The third post in our Great Power Competition (GPC) series takes a closer look at factors that make China's electric vehicle (EV) sector one of the more formidable global players. Domestically, the focus on EVs is part of a strategic shift away from the languishing property market and towards high-end manufacturing sectors in an effort to drive the country's future economic growth. At the same time, situated within the context of geopolitical tensions and trade wars, the strength of China's EV market continues to generate international headlines. Our recent tour of an EV factory in China sheds light on the country's delicate balancing act, galvanizing resources to support the development of a cutting-edge sector for the sake of its domestic economy while navigating growing international concern over unfair competition.1
EVs' Role in China's Growth Strategy
For more than a decade, China has made technological innovation in manufacturing part of a strategic push to promote industrial transformation in traditional manufacturing's inefficient, labor-intensive operating model. Its state-led strategic plan, "Made in China 2025" (MiC25), has stressed investment in innovation-driven manufacturing, with an emphasis on quality, green development, the optimization of industry structure, and the cultivation of human talent.2 In recent years, this top-down decision-making has given enterprises more room to invest in research and development (R&D). Consequently, since 2018, public and private Chinese enterprises have made significant investments in high-end EV manufacturing (Fig. 1; inclusive of R&D).
Figure 1
Share of Total Cumulative Venture Captial Investment in EV Technology Areas by Country or Region, 2018-2023*
Source: IEA analysis based on Cleantech Group i3 database as of March 2024.
*Includes both early- and growth-stage deals. The country or region is determined based on company headquarters and not the origin of investors. “Europe” includes European Union countries, Norway, Switzerland and the United Kingdom.
A New Type of Chinese Automaker
At its core, high-end EV manufacturing in China is built around the principles of MiC25 that emphasize "intelligent" production—i.e., applying technological tools in an attempt to create a fully-integrated production ecosystem.
ZEEKR Intelligent Technology Co., Ltd. (ZEEKR) is the EV subsidiary of Geely Automobile Holdings Ltd. and one of China's more prominent EV brands. Founded in March 2021, ZEEKR has a "co-creation and co-investment" business philosophy that works with global "ecological" partners.3 In 2021 and 2023, ZEEKR completed financing deals for $500 million and $750 million, respectively, to develop products and technologies, etc.4 Investors included entities such as Ningbo Tongshang Fund Management, Contemporary Amperex Technology Co. Limited (CATL),5 Yuexiu Industrial Fund, and Quzhou Xin'an Intelligent Manufacturing Fund. These suppliers specialize in various fields—e.g., in intelligent driving, batteries, materials, and advanced equipment manufacturing.
We visited ZEEKR's flagship factory, located in the Zhejiang province, for a glimpse into its operations.
Visit to ZEEKR's "Intelligent" EV Factory
ZEEKR's EV factory was put in operation in 2021 to manufacture its flagship EV model, ZEEKR 001 - a premium vehicle said to have more than 1.57 million customized configurations, targeting users who might want to switch from established European entry-level luxury brands. To accommodate the model's production requirements, the factory's design incorporates agile, interconnected manufacturing and intralogistics systems that emphasize the accuracy and timeliness of material distribution.
The day we visited, 700 workers were on the factory floor, mostly engaged in quality inspection. Most of the heavy assembly was handled by autonomous mobile robots (AMRs). In total, 300 AMRs were deployed in assembly, welding, and painting workshops. These AMRs were managed by a robot control system (RCS) which included flexible route planning functionality to avoid "traffic jams" and control material handling. This was purported to have improved labor efficiency by at least 20% and energy utilization rate by 15%.
Operating at a capacity utilization rate between 50% and 60%, ZEEKR's production stood at 480 vehicles per day (~200,000 vehicles per year).6 While capacity utilization was in-line with the average rate for China's automotive sector, it has declined from a high of ~78% a few years ago. For reference, Tesla produced 412,376 Model 3/ Model Y vehicles in Q1 of this year and lists its annual installed capacity for all Model 3/ Model Y vehicles at its Fremont, CA and Shanghai factories at more than 550,000 and 950,000, respectively.7
Changing Industry Structure through Public & Private Coordination
The high degree of coordination and integration amongst private enterprises, the local government, and state-owned enterprises supports the optimization of the EV sector. In ZEEKR's case, the factory was 5G-enabled throughout as it was built in cooperation with China Unicom Zhejiang, a state-owned telecommunications provider. In addition, Hikrobot, a subsidiary of the world's largest provider of video surveillance equipment (Hikvision), supplied the RCS managing the factory's AMRs.
Furthermore, the factory broke ground in 2018 and was commissioned within a very short timeframe. In fact, product deliveries began just three years after it broke ground. This was facilitated by a strategic agreement signed with the local government of Ningbo city, which cemented Ningbo as the locale for green technology and EV manufacturing.
On the demand side, central government subsidies to EV buyers and the loosening of license plate restrictions in key cities like Beijing smoothed the path for EV producers to get their product to market. These subsidies are also available to western EV makers that have set up shop in China, e.g. - Tesla, resulting in the country being one of the most competitive EV markets in the world.
China's Participation in the Global EV Market
Bolstered by public and private investments, China became the world's largest EV production base with ~6.7 million units made, which accounted for 58% of total global sales in 2022. By 2023, China's trade balance in the auto sector rose sharply by more than $30 billion, largely boosted by exports in motor vehicles - which had previously been negative.8
Currently, Chinese producers account for close to 20% of EV sales in Europe with the figure poised to reach 25% by the end of 2024 (Fig. 2 indicates the acceleration in exports). The sharp rise in Chinese EV exports has elicited cries of unfair competition from the U.S. and the EU as prices are often lower due to the lower cost of financing and indirect government subsidies into the sector. Indeed, a major Japanese automaker cut its annual profit forecast by 20% for the current year amid its plans to invest in artificial intelligence and its EV segment in order to better compete with China.
Figure 2
Chinese Battery Electric Vehicle Exports by Region ($B)
Source: Atlantic Council
ZEEKR's Planned Expansion & IPO
Located near neighboring ports and logistics facilities for ease of exports, ZEEKR plans to expand into six European markets in 2024 and is targeting another 38 markets across Southeast Asia and the Middle East. To date, the majority of ZEEKR's output is still being funneled into the domestic market.
To help finance its expansion, ZEEKR (ZK) went public on the NASDAQ in early May of this year. The timeframe for ZEEKR's IPO was three years compared to seven years for Tesla. Post visit, we learned that ZEEKR's valuation was sharply reduced by ~50% in its last funding round. This was likely due to concerns over the intense price competition in the global EV market as well as additional restrictions and tariffs to be levied on Chinese producers. For example, the U.S. has imposed restrictions on the export of lithography machines for chipmaking to China through third-party channels.9 In addition, following the completion of an anti-subsidy investigation that started in the fall of last year, the European Commission (EC) announced on June 18th that it would impose additional tariffs on EV imports from China, effective July 4th. ZEEKR's parent company, Geely, was among the automakers singled out by the EC. Tariffs ranged from 17.4% to 38.1%. Companies that did not cooperate would be hit with a 38.1% tariff.
A Broader Look at the EV Ecosystem
Despite being perceived as a threat to automakers in the developed world, the EV ecosystem in China is still reliant on imports. To illustrate, ZEEKR's factory imports ranged from high-end leather substitutes created by Italian fabric maker, Alcantara, to basic semi-conductor chips from Israel that power the operating systems of the EVs.
With that stated, the major cost component of EV manufacturing remains the battery, an arena where China commands a competitive advantage, given the dominance of the home-grown global battery giant CATL. Batteries are responsible for up to 40% of the cost of making an EV. To build out its EV ecosystem, China has invested heavily in bringing the previously less favored lithium iron phosphate battery (LFP) up-to-date in energy performance, thus lowering production costs. From a trading perspective, the U.S., in particular, is heavily dependent on China for lithium batteries, with a dependence ratio of 70.5% as of 2023. In addition, further up the supply chain, China also controls most of the world's refinery capacity for critical materials like cobalt, nickel sulfate, lithium hydroxide, and graphite.
Conclusion
China has been able to make technological leaps within the EV sector in just a few years. Our visit demonstrated just how effectively the government can marshal public and private resources to support targeted economic revitalization. While the EV sector may provide a promising blueprint on how to implement reforms that promote high-quality production and Chinese modernization, the country still has more to do to stimulate the economy long-term - e.g., replacing jobs lost in the thorny property sector and encouraging consumer spending.
Nevertheless, it is difficult for other countries to replicate China's highly integrated supply chain and logistics channels in the EV sector. As noted in our U.S.-China Competition Through Four Lenses blog, a key objective of MiC25 is to dominate advanced technologies of the future. In other words, through substantive investments and coordination, the government has sought to make prioritized industries more efficient and integrated. Potentially, this could help to enable producers to occupy the highest positions within global production chains.
With that stated, China remains deeply integrated in the global economic system, thus offering the U.S. (and the West) significant leverage. The latest EV-related restrictions and tariffs by the U.S. and EC demonstrate global production interdependence with no clear victors. Although moves by the U.S. and EC indicate a more hawkish approach towards China by current policymakers, China has responded with threats to impose tariffs of its own, which would affect agriculture, aviation, as well as cars with large engines.
1 This trip was organized by a sell-side institution. The descriptions and photos herein are used with permission from the entities involved. The views expressed herein are our own.
2 Source: Made in China 2025 (csis.org). Adopted in 2015.
3 Source: Zhejiang Geely Holding Group Co.
4 Sources: 2023 Press Release by Zhejiang Geely Holding Group Co. and 2021 Press Release by Zhejiang Geely Holding Group Co.
5 A Chinese battery-maker and supplier to Tesla.
6 Ratio of production to past investment(s). As of May 2024, Germany’s capacity utilization rate hovered around 80% in the auto sector.
7 Tesla Q1 2024 Update. "Installed capacity" refers to the maximum productive capacity according to the manufacturers' specification of machines / equipment.
8 Source: UN Comtrade and UBS estimates.
9 Source: China Daily. New focus boosting global supply chains.
Source(s) of data (unless otherwise noted): PGIM Fixed Income, as of June 28, 2024.
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