Chinese manufacturers represent both promise and threat in the EV future

Former President Donald Trump sparked a storm of controversy with his warning last weekend of “a bloodbath” for the US car industry and the country if he loses the election in November. Behind the political uproar, however, the context for his remarks was a real issue: the prospect of low-cost electric vehicles being manufactured in Mexico and imported into the US. 

Although EV sales are still rising in the US, the increase has lagged behind some of the more optimistic forecasts, and manufacturers, including Ford and General Motors, have been forced to push back their targets for growth. The cost of EVs relative to internal combustion engine (ICE) vehicles remains a significant barrier to adoption. 

Chinese manufacturers with lower production costs look like they are best placed to break through that barrier by driving EV prices down. But the consequences for the incumbent manufacturers in the US could be devastating. As Japanese manufacturers with more fuel-efficient vehicles captured market share from the Big Three of GM, Ford and Chrysler in the 1970s, Chinese companies with lower-cost EVs could, if they are allowed, pose a threat to the US industry in the 2020s. 

Trump has made clear, in his comments last weekend and in other statements, that he wants to stop Chinese manufacturers building plants in Mexico to sell cars into the US. He has also been an outspoken critic of EVs in general. However, he has suggested that Chinese companies wanting to build plants in the US would be welcomed. He said in an interview on CNBC recently: “We don’t want to get cars from China. We want to get cars made by China in the United States, using our workers.”  

The future of EVs in the US and, hence, the outlook for fuel consumption and power demand, will depend in large part on whether Chinese manufacturers are able to enter the market, and how far other companies can rise to the challenge by cutting their own costs. 

Incentives, including tax credits and emissions regulations, remain crucial for the adoption of EVs. The Biden administration’s Environmental Protection Agency this week published final versions of its new regulations for emissions from cars and trucks. The final rule is less stringent than the proposed version published last year, but still imposes demanding new standards that will push manufacturers to cut the emissions from the vehicles they sell. 

Michael Regan, administrator of the EPA, said the new standards would “give drivers more clean vehicle choices while saving them money,” because they would compel manufacturers to sell more fuel-efficient cars and trucks. 

The regulations do not mandate the use of EVs or any other specific technology. But selling more EVs is one way that manufacturers can comply with the new emissions limits. The EPA projected in its regulatory impact assessment that with the new rules in place, the share of battery electric vehicles in US car sales will rise to 63% by 2032, with a further 10% for plug-in hybrids. That compares to a projected EV share without the new regulations of 43% in 2032, again with a further 10% for plug-in hybrids.  

If Trump wins a second term in the White House, he can be expected to make it a priority to scrap those rules and replace them with emissions regulations that do not push manufacturers towards EVs. If the Republican party takes control of Congress, it is also likely to cut the US$7,500 tax credit for EVs, to free up room for tax cuts in other areas.  

Even if President Joe Biden wins a second term, the value of the tax credit is likely to be limited by rules linking eligibility to the sourcing of the vehicles’ components and raw materials, an issue discussed by Wood Mackenzie analysts in a recent online briefing. 

Those policy shifts threaten to exacerbate the fundamental problem for EVs, which is that they are still too expensive. Although total cost of ownership may be lower over time, because fuel and maintenance are cheaper, buyers will often look at up-front purchase costs above all, particularly if they face constraints around liquidity and borrowing costs.  

Even with the tax credit, EVs in the US are often more expensive than their gasoline-fueled equivalents. Ford’s F-150 Lightning electric truck, seen as critical to the electrification of transport in the US when it was launched three years ago, can still cost about US$5,000 more than the equivalent ICE model, even including the tax credit. Owners’ experiences have sometimes not justified that price premium, and Ford slowed production of the F-150 Lightning in January. 

In China, however, EV prices have been tumbling. Helped by falling battery costs, and spurred by a slowdown in domestic sales growth, Chinese car companies have been fighting a price war. BYD, the largest Chinese EV manufacturer, has cut its domestic sales prices by an average of 17% in the past few months. 

Prices in China for the BYD Yuan Plus, a battery electric compact SUV, now start at about RMB120,000 (about US$16,700). Those prices will not be available in the rest of the world. In overseas markets, where the car is sometimes badged as the Atto 3, the base model can cost more than twice that. But Chinese manufacturers do have structural cost advantages over their international rivals. 

“The cost advantage is there for a reason,” says Prateek Biswas, Wood Mackenzie’s lead analyst for EV policies, sustainability and automaker strategies. “Their supply chains are completely optimised for EVs. They have access to lower-cost components and materials. They are running their factories at higher rates of utilisation. And they are operating at a scale that is unprecedented in the EV industry. It’s really a smooth-running engine.” 

It is unclear when, if ever, these lower-cost EVs will hit the US market. BYD is looking for a location for its first factory in Mexico, but has said it will be targeting the local market, not attempting to sell into the US. BYD has launched the Yuan Plus in Mexico where it sells for about 11% less than a comparable Honda CR-V hybrid. 

If Trump is re-elected, BYD and other Chinese manufacturers may try to test his stated enthusiasm for them investing in the US. BYD has big ambitions for sales growth in the EU, and announced late last year that it plans to build a factory in Hungary, aiming to start production within three years. 

US manufacturers are already exploring ways to deliver lower-cost EVs of their own. Tesla announced plans for a gigafactory in Mexico a year ago. Construction has not yet started, but it has reportedly been seeking to build relationships with Chinese components suppliers. 

Ford has shifted the focus of its EV programme away from expensive luxury vehicles and towards smaller, cheaper cars and trucks. It is reportedly aiming to launch its first low-cost EV, at a starting price of around US$25,000, in 2026. The vehicle is expected most likely to use lithium ferrophosphate (LFP) batteries, which are increasingly popular for vehicles as a lower-cost alternative to battery chemistries that use cobalt and nickel. 

It is these and similar plans from other manufacturers, with more and more competitive models coming on to the market, that underpin Wood Mackenzie’s projections of continued growth in EV sales. Vehicle manufacturers are investing heavily in electrification in ways that make it difficult for them to change course, and many state governments will remain supportive of EVs even if the US federal government turns against them. 

In our latest forecast, recently updated, we estimate the battery EV share of the US car market will reach about 37% in 2032. That is lower than the “no new regulations” forecast just published by the EPA, but substantially above the 7.9% share recorded for 2023. 

Describing this looming change as “a bloodbath” might come to be seen as something of an overstatement, depending on how exactly it plays out. But it still represents a real threat to incumbent vehicle manufacturers, and a radical upheaval for other industries including electricity and fuel supply. We are still in the early stages of a fundamental change in road transport, and the full implications are only starting to emerge. 

Large energy users come together to accelerate low-carbon technologies 

Google, Microsoft and Nucor have joined forces to aggregate their demand for advanced clean electricity technologies, to help accelerate cost reductions. The three companies will work together to support the development of first-of-a-kind and early commercial projects in sectors including advanced nuclear, enhanced geothermal, low-carbon hydrogen and long-duration energy storage. They will initially focus on testing their model for demand aggregation and procurement with pilot projects in the US.  

That model includes three key elements: signing offtake agreements for emerging low-carbon energy technologies, advocating for frameworks to support these technologies and developing new tariff structures in partnership with energy providers and utilities. The companies said in a statement: “Pooling demand enables buyers to offtake larger volumes of carbon-free electricity from a portfolio of plants, reducing project-specific development risk, and enables procurement efficiencies and shared learnings.” 

All three companies have ambitious targets for cutting emissions and relying on zero-carbon energy. Google has goals of reaching net zero emissions across all of its operations and value chain by 2030, and running all its offices and data centers on 24/7 carbon-free energy. 

Microsoft has goals of “near zero” scope 1 and 2 emissions from its own operations and purchased electricity by 2025, and cutting its scope 3 emissions in its supply chain and from the use of its products by 50% by 2030. By 2050, its objective is to have removes an amount of carbon from the atmosphere equivalent to all the company’s emissions throughout its existence. Also by 2030, its aim is to have 100% of its electricity consumption matched by zero carbon energy purchases 100% of the time. 

Nucor has set a goal of net zero emissions, under scope 1, 2 and 3, by 2050. 

In brief 

Constellation, the US power company, is issuing the country’s first-ever green bond for nuclear energy. It is raising US$900 million from selling 30-year bonds to finance investments including maintenance, expansions and life extensions at its fleet of nuclear plants. The bonds have been verified as meeting the guidelines for green bonds and green loans set by the International Capital Markets Association and the Loan Market Association. Constellation is the US’s largest operator of nuclear plants and largest producer of zero-emissions power. 

TotalEnergies, Tokyo Gas, Engie and Mitsubishi are among the companies that have formed a new global association called the e-NG Coalition, intended to promote the deployment of e-methane, a synthetic gas made from hydrogen and carbon dioxide. When produced using zero-carbon hydrogen made with renewable energy, e-methane can be considered a zero-emissions fuel, and has the advantage of being usable in existing infrastructure without modifications. But it has high production costs compared to natural gas. Marco Alverà, chief executive and co-founder at TES, a green hydrogen and e-methane company, said in a statement that strong partnerships would build “a thriving, global e-NG market". 

Other views 

Call of duties: How emission taxes on imports could transform the global LNG market – Massimo Di Odoardo and others 

Can carbon offsets deliver for oil and gas companies? – Simon Flowers, Gavin Thompson and Nuomin Han 

Russian refining outages surge on Ukraine drone attacks: three key questions answered – Emma Howsham 

Beyond ESG: measuring corporate sustainability in an uncertain world – Luke Parker and Erik Mielke 

The energy transition outlook in the Americas – David Brown 

Global solar PV installed capacity will more than triple in the next ten years – Juan Monge 

Carbon management frequently asked questions part 3: CCUS – Mhairidh Evans and Peter Findlay  

Navigating the cross-commodity metals and mining landscape in 2024 – Robin Griffin 

EU wind pledges: a little overblown? – Ana Ana Fernández García, Zoe Grainge and Aaron Barr 

US energy storage market breaks installation record in Q4 2023 

Is upstream oil and gas delivering on decarbonisation? – Fraser McKay and Adam Pollard  

Factcheck: 18 misleading myths about heat pumps – Jan Rosenow 

A coal billionaire is building the world’s biggest clean energy plant and it’s five times the size of Paris – Diksha Madhok 

New winners, new losers: toward a new energy security – Morgan Bazilian and Cullen Hendrix 

How many transformers will the US distribution grid need by 2050? – Emily Mercer 

Climate models can’t explain 2023’s huge heat anomaly: we could be in uncharted territory – Gavin Schmidt 

Quote of the week 

“In the real world, the current transition strategy is visibly failing on most fronts… A transition strategy reset is urgently needed, and my proposal is this: We should abandon the fantasy of phasing out oil and gas, and instead invest in them adequately reflecting realistic demand assumptions.”  

Amin Nasser, chief executive of Saudi Aramco, argued that “five hard realities”, including persistent growth in demand for oil and gas, and the relatively high cost of many low-carbon alternatives, meant that the world needed to reassess its plans for cutting greenhouse gas emissions. 

Chart of the week 

This comes from a recent Wood Mackenzie note on global wind turbine orders, and shows global trends broken down by geography over the past five years. Wind power faced some challenges in 2023, especially in the offshore industry in the US and Europe, but turbine orders were a sign of underlying strength: they grew 12% year-on-year to a new record high of about 155 gigawatts.  

Records were broken in China and Europe, while in North America orders nearly doubled. Even for offshore turbines, there was growth in many markets. Orders in China dropped 56% because of a pause in procurement decisions, meaning that globally, orders for offshore turbines were down slightly year-on-year. But outside China, firm order intake for offshore wind markets tripled. Take a look at the full report for further details. 

Get The Inside Track

Ed Crooks’ Energy Pulse is featured in our weekly newsletter, alongside more news and views from our global energy and natural resources experts. Sign up today to ensure you don’t miss a thing.