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China’s electric vehicle industry, which has been thriving, may not be able to replicate the offshoring strategy that helped Toyota Motor Corp (NYSE:TM) and Honda Motor Co Ltd (NYSE:HMC) achieve global success, according to an expert.
What Happened: Alicia Garcia-Herrero, a senior research fellow at the Brussels-based economic think tank Bruegel, and the chief economist for Asia-Pacific at investment bank Natixis in Hong Kong, wrote an opinion piece for Nikkei Asia on Tuesday.
She pointed out that the offshoring strategy that helped Japanese automakers in the 1980s might not be as effective for China’s EV industry.
Garcia-Herrero explained that the success of China’s EV industry can be attributed to a combination of factors including industrial policy, hard work, a competitive environment, and technological transfer from foreign companies. However, she warned that the industry faces growing risks, including protectionism and a potential delay in countries’ decarbonization paths.
The reduction of subsidies post-COVID and a sluggish economic recovery have shifted focus towards exports, as per Garcia-Herrero. In 2023, Chinese EV exports surged by 22%, compared to a 2.7% increase in 2019.
She noted that the offshoring strategy that helped Japanese automakers in the 1980s might not be as effective for China’s EV industry due to several reasons. Firstly, labor costs in Japan were much higher in the 1980s than they are now in China, which made offshoring production more attractive to Japanese automakers.
Secondly, China is facing a shortage of jobs now with high youth unemployment, while Japan was in full employment with an overheated labor market. Thirdly, China’s ecosystem in terms of suppliers and trade infrastructure, coupled with many trade agreements, makes it easy for the nation to export, possibly more so than for Japan in the 1980s.
Finally, China is facing protectionism when it comes to setting up plants in other countries, which reduces the choices of the markets where it can be located.
“China would find it cheaper and more efficient to produce overseas but geopolitical reasons push against the offshoring argument. All in all, it appears that China’s “flying geese” will fly less than the Japanese ones of the 1980s, at least for the time being,” Garcia-Herrero wrote.
See Also: What’s Going On With Lucid Group Stock On Tuesday?
Why It Matters: The Chinese EV industry has been facing a series of challenges in recent times. The European Union, China’s largest export market for EVs, recently imposed countervailing duties on Chinese EVs, citing unfair state subsidies. This move was met with strong opposition from China, which vowed to take all necessary measures to safeguard its EV industry.
On the other hand, the European Union slashed tariffs on electric cars made by Tesla Inc. (NASDAQ:TSLA) in China, setting them significantly lower than those imposed on other electric car manufacturers. This move could potentially reshape the electric car market in the region.
Earlier in the year, Japanese automakers Toyota and Nissan partnered with Chinese tech giants Tencent and Baidu to enhance their artificial intelligence capabilities in China. However, this move was overshadowed by a certification test scandal that affected other Japanese automakers as well.
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Image Via Shutterstock
This story was generated using Benzinga Neuro and edited by Kaustubh Bagalkote
