EVs and the changing China auto sector

The nascent China auto sector services the largest car market in the world, a region which accounts for a third of the world’s passenger car sales. It is one of the most profitable markets for global brands as well, despite the strict policies, as per Baillie Gifford.

“The introduction of state subsidies for electric vehicles (EVs) in 2009 hoped to reposition China’s auto industry and strategically reduce the nation’s long-term carbon emissions,” writes the investment management firm. In 2019, Tesla became the first foreign brand to get these incentives, which in hindsight was supposed to improve competition and catalyse innovation from domestic firms.

Elon Musk’s Tesla was reportedly sourcing 90% of all car parts locally, which exponentially improved the EV parts supplier quality and quantity. Baillie Gifford talks about CATL, Wuxi Lead Intelligent and Yunnan New Energy in its insights report.

Meanwhile, Tesla’s strong branding has seen domestic brands such as BYD, NIO, and Li Auto riding on the US firm’s success. “This may mark the beginning of more Chinese names establishing themselves in the top tier of the market – not just new EV companies but also domestic brands that had previously only been able to sell to the lower end of the market,” writes Baillie Gifford, adding that AI, semiconductors, software, and other companies are now key to the China auto industry.

While new companies such as TSMC and Hua Hong have emerged, Baillie Gifford says that the traditional auto sector must overhaul its supply chain and that the window to rebuild it won’t be open for long. “This presents a challenge. It takes time for new entrants to prove their capabilities and product durability before their qualities become recognised by the wider global industry,” says the asset manager.

View the full insight here.