ArrowArtboardCreated with Sketch.Title ChevronTitle ChevronIcon FacebookIcon LinkedinIcon Mail ContactPath LayerIcon MailPositive ArrowIcon PrintIcon Twitter

Why China welcomes the pain Tesla brings

Generous policy expected to reap spillover benefits like Apple created

China has permitted Tesla to establish wholly owned operations and made its domestically produced vehicles eligible for subsidies.   © Reuters

HONG KONG -- When China allowed Elon Musk to set up the Tesla Gigafactory in Shanghai in 2018, it was as if a big catfish had just been dropped into a placid pond. Homegrown electric vehicle manufacturers were suddenly in mortal danger. The introduction of the industry's apex predator signaled an existential challenge. 

To make matters worse, Tesla had taken advantage of a new policy that permitted foreign carmakers to establish wholly owned operations in China, meaning that it was not obliged to share technology and manage relations with a Chinese partner. In addition, the cars produced by the $2 billion factory would be eligible for subsidies, just like those produced by native Chinese companies.

Some Chinese competitors were rattled. One, William Li -- often referred to as "China's Elon Musk" -- was obliged to inform investors in March this year that his company, Nio, may not have enough capital to last another 12 months. To be sure, many of Nio's problems were self-inflicted, but the challenge posed by Tesla had helped drive Nio's stock price down to a low of $1.19 in October last year. 

The extraordinary resurgence of Nio's share price to $18.8 on Monday -- along with renewed optimism surrounding other homegrown electric vehicle manufacturers -- says much about the way business works in China.

The crucial insight comes down to what in Chinese is called the "catfish effect." Beijing calculated that by introducing a predator into China's market, it would force its domestic companies to get stronger in order to compete. In its eyes, Tesla would become the "Apple of the automotive industry."

Apple's engagement with China, where it makes many of its smartphones, has expanded the Chinese supply chain because of the imperative for Apple to source key components locally. It has also created spillover effects in which technologies originally intended for Apple phones have been adapted by suppliers and used by domestic competitors.

One of the reasons why Chinese smartphone manufacturers such as Huawei, Xiaomi, Oppo, Vivo and others have risen so quickly over the last decade is because Apple has continually seeded its Chinese supply chain of around 380 companies with the latest intellectual property. The emergence of Luxshare-ICT, a Chinese Apple supplier, to become a formidable competitor to Taiwanese contract manufacturing giant Foxconn provides an example of the power of this influence.

It is the hope of this spillover effect that endears Tesla to Chinese officials. They realize that whatever short-term pain is suffered by competitors such as Nio, WM Motor, Li Auto, Xpeng Motors, BYD and others, the longer-term advantages that flow from the deepening of the Chinese electric vehicle supply chain will outweigh them.

Already, the example of Tesla is attracting other foreign giants to jump in. Volkswagen said this week that it, along with its Chinese partners, will pour 15 billion euros ($17.6 billion) into manufacturing electric vehicles in the country over the next four years.

Volkswagen's calculations are revealing of the entire industry. It knows that its electric vehicle business will be crucial in a time of global transition away from fuel-burning engines. It also knows that China, as the world's biggest auto market, will be crucial for any carmaker hoping to lead global sales.

Thus the pressures on companies such as Tesla and Volkswagen to nurture their Chinese supply chains are set to intensify. Whichever electric vehicle maker in China is fed by the most high-tech and efficient supply chain stands the best chance of producing market-leading cars.

With all this as background, Beijing will not be worried by the latest statistics showing that Tesla is far ahead of homegrown rivals in terms of monthly sales in China. In one sense, this was all part of the plan. Tesla's bestselling Model 3 has energized the domestic market to such an extent that owning an electric vehicle has become a status symbol for the urban elite.

The consultancy McKinsey is predicting a bright new dawn. It says that in 2022, some 3.5 million electric cars will be sold in China, up from 1.2 million last year. The economies of scale that derive from such strong sales will enable manufacturers to cut prices over time, unleashing a mass-market momentum.

The promise of such a market is the main reason why regional governments have swung their support behind local manufacturers in recent months. The most eye-catching example of this came from the electric vehicle startup WM Motor, which managed to raise $1.47 billion in a single round of funding in September. The fundraising was led by SAIC Motor, one of China's biggest state-owned car companies, and also attracted the government of Hubei province and the cities of Suzhou, Hengyang, Hefei and Guangzhou.

It appears that faith in China's electric vehicle market is running deep.

James Kynge is editor of Tech Scroll Asia, a newsletter on technology in Asia that combines the best reporting from Nikkei and the Financial Times. He is also the FT's Global China editor, writing about China's growing footprint in the world, and won the Wincott Foundation award for the U.K.'s Financial Journalist of the Year in 2016. His prizewinning book, "China Shakes the World," has been translated into 19 languages.

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

Nikkei Asian Review, now known as Nikkei Asia, will be the voice of the Asian Century.

Celebrate our next chapter
Free access for everyone - Sep. 30

Find out more