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China\u2019s world-dominating EV sector hit two major milestones last year. First, China overtook Japan<\/a> as the world\u2019s largest car exporter, thanks in part to affordable Chinese EVs. And second, EV giant BYD briefly overtook Tesla as the world\u2019s largest seller<\/a> of battery electric cars in the final quarter of 2023. (Tesla has since retaken first place<\/a>.)<\/p>\n But the threat of a flood of cheap EVs is spooking foreign governments. The European Union launched an anti-subsidy probe<\/a> against Chinese EV companies last year, which could result in higher tariffs for Chinese EVs. The U.S.\u2014which deems Chinese cars a national security threat<\/a>\u2014is warning that \u201cexcess capacity<\/a>\u201d in China could overwhelm world markets.<\/p>\n But at the Fortune Innovation Forum in Hong Kong last week, Roger Atkins, founder of Electric Vehicles Outlook, an EV consultancy, noted that previous car exporters found a way to manage protectionist backlash. <\/p>\n \u201cWe\u2019ve been here before,\u201d Atkins said. \u201cJapan had its export onslaught in the U.S. and Europe back in the 1970s and 1980s. The Europeans and Americans imposed tariffs, and then the way the Japanese got around that was to embed production plants in those locations.\u201d\u00a0<\/p>\n Atkins then pointed to BYD\u2019s new plant in Hungary as an example of how the Chinese carmaker is now expanding its global manufacturing footprint. (BYD is also building factories in Thailand<\/a> and Brazil<\/a>, and is considering new manufacturing facilities in Indonesia<\/a> and Mexico<\/a>.)\u00a0<\/p>\n Christopher Beddor, deputy China research director at Gavekal, saw parallels to earlier Beijing-led campaigns to encourage the solar and wind power industries.\u00a0\u201cChina is essentially doubling down on industrial policy,\u201d he said. <\/p>\n \u201cThe central leadership will say: We want to target a certain industry. Everyone focuses on that, it\u2019s conducted in a campaign style,\u201d he later explained. <\/p>\n Beijing is now starting to worry about overcapacity in the system, with one official in early January promising to take \u201cforceful measures<\/a>\u201d to address new EV projects that weren\u2019t supported by demand.\u00a0<\/p>\n This push-and-pull is part of China\u2019s industrial playbook, Beddor said. \u201c[Officials] go forward, [then] at some point, there\u2019s a recognition [they\u2019ve] gone too far. They pull it back,\u201d he said. <\/p>\n Beijing started offering tax and infrastructure incentives in the early 2010s, helping to foster as many as 500 EV companies at one point. That number has since come down to about 100 companies.<\/p>\n China is now rolling back its support for the sector, which could lead to further consolidation in the sector as EV companies, many of which have yet to make a profit, exit the market.<\/p>\n Yet Paul Gong, executive director of autos research at UBS, said at the Forum last week that the \u201cfierce competition\u201d in the sector\u2014between startups<\/a>, legacy automakers<\/a>, and even tech giants<\/a>\u2014has been good for the industry.\u00a0<\/p>\n Thanks to market competition, China\u2019s \u201ccarmakers have really brought down the EV cost on par versus [internal combustion engines],\u201d he said. \u201cIt is this market force that has brought the innovation [and] efficiency game.\u201d<\/p>\n Gong, at the Forum last week, also discussed the differences between BYD and Tesla, both battling for the position of the world\u2019s top EV seller.<\/p>\n After a teardown of the Tesla Model 3 five years ago, Gong said the UBS team was \u201cshocked how much Tesla was ahead in terms of technology leadership.\u201d Yet a similar teardown of a BYD car, just a few years later, revealed the company\u2019s level of technological sophistication was approaching Tesla\u2019s.<\/p>\n \u201cThere is little gap [in] technology, but just different priorities,\u201d he said. Tesla prioritized top speed and autonomous driving, while BYD focused on space and 5G connectivity, he continued.\u00a0<\/p>\n Yet Gong noted one critical difference: a BYD car, comparable to the Model 3, cost 15% less than production in Tesla\u2019s Shanghai Gigafactory. <\/p>\n Unlike Tesla, BYD makes its own proprietary battery, the Blade Battery, and so does not have to rely on an external supplier like CATL or LG Energy Solutions. (The battery can make up as much as 40% of an EV\u2019s cost.)<\/p>\n \u201cWe were shocked at how fast BYD has caught up,\u201d Gong said.\u00a0<\/p>\n<\/div>\n\nBYD and Tesla<\/strong><\/h2>\n