What We Can Learn from China’s Electric-Vehicle Graveyards

W hile China’s economy struggles, one of the bright spots is supposed to be its electric-vehicle industry. China pursued an industrial policy for years to become the world’s top EV manufacturer. It now makes more EVs than any other country by a long shot.

But a recent article in Bloomberg shows that this apparent success isn’t all it’s cracked up to be. China is home to EV graveyards, where unwanted vehicles are rotting amid tangles of weeds. They’re a visual manifestation of the problems with industrial policy.

The article outlines what led to the EV graveyards. In doing so, it offers a guide to some of the top problems with industrial policy.

Satisfying government, not people. Many of these cars are now rotting because nobody wanted them in the first place. The Chinese government began providing subsidies to producers to make EVs about a decade ago, and those subsidies drew hundreds of companies into the EV industry almost overnight. That meant a bunch of companies that had little idea of how to make EVs were now in the business of making them.

“They churned out huge numbers of early-stage EVs — relatively no-frills cars whose batteries in some instances could only run for around 100 kilometers (62 miles) on a charge,” the article says. There’s not much of a market for cars that can go only 62 miles at a time, but the Chinese carmakers were never trying to fill a market need. They were trying to satisfy the government, which told them to make EVs. They made EVs. Mission accomplished.

Accidentally spawning unsustainable markets. At a practical level, though, the carmakers had to do something with all those unwanted EVs. So they created ride-sharing companies. Many of these carmakers barely knew how to make cars in the first place, but now they were getting into another industry they didn’t know anything about, in response to the first set of government directives that led them to make low-quality products that people didn’t buy.

As one might expect, most of the ride-sharing companies were not successful, and many of them brought down their parent companies as well. “There are now around 100 Chinese electric-car makers, down from roughly 500 in 2019,” the article says.

Reducing individual freedom. The government wanted its industrial policy to succeed. Since people didn’t really want to buy EVs, it figured out ways to make them do so. It used subsidies to encourage EV purchases, with rebates of up to $8,400 per vehicle. It also restricted who could buy gasoline-powered cars in several major cities. Then, it created a credit system to reward the production of EVs and punish the production of conventional cars.

All of this carrot-and-stick meddling reduced the choices available to many Chinese car buyers. Some were outright prohibited from buying conventional cars, and even the ones who were permitted might not have been able to because government intervention made conventional cars unaffordable. But the government’s industrial policy was on the line, so individual freedom got cast aside.

Encouraging corruption. Carmakers cheated the government programs by falsifying records. “For example, they could produce an empty chassis that didn’t contain a battery, or make cars with batteries that didn’t meet the correct specifications,” the article says. The official Chinese-government estimate of money lost because of this kind of corruption is $1.3 billion. Who knows what the real number is?

On one hand, companies shouldn’t cheat, but on the other hand, what were they supposed to do, actually try to sell these pieces of junk? Producing to satisfy the government, rather than customers, puts companies in an awkward position where cheating can be a more reasonable course of action. The government knows that, and it can then selectively enforce penalties against cheaters based on political considerations. The article doesn’t say, but it’s a safe guess that Chinese carmakers who were more loyal CCP boosters were less likely to be punished for cheating than ones who were more lukewarm in their enthusiasm for Xi.

Making industries brittle. Probably sensing that it had encouraged massive overproduction, the Chinese government began reducing subsidies in 2019. “Many ride-hailing companies were unprepared for the policy change, which severely affected their cash flow,” the article says. Hundreds of firms around the country went out of business.

Contrary to the hopes of industrial-policy supporters, government backing of an industry can make it less, not more, resilient. Government policy changes with the whims of policy-makers, which are not often related to underlying market conditions. What one policy created out of thin air another policy can just as easily destroy.

Picking the wrong goal. China did succeed in becoming the world’s largest EV manufacturer, but at what cost? By opting to reward the production of EVs for its own sake, the government created countless perverse incentives that wasted tons of capital. Now it has to deal with graveyards of decaying cars, which contain precious metals and environmental hazards. Major Chinese car brands have near-zero name recognition outside of China, and they have a long way to go before breaking through in foreign markets, so Chinese car-buyers are stuck with low-quality cars.

As the EV industrial policy was running in the background, the Chinese real-estate and financial sectors were driving most of the country’s GDP growth, and now they’re falling apart. A local-government debt crisis looms as overbuilt infrastructure meets rising global interest rates. China is fighting deflation while the rest of the world is fighting inflation, and investor and consumer confidence in its economy are tanking. The one-child policy has wrecked its demographic profile, and the birth rate continues to decline. Youth unemployment is over 20 percent, and population gender imbalance means millions of young men are unmarriageable.

But China does have more EVs than anyone else.