming budget is, depending on who you ask, maybe £20bn.
Please use Chrome browser for a more accessible video player
UK long-term borrowing costs hit 27-year high
Well, the total losses expected on the Bank of England’s Quantitative Tightening programme (“tightening” because it’s the opposite of easing) is a whopping £134bn, according to the Office for Budget Responsibility.
Now it’s worth saying first off that, as things stand at least, not all of those losses have been crystallised. But over time it is expected to lose what are, to put it lightly, staggering sums. And they are sums that are being, and will be paid, by British taxpayers in the coming years and decades.
Now, if you’re the Bank of England, you argue that the cost was justifiable given the scale of economic emergency faced in 2008 and onwards. Looking at it purely in terms of fiscal losses is to miss the point, they say, because the alternative was that the Bank didn’t intervene and the UK economy would have faced hideous levels of recession and unemployment in those periods.
However, there’s another, more subtle, critique, voiced recently by economists like Christopher Mahon at Columbia Threadneedle Investments, which is that the Bank has been imprudent in its strategy of selling off these assets. They could, he argues, have sold off these bonds less quickly. They could, for that matter, have been more careful when buying assets not to invest too wholeheartedly in a single class of asset (in this case government bonds) that might be sensitive in future to changes in interest rates.
Most obviously, there are other central banks – most notably the Federal Reserve and European Central Bank – that have refrained from actively selling the bonds in their QE portfolios. And, coincidentally or not, these other central banks have incurred far smaller losses than the Bank of England. Or at least it looks like they have – trying to calculate these things is fiendishly hard.
But there’s another consequence to all of this as well. Because if you’re selling off a load of long-dated government bonds then, all else equal, that would have the tendency to push up the yields on those bonds. And this brings us back to the big issue so many people are fixated with right now: really high gilt yields. And it so happens that the very moment Britain’s long-term gilt yields began to lurch higher than most other central banks was the moment the Bank embarked on quantitative tightening.
But (the plot thickens) that moment was also the precise moment Liz Truss’s mini-budget took place. In other words, it’s very hard to unpick precisely how much of the divergence in British borrowing costs in recent years was down to Liz Truss and how much was down to the Bank of England.
Either way, perhaps by now you see the issue. This incredibly technical and esoteric economic policy might just have had enormous consequences. All of which brings us to the Bank’s decision today. By reducing the rate at which it’s selling those bonds into the market and – equally importantly – reducing the proportion of long-dated (eg 30 year or so) bonds it’s selling, the Bank seems to be tacitly acknowledging (without actually quite acknowledging it formally) that the plan wasn’t working – and it needs to change track.
However, the extent of the change is smaller than many would have hoped for. So questions about whether the Bank’s QT strategy was an expensive mistake are likely to get louder in the coming months.
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