Xi's Electric Dream: Turning into a Subsidy Nightmare? | Digging into China

Hi, I'm Dong Shong. Welcome to Digging into China, where we explore China in depth to review unique perspectives. China's electric vehicle industry has long been heralded by the Chinese Communist Party as a monumental achievement, often presented as a cornerstone of hope for the nation's economic future. So, where does this industry stand today? In this episode, we'll explore the state of Chinese electric vehicles. In my view, China's new energy vehicle sector is defined by two key traits. On the surface, it appears to be advancing rapidly, but beneath that, it faces a series of underlying crisis. Let's start with the positives. The apparent rapid progress. On the surface, China's electric vehicle industry has achieved significant success. Domestic electric vehicles dominate the Chinese market with foreign brands reduced to a single major player, Tesla. Legacy automakers such as BMW, MercedesBenz, Audi, and Toyota have struggled to compete with their electric offerings in China. As Chinese citizens see a variety of cars on the streets daily, there is a palpable sense that the domestic electric vehicles reign supreme. Fueled by the strength of the domestic market, BYD is expected to surpass Tesla in global sales this year, positioning itself as the world's top selling electric vehicle brand. Furthermore, the robust growth of domestic electric vehicles coupled with their rising share of China's total auto sales has left many traditional joint venture and foreign automakers struggling. Domestic brands now command over 60% of the market share in China, significantly eroding the profits of foreign and joined venture automakers. If we focus solely on these figures, it might seem that Chinese electric vehicles having conquered the domestic market are poised to dominate globally as the Communist Party suggests, promising a bright future. Could BYD become China's equivalent of Toyota? Could China emerge as the next global automotive powerhouse? In reality, the answer is no. Why is that? Let's turn to the undercurrents, the hidden challenges. Recently, you may have seen reports that on October 2nd, BYD released its financial result showing it sold just 400,000 vehicles in September, a 5 and a half% yearon-year decline. This marked the first sales drop in 19 months since the start of 2024. BYD also lowered its annual sales target from 5.5 million to 4.6. 6 million vehicles. This slowdown is not unique to BYD. The entire Chinese auto industry is experiencing similar trends. According Goldman Sachs analysis of passenger vehicle insurance registrations in China, growth in overall vehicle registrations has noticeably stalled with new energy vehicles showing the same pattern. Why use insurance registrations instead of sales figures? The reason is that some dealers in China's auto industry, particularly in the electric vehicle sector, are suspected of inflating sales by self-purchasing. Insurance registrations offer a more accurate picture of actual demand. With the Chinese market experiencing stagnant growth and sales, what about overseas markets? Haven't we heard that the Chinese electric vehicles are performing well abroad? Could there be a scenario where domestic struggles are offset by international success? Unfortunately, the overseas picture is similar. While news reports highlight Chinese electric vehicles being exported globally with impressive yearon-year sales growth, such as BYD's over 200% growth in Indonesia in the first half of the year or over 100% growth in other regions. These figures are misleading. The growth appears dramatic only because the baseline sales numbers are low. Chinese electric vehicles may be seeing high growth rates in Southeast Asia, but they haven't disrupted the region's auto sales landscape, where Japanese brands continue to dominate. More critically, despite years of talk about building factories overseas and expanding globally, progress has stalled due to local policies in some countries and the financial constraints. In 2024, Chinese electric vehicle overseas investment has lacked behind the levels seen in 2023 and 2022. Without the ability to establish local manufacturing, Chinese automakers face barriers to market access. Only about 24% of the world's major auto markets have minimal restrictions on Chinese imports, while 34% requires local production, and some outright prohibit Chinese imports. Without the local factories, the long-term prospects for Chinese electric vehicles abroad are limited, offering little room for optimism in the near future. Some might argue, what's the issue with a growth slowdown? It's not a collapse wide concern. It sounds like you are unfairly criticizing China's electric vehicles industry. Let's examine what this slowdown truly signifies. First, a slowdown in Chinese auto sales is highly unusual compared to other industries, especially given the substantial government subsidies for car purchases this year. The scale of subsidies such as incentives for new energy vehicles and trading programs has far exceeded the previous years. If no additional increases are made in 2025, the total subsidy budget will reach 342 billion yen, nearly 100 billion more than last year. This amount represents 2.8% of China's fiscal revenue and 7% of total auto sales revenue. In essence, the government is covering on average 7% of the price of every car purchased. This doesn't include the manufacturing side subsidies. In 2024, this share was 5% and in 2023, it was only 2%. When factoring in additional support like a land incentives and tax breaks, estimates from Goldman Sachs and others suggest that annual support for new energy companies range from 5 to 700 billion yen, about 15% of total vehicle prices, surpassing the fiscal revenue of a province like Hanan. This leads to a critical issue. Despite these massive subsidies, the auto industry has not seen growth and is even even showing slight contraction toward year end. What will happen next year? What if these subsidies are reduced? A recent forecast by the Rodium Group predicts that if the Chinese government halts largecale subsidies in 2026, maintaining only a minimal 0.8% 8% of fiscal expenditure. Auto sales could drop by nearly 30%. If current levels are maintained, sales could still decline by 13%. Only by increasing subsidies by approximately 10% could sales remain stable. This suggests that without significant government support next year, Chinese electric vehicle sales could plummet. Some might say a 30% drop isn't catastrophic, but such a decline could trigger a chain reaction, potentially destabilizing the entire Chinese electric vehicle industry. Why would a 10%, 20% or 30% sales drop have such severe consequences? To understand, we must consider two types of businesses model. Unlike the common assumption that a 30% sales drop leads a proportional drop in profits or stock prices, the situation for Chinese electric vehicle giants is different. Companies are divided into two categories. Mature companies like a Coca-Cola or Toyota have a stable profits and established markets. So a 30% sales drop typically results in a similar decline in profits and stock prices. However, growth oriented companies like a chat GPT or many Chinese automakers face a different reality. For these companies, a 30% drop in sales or user base can be devastating. For instance, a video on Billy Billy claimed Open AI is a failing because it lost 13.5 billion dollars in the first half of the year while praising Deep Seek for lowering costs and hurting Open AI's profits. This reflects a misunderstanding of the economics in the markets. Investors in AI companies like CH GBT don't prioritize current profitability, but focus on user scale. Chbt's 700 million weekly active users are its greatest asset. For CH GBT, losses are less critical than a 30% drop in active users, which would be catastrophic. The underlying logic is market expectations. Mature companies are expected to deliver stable cash flows and profits. Growth oriented companies however are expected to achieve monopolies or build competitive advantages through user scale, cost efficiencies or data dominance. Investors are betting on their future potential, not immediate profit. This explains why a slowdown or stagnation in Chinese electric vehicle sales has such a profound impact. It signals that the future these companies have promised is unattainable. The market has reached its limit. Regardless of their ambitious visions, the consequences consequences go beyond a simple 30% drop in profits or stock price. It necessitates a fundamental shift in their business models and narratives. Chinese automakers must now transition from growth oriented to mature companies, shifting their focus from future potential to current performance. This means prioritizing profit margins over sales volume. In stock market terms, this is reflected in the price to earnings PE ratio. the ratio of stock price to net profit. Mature automakers like a Toyota, Mercedes-Benz, BMW, and a Volkswagen, which lack expensive future narratives, typically have PE ratios between 6 and a 10, meaning their stock prices are 6 to 10 times their net profits. In contrast, the prominent Chinese electric vehicle companies often have PE ratios above 20 with companies like a series tied to Huawei exceeding 30. This was justifiable when these companies were focused on future growth. However, as market growth slows, they must transform into companies like a Toyota or BMW, significantly increasing their profit margins. Failure to do so risks sharp stock price declines, reduced funding and potential financial collapse due to disrupted capital chains. Transformation isn't inherently negative. It depends on preparation. Are Chinese automakers ready to shift from growth oriented to mature companies and lower their PE ratios? The answer is no. The reason lies in their core competitiveness. What do Chinese electric vehicles excel? The answer is clear. Affordability. This can mean lower prices or offering features like a built-in refrigerators or large screens at a fraction of competitors cost. This advantage holds in markets like Southeast Asia. A Blumenberg survey found that over 85% of Southeast Asian buyers and 95% of European buyers choose Chinese electric vehicles for their affordability. Data supports this. Chinese electric vehicles have gained market share through low prices. Despite Huawei launching high-end models like the M8, the average price of Chinese electric vehicles has been declining. In 2022, vehicles priced between 200 and 300,000 yen accounted for 26% of sales. But by 2025, this dropped to 20%. The price peak has shifted to the more affordable 100 to 150,000 yen range. This trend is even clearer in overall vehicle pricing. Chinese EV have relied on low prices to capture market share. However, this creates a paradox when transitioning to a mature business model. Their core strength high value at low cost depends on affordability. As markets saturate and growth slows, companies must pursue profits by raising prices which undermines their primary advantage. This loss of competitiveness further impact sales. Affecting market expectations and creating a vicious cycle forcing Chinese automakers to become mature companies and prioritize profits challenges their fundamental strength low prices. To illustrate the impact of price increases, consider per vehicle profit margins based on 2024 financial reports and the first half of 2025. I have avoided comparing Chinese electric vehicles to luxury brands like a BMW or Mercedes which have high margins or outliers like a Neo which reportedly lose 100,000 yen per vehicle. Instead, let's compare mainstream brands like a Toyota and a Tesla to Chinese electric vehicles companies with a relatively stable profits. Toyota earns a per vehicle profits of 22,400 yen and Tesla earns 17,000. In contrast, Xiaomi loses 5,100 yen per vehicle and Shiao loses 5,800. Lee Auto and BYD perform better with per vehicle profits of 7,000 and 8,000 yum respectively. Yet, these figures lag far behind a Tesla and a Toyota to become mature companies. Chinese electric vehicle makers would need to match these profit margins, requiring price increases of 10 to 30,000 per vehicle. If Chinese electric vehicles cost 10 to 30,000 yen more, would they remain competitive? Would consumers still buy them? Would they retain their edge overseas? How much further will the sales decline? For any company transitioning to a mature business model is inevitable. Even Chad GBD will eventually reach user saturation. The key is whether the company is prepared for that shift. For Chinese automakers, the answer is evident. They are not ready. The Chinese electric vehicle industry got an early start but failed to build critical competitive advantages such as advanced autonomous driving technology, strong brand identity or compelling narratives. None of these have been established. Chinese automakers did not leverage their early mover advantage to create these strength. A few years ago, they hyped autonomous driving, but incidents like a Xiaomi car crash in April and a safety test by a car review platform exposed their shortcomings. Does anyone still tout Chinese autonomous driving? As for brand identity, BYD is not seen as a premium brand. It's more associated with taxi fleets. Other automakers have faced has faced frequent issues like vehicle fires or consumer mistreatment fostering an image of disregard for safety and customers. They haven't cultivated Toyota's reputation for affordable reliability or the luxury prestigious of BMW or Mercedes. What have they built? Little of substance. In terms of storytelling, they lag far behind the figures like Elon Musk. Musk recogni recognized early that the electric vehicle market was becoming saturated and began creating new competitive advantages such as the robo taxi business based on FSD, autonomous driving or robotics leverage industrial capabilities. While many of these are still conceptual, they provide the market with a room to envision Tesla's future, preventing it from being reclassified as a mature company. Chinese EV companies, by contrast, have focused almost exclusively on price wars and sales volume, offering features like a refrigerators and large screen TVs. What's the root of their challenges? Why are they trapped in a cycle of cutting prices and chasing sales? I see two primary reasons. First, misguided government policies have driven the Chinese electric vehicle industry into reckless competition. The industry's rise began with Xiinping's directive to prioritize electric vehicles, prompting companies nationwide to enter the market. The government cared little about the profitability, only about the sales volume and reinforcing she's narrative of triumphant success. As a result, automakers become fixated on sales, chasing the dreams of surpassing global powers in three years while neglecting core competitiveness. Some companies may have prioritized the competitiveness, but their slower progress didn't align with the she's win fast, win big agenda and was sidelined. Second, in China, cutting costs, particularly through labor exploitation, is far easier than innovation. BYD's low costs beyond the economics of scale and a willingness to absorb losses stem from extreme exploitation of Chinese workers. Why invest in R&D when labor can be squeezed so effectively? BYD also pressures its suppliers using tactics like a delayed payments to extract more value. A company that disrespects its people and builds its competitiveness on exploitations is destined to falter. Does this mean Chinese electric vehicle companies will collapse next year? Not necessarily. While I've highlighted many challenges, they depend on sales slowing or declining. Without substantial government subsidies, next year the industry could face collapse. However, Xi Jinping may employ aggressive political measures such as larger auto purchase subsidies to prevent this outcome. If subsidizing 7% of car price failed to boost sales this year, why not increase it to 10% next year? If 10% isn't enough, why not 15%. If 996 work schedules still result in high cost, why not permit 997 schedules to further exploit workers? These measures might temporarily mitigate the crisis, but they only postpone the inevitable reckoning for the Chinese electric vehicle industry. They will keep the industry in a state of limbo next year, unable to resolve its core issues or deliver the promised prosperous future, let alone benefit the Chinese economy or its people. The Communist Party should abandon largecale subsidies and focus on protecting labor rights as the South Korea once did. The government should fulfill its fundamental role and trust in the ingenuity and effort of Chinese people. Without government interference and with fair labor protections, Chinese companies and citizens would naturally create a competitive innovative enterprises. Government intervention only creates an illusion of prosperity while stifling truly innovative firms. The Chinese people don't need an overbearing overseer. Not the United States, but the Xiinping himself. Thank you so much for watching. If you find this video helpful, please like it, drop a comment below, and hit the subscribe button right here. It really helps YouTube suggest my video to others. I'll be back with more content soon. Until then, be