The week of May 8, 2023: China’s EV opportunity, regulation, the Fed, markets, and much, much, more.
The week of May 8, 2023: China’s EV opportunity, regulation, the Fed, markets, and much, much, more.
I t should not, by now, be news that the switch to electric vehicles (EVs) represents a historic economic and, by extension, geopolitical opportunity for China. Indeed, Beijing is poised to establish itself internationally in an industrial sector that has long been dominated by the “West” (which, of course, includes Japan and South Korea).
EVs have rewritten the rules of the game. As I wrote in February:
EVs are far easier to manufacture than conventional cars. To oversimplify, they are four-wheeled boxes containing a computer and a battery. To oversimplify a little less, it’s estimated (CNBC reports) that they require around 30 percent less manufacturing labor than a conventional car, something largely explained by the fact that they have far fewer moving parts. As a result, much of the advantages of incumbency enjoyed by Western manufacturers will be swept away, creating an opening that Chinese EV manufacturers, benefiting from their domestic experience (EVs accounted for around 19 percent of new car sales in China in 2022, with the overwhelming majority coming from domestic manufacturers) are well placed to exploit. Not only that, but Chinese companies have also established a leading position the whole way down the EV supply chain.
The interventions of central planners in the EU, U.S., and the U.K. have magnified the extent to which China will benefit from the way that those rules have been rewritten. Moving forward, many consumers wishing to buy new cars will be increasingly forced to buy EVs before they want to do so, and before the auto sector — in terms of technology or supply chain — is ready.
The rush to electrify will do little or nothing to help the climate, but it will do a great deal to increase the chance that the switch to EVs will, in many countries, be a fiasco at best. It’s certainly unlikely to be good news for Germany, where the auto sector plays a central role, accounting for just under 10 percent of GDP (if equipment manufacturers are included).
Turning, unusually, to Jacobin, (from 2021):
German auto production employs around eight hundred thousand people — with a further 1.8 million jobs indirectly linked to the industry. But even these figures don’t convey quite how important it really is. Apart from the fact that brands like Volkswagen are known the world over, the sector drives industrial knowhow upon which the German economy’s strength relies. . .
[E]ven if German companies can catch up with the switch to electric, it will cost numerous jobs; combustion engines were much harder to manufacture than electric cars. More than four hundred thousand jobs are at risk by 2030, according to a report for the German government by the National Platform for the Future of Mobility.
China is the leading market for German auto exports. On top of that, German companies sell a large number of made-in-China autos there too. The rise of the Chinese EV sector not only represents a clear threat to the sales of German cars (or made-in-China German cars) in China, but also to the position of German car manufacturers in their home market.
Chinese-built electric vehicles pose the greatest risk to Europe’s automakers and could cost them 7 billion euros ($7.7 billion) a year in lost profits by 2030 unless policymakers take action, according to an Allianz Trade report.
Patrick Koller, chief executive of French auto supplier Faurecia (EPED.PA), said the entry-level EV market in Europe was an open lane for Chinese automakers.
And so to Volkswagen (VW).
The Financial Times (May 8, 2023):
In 1978, a Chinese delegation dressed in Mao suits travelled to Wolfsburg with a stunning message for the men running Volkswagen: Deng Xiaoping’s China was open for business.
Now, after four decades building the world’s biggest car market from scratch and profiting from the rise of an economic superpower, the automaker has suddenly found itself fighting for its position in China.
While the sprawling German group, which today includes Porsche and Audi, sells more cars in China than any other company, its flagship VW brand was recently dethroned as the country’s best-selling car by BYD, the Shenzhen-based conglomerate backed by Warren Buffett.
The German company is falling behind in the fast-growing electric car segment, where the VW brand sits in ninth place with a market share of just 2 per cent. BYD, which holds the top spot, has nearly 40 per cent and Elon Musk’s Tesla, in second, has more than 10 per cent.
Chinese makers of electric vehicles, which include plug-in hybrid and battery-powered cars, dominate in their own market and are also expanding aggressively overseas. China overtook Germany in auto exports in 2022 and is set to eclipse Japan as the world’s biggest car exporter this year.
VW, one of Germany’s largest and most prestigious companies, depends on China for at least half of its annual profits, which last year reached €22bn. Its position in the race for EV market share is placing the future security of those earnings in jeopardy.
The FT goes on to report that, in the past year alone, VW has announced investments totaling €4 billion in China, part of a strategy to localize production in the country (where it already has, either directly or through joint ventures) over 40 manufacturing facilities. The hope, the FT explains, is that its strong local presence will insulate VW against “supply chain shocks and deepening divisions between the west and China.” This is, in all likelihood, a forlorn hope, at least so far as the latter is concerned. In reality, VW’s expansion in China will mean greater vulnerability to Chinese blackmail as relations continue to deteriorate with the West, as they will.
In 2021, Volkswagen’s CEO commented that “China probably doesn’t need VW. . . but VW needs China a lot,” something, of course, of which Beijing is already well aware. Reassuringly, U.S. automakers have far lower exposure to China.
A WSJ report from a car show in Shanghai in April illustrates the extent of the challenge facing foreign EV manufacturers in China, and, by extension, the strength of the platform that China is building for selling its EVs abroad. It was a jolt to read that the cheapest EV on show there had a starting price of $11,500. Chinese prices for Chinese consumers, but even so.
But wait, there’s more.
The WSJ:
Digital and infotainment features are particularly important for Chinese customers, auto makers say—an area in which the domestic players have taken a clear lead over foreign brands.
Sleek and futuristic exteriors are increasingly hallmarks of premium Chinese EVs that target the same segment of buyers as Tesla Inc. . .
Overall, the sophistication of Chinese electric cars on display in Shanghai is a sign of how far the local brands have come since a decade or so ago, when the country’s auto shows were filled with quirky and awkward-looking homegrown vehicles that also trailed behind foreign brands in fuel efficiency.
At the time, China’s consumers aspired to own foreign brands, which built a dominant presence as they rolled out their global models developed overseas.
Now, the tide has turned.
What’s more, China’s current dominant position in the manufacture of the EV battery market means (assuming its contracts give it the ability to do so) that it can decide who gets batteries in the event of a supply squeeze.
Meanwhile (via Nikkei):
Chinese companies have submitted more patent applications related to electric vehicle charging and battery swapping than rivals from any other country, achieving strides in key technologies to make the experience faster and more convenient.
It’s also worth adding that the costs of the switch to EVs is one reason why cheaper conventional new cars from U.S. manufacturers are becoming harder and harder to find. There is one country that is willing and able to fill that gap. You won’t find it hard to guess which one.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 118th episode, David is joined once again by Ryan T. Anderson, president of the Ethics and Public Policy Center, and a stalwart defender of the free and virtuous society. David and Ryan discuss the current skepticism on the right over free markets, the principles at play that limit freedom, and where lines ought to be drawn (or not drawn) in some controversial issues of our day.
No Free Lunch
Earlier this year, David launched a new six-part digital video series, No Free Lunch, here on National Review Online. In it, we bring the debate over free markets back to “first things” — emphatically arguing that only by beginning our study of economics with the human person can we obtain a properly ordered vision for a market economy. . .
The series began with a discussion with Fr. Robert Sirico of the Acton Institute. Later guests include Larry Kudlow, Dennis Prager, Dr. Hunter Baker, Ryan Anderson, Pastor Doug Wilson and Senator Ted Cruz.
Yes, the six-part series now has seven parts.
Enjoy.
The Capital Matters week that was . . .
Regulation
The world has faced no shortage of crises recently, from the pandemic and a scarcity of baby formula to the war in Ukraine and rampant inflation. In the United States, some policy-makers blame corporate greed for our economic woes, but a closer look — and basic economics — reveal the real culprit: restrictive trade laws. . .
A 2016 Heritage study found that the regulations then (not nearly as onerous as the ones most recently proposed) — in that valuable currency known as the pre-Biden dollar — increased the price of a new vehicle between $3,800 and $7,200.
As my favorite economist, David Gerard, says, when it comes to prices, the question is never not, “Well, is it supply or demand?”
For the U.S. government, the answer to that query has been “yes” in the worst way — down with supply and up with demand. The media omission of the government’s marketplace effects is annoying, personally, but much more importantly, offers the public an incomplete picture of a complex industry. . . .
Less powerful dishwashers may use less water, but they could also yield dishes that are less clean. In response, people would likely do one of two things: run the dishwasher more than once or clean more dishes in the sink before or after putting them in the dishwasher.
If your dishwasher uses 34 percent less water per load, but you run it twice, you’re using more water than if you only ran it once. Since the proposed rule would only apply to default cycles, people would be more likely to use heavier cycles more often. And dishwashers, even less efficient ones, are more water-efficient than washing dishes in the sink. . . .
The bill does include many provisions the Biden administration has been calling for. After stridently calling out Buttigieg’s incompetence, some Republican senators, and now the last Republican president, are proposing to give Buttigieg more regulatory authority.
The Railway Safety Act was initially 18 pages long. Now, after bouncing around the Senate for two months, the bill is 76 pages. Senate Commerce Committee chairwoman Maria Cantwell (D., Wash.) said Monday that the 76-page version will be up for a vote to advance out of committee on Wednesday. . .
Employment
As Scott Lincicome and Ilana Blumsack wrote for the Cato Institute, research shows that people with criminal records have a hard time finding work and have lower upward mobility. Simply having a criminal history makes finding work more difficult, even if the crime occurred a long time ago and a person has been law-abiding since or if the person was acquitted of a crime they were accused of. Lincicome estimates that the number of people being held back from labor-force participation for criminal-justice reasons, about 2 million, is three times as high as the number not participating because they are on Social Security disability insurance.
It’s important to lock up criminals. It’s also important to make sure people can reenter the workforce once they have served their time. That’s especially the case for people who were able to earn credentials and learn skills while in prison. . . .
Electric Vehicles
Central planners across the Western world — from the British Conservative Party to the Biden administration — are doing their best to force buyers of new cars to switch to electric vehicles (EVs). But what if consumers prefer to stick with “traditional” cars that are more closely tailored to their needs? Something tells me that, unless regulators get involved — spoiler, they probably will — the afterlife of the internal-combustion engine will last far longer than the planners would like, raising the prospect that, as has been the case in Cuba, another scene of central planning triumph, ancient cars will be driving around for a long, long time. . .
There’s no serious dispute that one of the most significant obstacles to the adoption of electric vehicles (EVs) is the lack of suitable charging infrastructure to back them up, something of particular importance given the anxiety that many consumers feel about the range an EV can go without a charge and, for that matter, the amount of time that it takes to charge an EV. . .
Healthcare
Insulin prices are falling. So why is Congress holding a hearing on the rising cost of insulin? The Biden administration and likeminded members of Congress think the issue is ripe for political points, even though their purported solutions would cause more harm than good. . . .
Fiscal Policy
Americans view Social Security as a sacred trust. They pay in while they work and receive benefits when they retire. Today, however, if pronouncements that the Social Security Trust Fund is going broke continue to be ignored, that trust may well be broken. Social Security needs reform, and without it, the results for many will be calamitous. . .
Transportation
One year after negotiations began, the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA) are inching towards a new labor contract. West Coast dockworkers have been operating without a contract since July 1, and the uncertainty has caused shippers to seek alternative ports. Without a contract, the dockworkers can strike whenever they want, and ordinary arbitration processes for resolving disputes aren’t in effect.
Reports from the negotiations, which take place behind closed doors, seem to indicate that the issue of automation, a major sticking point, has been tentatively resolved. . .
Republican skepticism is warranted. The bill has quadrupled in length since it was first introduced and contains many provisions that have little to do with the accident in East Palestine. Joe Biden, Chuck Schumer, and Pete Buttigieg have all said they support the bill. It would expand Buttigieg’s power to regulate the rail industry, with 35 “Secretary shall” phrases directing him to perform specific actions, despite Republican claims of Buttigieg’s manifest incompetence. Imposing new regulations on rail could make overall transportation more dangerous by shifting marginal traffic to more dangerous modes, such as trucking. Just because the bill has “safety” in the title doesn’t mean it will actually increase safety. . . .
The Fed
Why is the Federal Reserve, the central bank of the United States, involved with climate policy? In congressional testimony this March, Fed chairman Jerome Powell faced questions on the agency’s climate agenda, but his responses were not consistent with the Fed’s own policies.
For example, Powell said (and has often repeated) that the Fed will not be a “climate policy-maker.” It would be inappropriate, he said, for the agency to use its tools “to promote a greener economy or to achieve other climate-based goals” and, furthermore, that its policies will not have distributional effects that disproportionately harm particular companies or industries.
None of these claims are true. . .
Anyone who still thinks that the Federal Reserve can guide us to a soft economic landing has not been paying attention. Between the Fed’s forecasting that a credit crunch (in which the banks make it more difficult for households and companies to borrow money) is coming and the seemingly irreconcilable differences between President Biden and Speaker McCarthy on the debt-ceiling issue, Treasury Secretary Janet Yellen’s dire warning of an impending economic catastrophe should be taken seriously. . .
The Markets
Banks, because of the nature of their business — to put it at a very basic level, they lend out much more money than they have in the till — depend to an unusual extent on confidence. If too many of a bank’s depositors want their money back at the same time, that can sink it.
It doesn’t help that pulling money out (or trying to) has now become a matter of a minute or two of a depositor’s day spent on his or her laptop. There’s no longer any need to stand in line at, say, George Bailey’s chaotically run building and loan. And for depositors with uninsured deposits, there will be a strong incentive not to wait and see. Why take the risk of staying with their existing bank when they can move their money somewhere else and not have to worry? Could that mean that a sound bank can sometimes be forced under? Yes.
A falling stock price can be a warning to depositors that a bank is in trouble. . .
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Please note that, owing to travel plans, there will be no Capital Letter next week.