1 Introduction

In architectural technological revolutions, new entrants often disrupt and even undermine and displace incumbent firms whose competitive advantages are based on the existing technological paradigm. The internal combustion engine (ICE) industry, which is based on hydrocarbons and emerged 150 years ago, faces such a disruption, driven by global warming and political and government policies that target decarbonization as well as by market forces that drive the replacement of ICE vehicles with battery-powered electric vehicles (EVs). This disruption is expected to make past capital investment in infrastructure in the ICE industry and the technological knowledge that underpins the business models of ICE producers obsolete.Footnote ¹

The contemporary EV industry was initiated by Tesla, the Silicon Valley–based entrant founded in 2003, which produced its millionth car on March 9, 2020. By the end of 2021, it had become the world’s largest producer of EVs, only to be surpassed in 2024 by BYD, a Chinese manufacturer. BYD, a startup, began as a manufacturer of rechargeable batteries and expanded to auto manufacturing in 2003, and by 2024 it became the world’s largest producer of EVs. The EV technological revolution is driving a momentous geopolitical shift, as China is on track to becoming the EV technological leader. This is facilitated by its emergence as the dominant manufacturer of EVs and their components and the largest market for EVs. This is important as well for most related components – in particular, the batteries, and the increasingly intense competition in drivetrain components that power these vehiclesFootnote ² – and in combination with its leadership in the production of renewable energy equipment.

The motivation for this Element was an issue of the Management and Organization Review Forum on Tesla in 2018 that initiated a debate whether or not China could reshape the global auto industry and attracted wide attention in the academic and wider community (Teece Reference Teece2018). Teece (Reference Teece2018) applied the dynamic capability framework (Teece et al. Reference Teece, Pisano and Shuen1997) to review the growth of the Chinese auto industry and concluded that the China-based ICE joint ventures would not build parallel EV capabilities there. Although doing so was technically feasible, these firms would not chose do so because they would not want to compete with their highly profitable domestic ICE market. Agreeing with MacDuffie (Reference MacDuffie2018), Teece argued that Tesla would find it challenging to build up the EV supply ecosystem manufacturing capability of a large-scale EV manufacturer in the United States, though, at that time unobserved, China was in the process of building an entire EV supply chain ecosystem from mineral mining to end-of-life recycling (in contrast, five years later, see Jiang and Lu Reference Jiang and Lu2023).

In 2018, the perspective advanced by Teece and MacDuffie may have been on target, given the contexts, capabilities, and embedded “lock in” of ICE’s technology and mindset, which had been framed by the earlier EV developments initiated by ICE producers. Overcoming the century-old path-dependent trajectory developed by the ICE-powered automotive ecosystem meant that creating a new trajectory and ecosystem appeared to be an exceedingly difficult challenge (Kanger et al. Reference Kanger, Geels, Sovacool and Schot2019). This difficulty is demonstrated by the fate of the early mass-produced all-EVs, such as the GM EV1, which was abandoned in 2002 despite a relatively positive market reaction. Lead-acid battery–powered EVs were mostly confined to specialized uses, such as golf carts, forklifts, and government-subsidized niches. However, this was about to change, as battery technology advanced initially with the Toyota Prius cobalt-based batteries and when the Silicon Valley startup Tesla became the most important newcomer in the US auto industry since 1947; under its iconic owner, Elon Musk, Tesla eventually became the world’s leading EV manufacturer until being displaced by BYD in 2024 (Perkins & Murmann Reference Perkins and Murmann2018).Footnote ³ This transition would be accelerated by the supersession of cobalt-based batteries by lithium iron phosphate (LFP) and, perhaps, eventually sodium – in both of which Chinese firms are leaders.

Despite Tesla’s remarkable success, the center of global technological, market, and manufacturing leadership in EVs rapidly shifted to China, even as management scholars hotly debated the strategic and organizational inertia of ICE automakers and industry (Murmann & Vogt Reference Murmann and Vogt2023). This shift soon led Tesla to find it strategically necessary to build what became its largest factory in Shanghai both to actively compete in the Chinese market and export globally. The shift to China has resulted in automotive history being written at “the speed of China.” For example, only ten months passed between Tesla’s completion of an agreement with the Shanghai government for the construction of its Gigafactory and the commencement of production.

To understand the importance of the Chinese EV market, we need to comprehend its size and its growth rate. Figure 1 summarizes the annual sales volume of EVs from 2018 to 2023.

Figure 1 Electric car registration and sales share in China, the United States, and Europe, 2018–2023.

Source: IEA, 2024, www.iea.org/reports/global-ev-outlook-2024/trends-in-electric-cars/

Figure 1Long description

Across all 4 graphs, the left y-axis notes the electric car registrations in millions (B E V plus P H E V), ranging from 0 to 21, while the right y-axis notes sales share in percentage, ranging from 0 to 70. The axis marks the years 2018 to 2023. The graphs read as follows. World. 2018: 2.5 million; 2%. 2019: 2.6 million; 4%. 2020: 3 million; 5%. 2021: 6.5 million; 10%. 2022: 10.5 million; 14%. 2023: 14 million; 19%. China. 2018: 1 million; 5%. 2019: 1 million; 5%. 2020: 1 million; 5%. 2021: 3.2 million; 16%. 2022: 6 million; 30%. 2023: 8.5 million; 38%. Europe. 2018: 0.3 million; 2%. 2019: 0.7 million; 3%. 2020: 1.5 million; 10%. 2021: 2.5 million; 18%. 2022: 2.9 million; 20%. 2023: 3.1 million; 21%. United States. 2018: 0.2 million; 2%. 2019: 0.2 million; 2%. 2020: 0.2 million; 2%. 2021: 0.6 million 5%. 2022: 1 million; 8%. 2023: 1.5 million; 10%. All values are approximate.

The growth in China continued apace as in January 2025, 790,842 EVs were sold, and increase of 21 percent year on year (AutoVista 2025a). This exceeded the goal of the central government for sales of new energy vehicles (NEVs) to capture 20 percent of the market for cars in the country by 2025 (MIIT 2017). In contrast, in 2024, nearly 1.3 million EVs were sold in the United States (mostly Teslas) (Cox Automotive 2025), and nearly 2.96 million produced by Tesla and, in particular, legacy German automakers were sold in Europe (AutoVista 2025b). In other words, more EVs were sold in China than in Europe and the United States combined (O’Donovan Reference O’Donovan2024).

As Figure 2 indicates, among the top-twenty global OEM groups in terms of EV sales in the first half of 2024, ten were Chinese. BYD sold nearly 1.6 million vehicles (EV and PHEV), making it in the top spot worldwide. Meanwhile, sales of its biggest rival, Tesla, fell by nearly 7 percent over the previous year, relegating it to second place – though admittedly market-share leadership may still fluctuate between BYD and Tesla due to various economic factors, including uncertainty in global trade. Perhaps more important, batteries are the highest value-added component in EVs, and, since 2018, Chinese battery manufacturers have steadily increased their market share to become global leaders, surpassing the previous leaders in South Korea and Japan. In fact, the entire EV value chain is experiencing a similar shift to Chinese leadership, led by rapid growth in the huge domestic market.

Figure 2 Global EV sales by OEM groups in the first half of 2024

Source: EV Volumes-Aggregated BEV & PHEV sales by model and country

Figure 2Long description

The x-axis plots numbers sold from 0 to 1,600, while the y-axis lists them O E M s. The graph also provides a context of their sales as compared to the first half of 2023. In order of their B E V plus P H E V sales, the O E M s and their percentage comparisons are as follows: B Y D: plus 20%. Tesla Inc.: minus 7%. V W Group: plus 6%. Geely Auto including Smart: plus 68%. G M including Wuling: plus 32%. Stellantis: minus 9%. B M W Group: plus 13%. Changan Automobile Group: plus 87%. Hyndai & Kia: plus 0%. Li Auto (C H J Automotive): plus 46%. Guangzhou Automobile (G A C): minus 10%. Mercedes-Benz Group: plus 10%. Geely Volvo & Polestar: plus 20%. Seres Group: plus 515%. Toyota Motor Corp.: plus 56%. Shanghai Automotive (S A I C): plus 13%. Great Wall Motors: plus 53%. Chery Automobile: plus 179%. Renault-Nissan-Mitsubishi: minus 21%. Dongfeng Motor: plus 81%. Ford: plus 21%. Nio Inc.: plus 54%. Leapmotor: plus 90%. F A W: plus 45%. Xiaopeng: plus 30%. Others: plus 26%.

As shown in Figure 3, at the beginning of 2024, the two largest EV battery producers were Contemporary Amperex Technology Co., Limited (CATL), and BYD. These two companies accounted for 55.1 percent of the global market, and when other smaller Chinese battery manufacturers (CALB, Gotion, Sunwoda, and Eve) are included, the Chinese share increases to 67.1 percent. It is noteworthy that no US firms are among the leaders, and the market share of Chinese battery producers has seemingly inexorably increased.

Figure 3 Market share of world’s top EV battery manufacturers (January–December 2024).

Source: https://cnevpost.com/2025/02/11/global-ev-battery-market-share-2024/. Note: CATL, BYD, CALB, Gotion, Sunwoda, and Eve are Chinese; LG, SK, and Samsung are Korean; and Panasonic is Japanese

Figure 3Long description

The x-axis plots the market share from 0 to 40%, while the y-axis lists them O E M s. IT reads as follows. C A T L: 37.9%. B Y D: 17.2%. L G Solution: 10.8%. C A L B: 4.4%. S K On: 4.4%. Panasonic: 3.9%. Samsung S D I: 3.3%. Gotion High-tech: 3.2%. Eve Energy: 2.3%. Sunwoda: 2.1%. Others: 10.5%.

In general, if competing ICE technologies are inexpensive, EVs would not be the runaway success that the Chinese government expects. The early efforts and failures of EVs suggest that “crossing the chasm” (Moore Reference Moore2014) required EVs to become economically competitive, considering that a car is the most expensive consumer durable purchased. In contrast to the major Western ICE brands, and even Tesla, Chinese companies increased the economic competitiveness of electric cars by moving them from a niche luxury to the mass market through technological advances in batteries, production efficiency, and massive capacity to capture economies of scale, all of which resulted in an ongoing ferocious price war that drives dramatic price decreases.

This was illustrated in July 2020, when the SAIC-GM-Wuling joint venture introduced the Wuling Hongguang (WH) Mini EV, a fully roadworthy EV, priced from $4,162 to $5,607, depending on the model – making it a car that most Chinese families and, indeed, buyers globally could afford. In less than two months after its debut, the WH Mini EV surpassed Tesla’s Model 3 in the top spot for China domestic sales, sparking a boom in ultracompact EVs after it was given the nickname of being the “god car.”

The success of the WH Mini EV demonstrates enormous demand for smaller, more affordable EVs, and Chinese manufacturers are well placed to satisfy this demand. Not surprisingly, other domestic manufacturers quickly entered the ever-expanding market for low-cost, light vehicles by launching competing models. The first contender, Chery Automobile, a long-established manufacturer, launched the QQ Ice Cream at the end of 2021; this vehicle was similar to the WH Mini EV in appearance and performance but had an even lower price. The leading state-owned automaker, Chang’an Automobile, also joined the price war by launching the Lumin, an ultracompact EV, in June 2022. In addition, Geely Automobile launched the Panda Mini, targeting female consumers. In 2023, the escalating price war eventually sparked price decreases by BYD, which launched the Seagull, its least-expensive EV, with a price of $9,700 and a competitive advantage based on its cutting-edge blade batteries and e-platform 3.0 system.

Although, at this point, BYD is unlikely to introduce the Seagull EV in the US market, it is already available in Brazil, at a starting list price of $20,000, far less than for any models offered by Tesla. The existing ICE joint ventures are finding that their survival in the Chinese market is increasingly threatened by sharp price competition from local EV manufacturers.

This is accompanied by the reality that, after facing years of fierce competition in the Chinese domestic market, coupled with the sunsetting of various central government subsidies, hundreds of smaller Chinese EV manufacturers and brands are being driven out of the market as it consolidates. The December 5, 2023, issue of the Japanese magazine Economist Weekly reported that about 96 EV manufacturers had a record of production, only 41 of which had an annual production capacity of more than 10,000 vehicles. Ten manufacturers accounted for 70 percent of the Chinese domestic market, and eleven of the twenty top-selling brands in China were domestic. According to a Bloomberg analysis of data from the China Automotive Technology Research Center (CATARC), in July 2023, Chinese domestic automakers, led by BYD and Geely Automobile, accounted for 50 percent of domestic market sales for the first time, having taken a portion of the market share from state-owned–foreign joint ventures producing ICE autos. This suggests that the automotive market in China will experience a shakeout among the smaller EV and ICE producers – many of which are foreign–Chinese joint ventures.Footnote ⁴ Only Tesla has been able to withstand this onslaught of price cutting.Footnote ⁵ In many respects, the current developments in the EV industry in China echo what happened earlier in the US personal computer industry and the early days of the US ICE industry: a massive number of entrants, wild experimentation, an acceleration in technological change followed by a massive shakeout (e.g., Utterback and Suárez Reference Utterback and Suárez1993).

Because China has established itself as the leading market and manufacturer, in 2024 foreign firms were compelled to invest there in order to secure access to local EV technologies and markets. This was the opposite of the rationale for their ICE investments, which involved technology transfers of outdated foreign technology to their Chinese partners (Chu Reference Chu2011). This reversal is exemplified by a decision by VW in July 2023 to invest $700 million to acquire a 5 percent stake in the EV manufacturer Xpeng Automobile, in an effort to boost its position in the Chinese market. VW also made large investments, including acquisition of a majority stake in its joint venture with JAC Motors focused on the production of small EVs and the establishment of an R&D center in Hefei, in Anhui Province. Other investment activities by German legacy manufacturers include Daimler-Benz’s investment in the production of small EVs by BAIC and the opening of an R&D center in Beijing. After the Chinese government lifted restrictions on the ratio of capital contribution at foreign joint ventures (JVs), BMW announced plans to increase its stake in its Chinese joint ventures from 50 percent to 75 percent. There is growing recognition that the paradigm shift toward electrification creates new opportunities for Chinese automakers to compete overseas and foreign firms to export EVs made by their Chinese JVs.

At the same time, given the uniqueness and idiosyncrasies of China’s domestic market, many observers thought that overseas success of Chinese EV manufacturers was unlikely. For example, Teece (Reference Teece2018: 504) argued, “success in China, however, is not necessarily a good predictor of success globally.” Yet the evidence has shown that Chinese automotive firms have multiple paths to globalization while developing both ordinary capabilities and dynamic capabilities. A notable example is Geely, which accelerated its globalization by acquiring Volvo Cars for $1.8 billion in 2010. Most remarkable is that in 2024 Chinese auto exports in unit terms surpassed those of any other country and have continued to grow in 2025.

The growing evidence also suggests that advances in technological capabilities and low-cost competitiveness by Chinese auto companies have given them the confidence to build plants overseas. For example, Chinese firms are targeting the geographically proximate Southeast Asian market: SAIC set up a new joint venture plant in Thailand, Geely acquired a 50 percent stake in a local Malaysian company, and BYD opened its first overseas automotive assembly plant in Thailand in 2024. Historically, these markets have been dominated by Japanese automakers, whose vehicles accounted for 86 percent of the market in Thailand in 2018. However, the structure of the market and consumer demand have greatly changed. Sales records for 2023 show that, with the exception of Tesla’s Model Y and Model 3, the top ten EVs sold in Thailand were Chinese – among which BYD achieved particularly strong performance, comprising about 40 percent of the Thai EV market. The initial success of Chinese cars in Southeast Asia has been followed by success in Latin America, Africa, Central Asia, and Russia.

As mentioned earlier, battery technology is the key to the EV industry. A report by the European Union (Bielewski et al. Reference Bielewski, Pfrang and Quintero Pulido2023) states that, while Japan became the annual leader in battery patents in 2009, it lost this position after 2020, when South Korea and China took first and second place, respectively, as global leaders because of the gains by LG, CATL, and Samsung. At present, the main R&D competition is between South Korean and Chinese battery manufacturers and in 2024 the Chinese manufacturers had far surpassed the South Korean firms.Footnote ⁶

These changes have been driven by the rapid pace of improvement in battery technology in terms of energy density, charging speed, driving range, and cost. As a result, the price of batteries dropped significantly, from $180/kWh in 2022 to $115/kWh in 2024, and is expected to $82/kWh by 2026 (Goldman Sachs Reference Sachs2024). This has led industry observers to predict that by 2026, EVs will achieve cost parity at time of sale with ICE vehicles even without government subsidies – by most measures, they are already cheaper on a life-cycle basis.Footnote ⁷ In 2025, over 20 percent of the global new car sales were only 4 percent, thirty-one countries have reached the point at which 5 percent of the new cars sold are EVs (Bloomberg News 2024). Among these countries, in Norway where in 2024 90 percent of the cars sold were EVs and in China in 2025 EVs accounted for more than 50 percent of the new cars sold.

The rise of EVs will not only help the world mitigate climate change but, more importantly, will shape the perspective on industrial transition, and the increasing competitiveness of EVs (projected and rapid price decreases, longevity, low operating costs, and superior performance) is likely to obsolete ICE technology across nearly all applications, perhaps, even including jet engines. For decades, many automakers believed that technologies such as fuel cells and hydrogen would prevail in any transition from the ICE and that the transition was likely to be slowFootnote ⁸ – in part because an entirely new energy distribution system would be needed. Something that electric vehicles did not need – all it needed was charging stations and a reworking of the electric grid – as the distribution system already existed.

The ICE manufacturers made half-hearted efforts to enter the EV market, but most (in particular, Toyota) were content to produce hybrids (see, e.g., McKinsey 2021; Wilmot Reference Wilmot2023). This relatively benign neglect turned into a panic when they realized that Chinese firms, in the aggregate, had become the largest global producers of EVs (both passenger vehicles and buses) and an increasingly strong competitor in cutting-edge lithium battery technology and, just as important, had established an entire supply chain from lithium mining (China controls 80 percent of global production) to the design and assembly of EVs. And, most alarmingly, Chinese manufacturers were rapidly entering markets where automakers from the G-7 countries had traditionally been dominant.

In the 2020s, venture capital (VC) funding for EVs was at an all-time high.Footnote ⁹ According to the International Energy Agency (2022a), in the period 2018–2022, China accounted for 70 percent of VC investment in EV startups, whereas the United States led in investment in charging infrastructure, trucks, and battery components. IEA data also shows that, in 2022, VC investment in early-stage startups to develop battery technologies increased 15 percent over the level in 2021, totaling nearly $850 million. In 2023, funding for new EV entrants seemed to dry up, as competition intensified, and major ICE manufacturers accelerated production of EVs (IEA 2023), and this retreat by investors continued in 2025.

The consulting firm, AlixPartners, estimated that by 2025 investment in EVs would reach a cumulative total $330 billion. Reuters stated that global automakers expect to spend over one and a half trillion dollars on EVs and batteries until 2030 (Lienert Reference Lienert2022). These investments reflected the looming urgency of addressing zero-carbon mandates in cities such as London and Paris and countries from Norway to China, though by 2024 venture capitalists and many European and US incumbents began to postpone or cancel their planned investment as the market for their EVs did not materialize as they had expected.

At the time that this Element was being finalized, the advance of the EV industry in China was making ICE automobiles obsolete there, and, given the growth in the market and advances in technology, China is almost certain to lead the world in the global transition to EVs. But it is also possible that the period of technological ferment is not over and that other energy-storage technologies might replace lithium-based battery technologies. However, at present, the technological trajectory toward lithium, and possibly sodium batteries, in which Chinese firms are increasingly dominant, appears likely to continue.

We draw on evidence from extensive internet searches, including public documents, company histories, and other archival data. By triangulating various resources (articles in business newspapers, consulting reports, trade journals, publicly available interviews and presentations, etc.), we chronicle the emergence and evolution in China’s EV industry, which began with earlier initiatives in five-year plans (FYPs) and was dramatically initiated with the country’s ninth FYP (1996–2000) and highlighted during the twelfth FYP (2011–2015).

Since the enactment in the United States of both the CHIPS (Creating Helpful Incentives to Produce Semiconductors) and Science Act in 2022 and the Inflation Reduction Act (IRA) in 2023, US auto manufacturers planned to quadruple their announced EV manufacturing and battery investment to $210 billion, which was expected to exceed that of any other country (Mui Reference Mui2023). Moreover, because of the success of Chinese EV firms, in 2024 and, more recently, under Trump the US government wanted to impose heavy tariffs in order to protect the US market against imports of Chinese EVs. As part of the legislation, the US government intends to exclude Chinese battery firms and even licensing of their global-leading technologies by US manufacturers – and Korean and Japanese battery makers hoped to take advantage of this, though again their involvement is likely contingent upon the new Trump administration’s decisions.

The Element begins by discussing the history of EVs. At the beginning of the automobile era, several different battery-powered vehicles were developed yet failed to prevail, as the ICE won out due to technical challenges and the cooperation between automakers and the petroleum industry, which rapidly built out a fuel infrastructure. We then fast-forward to the twenty-first century to discuss the experimentation and reemergence of EVs in the form of the Chevy Volt and the Nissan Leaf, followed by the emergence and success of Tesla. Then we explore the interaction between government policy and entrepreneurial activity that led to the emergence and rise to global dominance of China’s EV industry.

Next, we show that the Chinese EV industry is based on the building of an EV supplier ecosystem that increasingly integrates the entire value chain from raw materials mining to recycling – a process that made China the center of the EV global industry. The ferocious competition in China resulted in excess capacity and dramatic price decreases and has driven EV manufacturers, domestic and foreign, to export automobiles, as discussed in Section 5. Subsequently, China became the world’s largest automobile exporter, and Chinese EV firms are establishing manufacturing operations globally. We offer reflections on China’s success and its implications for the global economy.

The Element concludes with a discussion of the implications of this profound technological disruption and paradigm change. How will it affect China and its economy? Does this transition in the transportation industry have a positive effect on what some have called China’s middle-income trap (Lewin et al. Reference Lewin, Kenney and Murmann2016)? Are batteries the next main general-purpose technology? If advancement in battery technology and Chinese centrality in EV production continues, in combination with the powerful position of Chinese firms in photovoltaics, wind turbines, and other alternative energy technologies, will China lead the energy transition globally? Could the EV transition in China enable it to lead the next Kondratieff long wave? Will this enable China to become the global center, not just of manufacturing but of the global economy in general? Finally, will this transition cause the United States, Japan, and Western Europe to become clean technology backwaters? Certainly, much is at stake in the EV revolution.

2 The Early History of Battery-Powered Cars

3 The Rise of the Chinese EV Industry

3.1 Evolution of China’s Industrial Policy in New Energy Vehicles

Given China’s long-term dependence on petroleum imports, it is not surprising that the Chinese government began to consider NEVs by the 1980s. Further, as the Chinese economy grew and Chinese cities boomed, the country experienced a dramatic and health-threatening increase in air pollution, in large measure, due to ICE automobiles. This added incentive to the search for new non-petroleum-based transportation solutions. For example, in 1990, the eighth National Key Technology R&D Program supported small-scale EV demonstration projects. Government interest in NEVs was also heightened by the fact that the joint ventures with Western multinational enterprises that were ICE automakers resulted in only minimal technology transfer, and yet, generated enormous profits (Helveston et al. Reference Helveston, Wang, Karplus and Fuchs2019). The government came to understand that the foreign firms had no interest in improving the capabilities of their Chinese JV partners – and it became clear that it would take a long time to catch up to them in manufacturing ICE (Howell Reference Howell2018).

This section focuses on the central government policies regarding NEVs, while recognizing that many of these policies were delegated to the local and provincial governments, resulting in a large variety of incentives directed at both NEV producers and consumers. For example, Shenzhen assisted BYD by purchasing EV-powered municipal buses (Ren Reference Ren2018). The municipal government of Shanghai was very important in assisting Tesla in its negotiations over obtaining an operating license for its wholly owned Gigafactory there (Han 2024). Local government initiative in developing bottom-up strategies is a central aspect of the Chinese national innovation system (Sun & Kenney Reference Sun and Kenney2024). However, in the interest of brevity, we do not include local government policies, though they have been vital in nurturing the growth of NEV firms and technologies – and, in many cases, local governments, through their interaction with local firms (e.g., BYD and the Shenzhen local government), learn and develop policies before the central government (Sun & Kenney Reference Sun and Kenney2024).

Government policy concerning NEVs can be separated into several stages of development. Initially, the government discussion and policy initiatives were largely R&D oriented and rather general. Later, central government attention increasingly was directed to EVs and developing an entire ecosystem, including suppliers, and even going so far as to secure access to key raw materials, rollout a charging infrastructure, and even end-of-life recycling. At each stage, R&D was encouraged and incentives were provided to build an entire supply chain. In the following discussion, we divide this development process to reflect these stages.

3.1.1 Stage 1: Industrial Policies for Developing the Technology, 2001–2009

Although experimentation was already underway, the tenth five-year plan (FYP) for National Economic and Social Development, released in 2001, explicitly called for “the development of economical cars, the improvement of the manufacturing level of automobiles and key components, and the active development of high-efficiency, energy-saving and low-emission automobile engines and hybrid power systems.”Footnote ¹⁴ During this period, the idea of developing an “NEV industry” started to appear in various “horizontal” national key industrial planning and policy documents, though, at this time, there were very few industry-specific dedicated policies. From 2001 to 2009, the central government industry policies mainly targeted the development of technology that would enable a NEV industry to emerge – also, at this time, the R&D incentives were technology agnostic (i.e., EV, hybrid, or fuel cell/hydrogen).

In 2001, the State Economic and Trade Commission issued the tenth FYP for the Automobile Industry, calling for the promotion of “R&D of electric and hybrid vehicles, accelerate the popularization and use of alternative-fuel vehicles, and proceed with the leapfrog development of the automobile industry.”Footnote ¹⁵ This FYP was important, as it explicitly called for the development and commercialization of NEVs. In addition to the horizontal policy stress, the central government promoted the initiation of the NEV industry by launching the 863 Major Special R&D Program of the Ministry of Science and Technology (MoST) on Energy-saving and New Energy Vehicles, which jumpstarted R&D investment in NEVs. To pursue the development of NEVs, the central government announced the “three vertical and three horizontal” technology development strategy, building on a policy direction that had started in the 1990s. The “three vertical and three horizontal” means the three vertical vehicle technology routes, that is, “hybrid vehicles, pure electric vehicles, and fuel cell vehicles”; and the three horizontal system routes, that is, “the multi-energy powertrain control system, the electric drive motor and control system, and the power storage battery system.”Footnote ¹⁶ This policy nurtured the development of the fundamental technologies that supported subsequent development of China’s NEV industry.

Subsequently, a series of technology development measures were announced. In February 2003, the General Office of the State Economic and Trade Commission formally released the Notice on Declaring the National Technology Innovation Plan Projects, declaring NEVs and related technologies and products as an area in which firms could apply for project support. Then, in December 2005, the National Development and Reform Commission (NDRC) (including the former National Development Planning Commission, the former National Planning Commission) launched the Industrial Structure Adjustment Guidance Catalogue (2005), adding “the development and manufacturing of new energy vehicles (e.g., hybrid cars, electric cars, fuel cell vehicles) and their key components.” At the same time, the State Council issued the “National Medium and Long-term Science and Technology Development Plan Outline (2006–2020)” declaring that the national key areas and priority themes included “low energy consumption and new energy vehicles.”Footnote ¹⁷

One year later, the Eleventh FYP for the Development of Science and Technology called for the organization and implementation of major projects on energy saving and NEVs in the plan for the development of modern transportation technology.Footnote ¹⁸ The development of energy saving and new energy vehicles was included in the “Outline for the Implementation of International Science and Technology Cooperation in the Eleventh Five-Year Plan” and the notice on “The Key Technologies and Product Catalogs that China should master Indigenous Intellectual Property Rights” in late 2006. These policies emphasize the development of energy-saving and new energy vehicles, comprising the development of technologies for complete vehicle design; integration and manufacturing; power system integration and control; an automotive computing platform; key components, such as high-efficiency and low-emission ICEs, fuel-cell engines, power batteries, and drive motors; and NEV infrastructure.Footnote ¹⁹ In late 2007, the NDRC released the “Management Rules for Access to New Energy Vehicle Production and Industrial Restructuring Guidance Catalog (2007)” defining NEVs and outlining specific requirements for firms that wanted to qualify for, access, and apply for government support.Footnote ²⁰

In the tenth FYP period, the central government invested RMB 880 million (about US$125 million) in the “863” Electric Vehicle Major Science and Technology Project to support automobile manufacturers and universities that wished to form partnerships to develop technology. Then, in the eleventh FYP period, the government funded 270 science and technology projects on NEVs based on the “863” Energy-Saving and New Energy Vehicle R&D Major Project, which covered key components, power systems, vehicle integration, test platforms, demonstration and promotion, as well as standards and policies. The financial investment available through the project totaled RMB 7.5 billion, of which RMB 1.16 billion was allocated out of central government financing, and more than RMB 7.5 billion was invested by local governments and enterprises.Footnote ²¹ During this period, the main emphasis was on technology development across all NEV technologies. Tesla was formed in Silicon Valley to develop EVs in 2003; thus, China was using government-funded university/industry partnerships to develop NEV technology at roughly the same time that global leaders such as Tesla were being founded, and hybrid vehicles, in particular, the Prius, achieved significant market acceptance. At roughly the same time as these developments, though largely unsupervised or supported by the government, Chinese entrepreneurs were introducing battery-powered motorcycles that were successful with consumers (Weinert 2007) and learning from these developments. As this phase ended, the central government began to consider the demonstration phase.

3.1.2 Stage 2: Industrial Policy for Pilot Production, 2009–2013

Beginning in 2009, the government introduced policies to create a market for NEVs. The central government began by designating pilot cities that would create demand for NEVs. These industrial policies were a combination of short-term demonstration projects and medium- and long-term plans. In early 2009, the State Council advocated the large-scale development of NEVs and called for large-scale demonstration pilot projects. The centerpiece was the “Ten Cities and One Thousand Vehicles Demonstration and Application Project for Energy Saving and New Energy Vehicles,” known as the Ten Cities and One Thousand Vehicles Policy. This policy initiative was jointly introduced by the MoST, the Ministry of Finance (MoF), the NDRC, and the Ministry of Industry and Information Technology (MIIT). The policy assigned financial subsidies to 10 cities annually in three-year windows.Footnote ²² Each city was meant to purchase and use 1,000 NEVs. These large and medium-size cities introduced NEVs in various fields, including public transportation (NEV buses), rentals, public service vehicles, and postal services. The ambitious goal was to have NEVs account for 10 percent of all vehicles sold by 2012. However, in 2012, only 27,432 pilot vehicles were in use in the 25 NEV demonstration cities – of which 23,032 were in the public service sector and 4,400 were purchased by private individuals (Wang et al. Reference 66Wang, Liu and Kokko2012). The results of these initial demonstration cities were disappointing. Only 40 percent of the target for the public service sector fleet for the twenty-five cities was attained (Gong et al. Reference Gong, Wang and Wang2013). Moreover, in 2012, only seven cities had 1,000 NEVs in operation (Economy Reference Economy2014).

Also in 2009, the State Council issued the “Plan for the Adjustment and Revitalization of the Automobile Industry” to announce that it would invest RMB 10 billion (US $1.25 billion) to support NEV manufacturing and the production of key components. EVs were highlighted in this plan, which stated goals such as:

Scaling the electric vehicles’ production and sales. Transforming the existing production capacity to form 500,000 new energy vehicles (pure electric, rechargeable hybrid, and ordinary hybrid) production capacity. Having new energy vehicle sales account for about 5 percent of total passenger car sales. Major passenger car manufacturers should have certified new energy vehicle products.Footnote ²³

In 2010, the State Council (2010) declared that NEVs were among China’s seven strategic key emerging industries according to the industrial policy.Footnote ²⁴ The Decision of the State Council on Accelerating the Cultivation and Development of Strategic Emerging Industries was quite comprehensive, specifically targeting:

Breakthroughs in key core technologies in the fields of power batteries, drive motors, and electronic control, and promote the popularization, application, and industrialization of plug-in hybrid and pure electric vehicles. At the same time, carrying out research and development of cutting-edge technologies related to fuel cell vehicles, and vigorously promote the development of energy-efficient and low-emission energy-saving vehicles.Footnote ²⁵

Other policies regarding financial subsidies and specific product categories were issued as well, such as the Interim Measures for the Administration of Financial Subsidies for the Demonstration and Promotion of Energy-saving and New Energy Vehicles in 2009,Footnote ²⁶ the Implementing Rules for the Promotion of Energy-Efficient Vehicles (Passenger Cars Below 1.6 Liters) under the Energy-Efficient Products Benefiting the People Project in 2010,Footnote ²⁷ and the Notice on the Adjustment of Subsidy Policies for the Promotion of Energy-Efficient Vehicles in 2011.Footnote ²⁸

In 2012, the State Council followed up by launching the Development Plan for Energy-saving and New Energy Vehicle Industry (2012–2020) further clarifying the technology trajectory of China’s NEV industry as

targeting pure electric drive as the main strategic orientation for the development of new energy vehicles and the transformation of the automobile industry, the current focus is on promoting the industrialization of pure electric vehicles and plug-in hybrid vehicles, promoting the popularization of non-plug-in hybrid vehicles and energy-saving internal combustion engine vehicles, and upgrading the overall technical level of China’s automobile industry.Footnote ²⁹

Interestingly, this 2012 policy shows that EVs and PHEVs were becoming the focus of government policies for industrialization, as hybrids such as the Prius and energy-efficient ICE vehicles were being accepted in the market. However, the policy clearly acknowledges that the Chinese automobile industry technically continued to lag the overall global level, especially in hybrids and energy-efficient ICE vehicles.

The government recognized that NEV industrialization still required significant preparation and policy mobilization. The Development Plan for the Energy-Saving and New Energy Vehicle Industry (2012–2020) set a goal that “by 2015, the cumulative production and sales volume of pure electric vehicles and plug-in hybrid vehicles will strive to reach 500,000 units; and by 2020, the production capacity of pure electric vehicles and plug-in hybrid vehicles will reach 2 million units, and the cumulative production and sales volume will exceed 5 million units.”Footnote ³⁰

By 2012, the Chinese government had clearly identified EV and PHEV as the goal of its NEV policy. To calibrate Chinese development, the interest in EVs was growing rapidly as new EV firms were being formed in the United States and, in particular, Tesla was growing rapidly. Further, Chinese air pollution problems were worsening, as automobile ownership grew rapidly. To achieve widespread adoption of NEVs, the government decided that new policies to encourage their purchase were needed.

3.1.3 Stage 3: Industrial Policy for Large-Scale Adoption, 2013–2018

In the third stage, the government goal was to target the large-scale adoption of NEVs. First, the Ten Cities and One Thousand Vehicles Policy was extended due to an evaluation of NEV promotion programs in various cities by several ministries and confirmed 39 cities/city clusters as the basis for this promotion of NEVs between 2013 and 2014 – this included most of China’s large and medium-size cities. By September 2015, 180,945 NEVs were operating in 39 cities. Moreover, in 2015, 379,000 NEVs were sold, outpacing US EV sales. Going forward, China became the world’s largest NEV market (Liu Reference Liu2024: 37).

Industrial policies now focused on consumption incentives to encourage large-scale adoption. For example, implementation of the purchase tax exemption policy in September 2014 triggered rapid adoption by individuals. The central government introduced purchase subsidies, such as the “Announcement About the Purchase Tax Exemption of New Energy Vehicles,”Footnote ³¹ the “Implementation Plan for Government Agencies and Public Institutions Purchasing New Energy Vehicles,”Footnote ³² and the “Notice on Issues About the Electricity Price Policy for Electric Vehicles.”Footnote ³³ For example, in the Financial Support Policies for the Promotion and Application of New Energy Vehicles for the Period 2016–2020 issued in 2015 that targeted consumers. NEV manufacturers reduced the price of vehicles by deducting the subsidies, and the central government reimbursed manufacturers.Footnote ³⁴ In addition, the subsidy was based on the vehicle’s energy savings, emissions reduction, and other factors, such as the production cost, production scale, and technology level. The policy set the subsidy standard in 2016 for various types of NEVs. In 2017–2020, subsidies other than those for fuel cell vehicles were gradually reduced. For example, the level of subsidy for NEVs in 2016 was reduced in 2017–2018 by 20 percent and in 2019–2020 by another 20 percent over the level in 2016 (Liu Reference Liu2024: 109).

The government also advocated subnational industrial policies, such as preferential license quotas, traffic control exemptions, and infrastructure support. Many cities addressed the infrastructure bottlenecks by increasing the installation of public chargers. In addition, some cities reduced costs for vehicle owners by reducing annual inspection fees and parking fees, among other policies. For example, in 2014 the Beijing government drastically reduced the new ICE vehicle quotas, while increasing those for NEVs.

At the same time, to increase the size of the NEV market the central government introduced vertically specific industrial policies such as restricting licenses for ICE vehicles, except for the zero-emissions EVs and implementing policies to accelerate the large-scale NEV adoption. For example, the Measures for Parallel Management of Average Fuel Consumption and New Energy Vehicle Points for Passenger Vehicle Enterprises were launched on September 27, 2017.Footnote ³⁵ In this document, the MIIT and other five departments jointly established two types of points for average fuel consumption and NEVs of enterprises and established a point trading mechanism that enterprises could use for independently determining how to offset negative points and thereby achieve two goals: energy conservation and reduction in fossil fuel consumption as well as NEV development.

These approaches enabled rapid growth in the consumer market for NEVs, as the number grew from a few thousand in the public transportation niche at the end of 2013 to more than 60,000 at the end of 2017, of which more than 60 percent are privately owned (Jin et al. Reference Jin, He and Cui2021). This trend is shown in Figure 4. The growth was disrupted in 2016, when a scandal regarding NEV subsidy frauds erupted, as five NEV manufacturers were producing and selling poorly made EVs to car rental firms that they owned and then collected over RMB 1 billion (approximately $150 million) in public subsidies (Yan & Dou Reference Yan and Dou2016). As a result, it was announced that fiscal incentives would be gradually decreased. Also, in the future, to qualify for subsidies, NEVs would have to be graded by government inspectors, and the subsidies would favor EVs with advanced technologies. Finally, anti-fraud and enforcement measures were added that allowed government officials to test and certify NEVs (Qiong Reference Qiong2017). These measures initiated a new phase of deeper government involvement in the NEV market.

Figure 4 Production, sales, and registration of China’s new energy vehicles (2014–2023).

Source: China Association of Automobile Manufacturers

Figure 4Long description

The y-axis marks the numbers per 1,000 vehicles, ranging from 0 to 25,000, while the x-axis lists the years from 2014 to 2023. The number of vehicles produced, vehicles sold, and vehicles registers respectively for the years are as follows:

2014: 79, 75, 220. 2015: 340, 331, 420. 2016: 517, 507, 910. 2017: 794, 777, 1530. 2018: 1270, 1256, 2610. 2019: 1242, 1206, 3810. 2020: 1366, 1367, 4920. 2021: 3545, 3521, 7840. 2022: 7058, 6887, 13100. 2023: 9587, 9495, 20410.

3.1.4 Stage 4: Industrial Policy to Encourage Market Competition, 2018–

In this fourth stage, which began in early 2018, the central government gradually decreased the subsidies and promoted the marketization of NEVs. In February 2018, the four ministries (i.e., MoST, MoF, NDRC, MIIT) jointly issued the Notice on Adjusting and Improving Financial Subsidy Policies for the Promotion and Application of New Energy Vehicles, highlighting the increase in technical threshold requirements, raising the standards to qualify for subsidies, and increasing the driving range for NEVs.Footnote ³⁶ Also, it was decided that subsidy policies would be updated annually and gradually decreased in terms of the size and the vehicles that qualified. Contemporaneously, the government opened the Chinese market by allowing the then global leader, Tesla, to build a factory in China in a bid to further spur competition. In July 2018, the Shanghai Municipal Government and Tesla signed a memorandum of cooperation to build a factory wholly owned by Tesla meant to produce 500,000 EVs per year.

The central government also increased support for building charging infrastructure and deploying batteries, and so forth, while encouraging technological innovation in NEVs, such as developing intelligent, connected vehicles. The Circular of the General Office of the State Council on the Issuance of the New Energy Vehicle Industry Development Plan (2021–2035) issued by the State Council highlights focusing the development agenda on the “three vertical and three horizontal” R&D trajectories. With respect to the “three vertical” trajectories, it emphasized focusing on pure electric vehicles, plug-in hybrid (including programmable) vehicles, and fuel cell vehicles. In addition, the industrial policy emphasizes improving EV infrastructure by subsidizing the construction of charging networks, coordinating and promoting the construction of intelligent road networks and facilitates, and orderly creation of a hydrogen fuel supply system.Footnote ³⁷

Since the 10th FYP for the National Economic and Social Development of China, China’s NEV industrial policy has evolved in four stages. The initial “three vertical and three horizontal” technology development strategy was intended to develop the technology for building a domestic NEV industry. The targets of these industrial policies evolved from the supply side to the demand side. Initially, the demand-side industrial policies were aimed at vehicles for public transportation, such as buses and taxis, in designated cities. This was followed by attempts at large-scale marketization of NEVs in the nationwide consumer market for passenger cars. This stage was driven by production and sales subsidies. In this stage, the supply-side industrial policies continued, with large subsidies for R&D and the development of charging infrastructure. The interactions between the supply-side and demand-side industrial policies contributed to the ongoing evolution of NEVs. When technological capabilities (e.g., battery technological innovations by CATL and BYD), production levels, and the scale (e.g., large sales) satisfied the conditions for industrialization, the competitive advantage of China’s EV industry began to fully emerge.

4 Emergence of the EV Supplier Ecosystem in China

By definition, a social and technical transition from a core general-purpose technology, such as the internal combustion engine (ICE), requires creating a new supply chain, but also a new way of thinking. In this case, that transition is from a system based on petroleum to one based on batteries, which probably – but not necessarily – will be made with lithium. While car batteries have existed for a long time, for years, they were heavy lead acid batteries, used mainly in ignition systems. Over time, batteries have evolved dramatically. The greatest change was the replacement of earlier vehicle battery chemical compositions by lithium – a technology that was initially used in portable electronic devices. And yet, the dominant design in terms of battery storage material is still subject to some uncertainty.

If China wished to play a leading role in the EV transition, it would have to build an entire ecosystem more or less simultaneously. Many of the components of the new ecosystem – such as an electricity grid, auto bodies, tires, and brakes – already existed, and so did manufacturers that could join the emerging social and EV technical ecosystem. Similarly, China did have various battery makers, especially, for portable devices, though their technology was not yet cutting-edge. Hence, many parts of what would become the new ecosystem already existed in China and elsewhere; however, the ICE system was entrenched, and many other capabilities would have to be developed to support the emerging EV system.

Because EVs represent a disruptive technology, there was space for EV startup entrants to displace traditional ICE manufacturers that were caught between protecting their existing ICE businesses and entering the initially uncertain new industry. This dramatic technological disruption threatened not only the skills and knowledge base of the traditional manufacturers but also the capabilities of much of their supplier base, that is, essentially all the skills related to internal combustion – including engines, fuel, ignition, and exhaust systems – affecting products from gas tanks and spark plugs to catalytic converters and mufflers. Few firms involved in producing parts for ICE vehicles are expected to survive in the EV age, absent their own transition. Other firms, such as those involved in the business of tires, windshields, brakes, and auto body parts, should be able to survive the transition. But, in some activities, such as tires and brake manufacturing, global leaders will have to reengineer their products to be optimized for EVs – for example, brakes that generate electricity or tires built for the different torque and wear characteristics of an EV (Hankook 2024).

In this section, we examine how China created the world’s most comprehensive EV supply chain and the remarkable rise of Chinese suppliers, particularly in batteries. As late as 2017, Japanese and Korean automotive battery suppliers were dominant globally (Yeung Reference Yeung2019), only to be displaced in the 2020s. Moreover, a number of non-Chinese suppliers began to move significant EV-related engineering capability to China – thereby reinforcing it as the global center of EVs.Footnote ³⁹ Moreover, China is quickly becoming the location for global technological leaders in nearly every aspect of the battery supply chain. This development challenges the competitive position of auto assemblers in the European Union (EU) and the United States, which will increasingly depend on imported parts from China or risk producing obsolete or excessively expensive vehicles.Footnote ⁴⁰ Finally, we reflect on the implications of components developed for EVs, such as batteries, for other industries, such as energy storage for utilities or innovations in electrical motors for cars that might be useful for those used in factories.

The greater simplicity of EV technology and manufacturing requirements is likely to reduce the number of suppliers, as EVs require far fewer parts than ICE-powered vehicles. Even as the number of EV components is fewer, the production of many of these remaining components will require capabilities that are entirely different from those needed for ICE. The drivetrain technologies will also shift and new configurations become possible such as equipping each wheel with an electrical motor, rather than having only one central motor – something that was nearly impossible in ICE-powered vehicles.

Despite the rapid progress, it appears as though battery technology is still at an early point in its scientific, engineering, and manufacturing evolution. Nevertheless, the existing lithium-based batteries are currently widely installed, and highly automated manufacturing processes are operating at the latest battery giga-factories in China, Korea, and the United States.

The growth and strength of the EV supplier ecosystem demonstrates Chinese competitiveness based on the speed and comprehensiveness of the ecosystem’s formation and maturation. This growth was due to both government policy and entrepreneurial activity. At this point in the evolution of EVs, the technological ferment in batteries appears to be central for continuing progress of the entire system. For assemblers, the make-or-buy decision seems to be central – firms producing ICE vehicles combined engine production and final assembly. No dominant organizational design has emerged yet in the EV industry – for instance, BYD has combined battery production and auto assembly while also selling batteries to other assemblers. Similarly, Tesla produces its own batteries and purchases batteries from others. Finally, CATL and other battery producers supply batteries to assemblers. Auto assemblers that purchase batteries no longer make the highest value-added component of an automobile (the engine). For incumbent assemblers that use an Internal Combustion Engine as a major product differentiator, relying on new outside vendors for the electric battery (the major product differentiator) is very likely to be viewed as a competitive liability.

Finally, the Chinese EV ecosystem threatens to become so advanced that it will make the rest of world dependent on it. For example, Tesla’s Shanghai factory is already its lowest-cost location, and German automakers are importing Chinese-made EVs to Europe. The strength of Chinese ecosystem may make it increasingly difficult for other countries, such as the United States and EU member countries, to impose sanctions on Chinese EVs and batteries, as this could be a choice to remain technological and economic laggards with higher cost structures than China.Footnote ⁴¹

4.2 Developing a Supplier Ecosystem

The rapid growth in the Chinese EV industry created enormous demand for components and materials such as lithium and graphite as the main materials in EV batteries, which are very different from those in ICE vehicles.Footnote ⁴³ China dominates production at every stage of the EV battery supply chain beginning with control of 80 percent of Lithium mines. In heavy industry, SOEs were important investors in building mines around the world, particularly for lithium. However, component suppliers are often either existing firms extending their product lines (e.g., graphite producers) or new entrants. Supplier production was highly concentrated in a few firms globally, and, just as important, Chinese producers have become even more important since 2021 (IEA 2022b).

Table 6 gives a partial list of the main Chinese suppliers of EV inputs. In 2024, nearly three-quarters of the battery cell, specialized cathode, and anode material production capacity is in China. Also, China has 70 percent of the global cathode and 85 percent of anode material production capacity and over half the global raw material processing of lithium, cobalt, and graphite. China dominates the entire graphite anode supply chain end to end, as it has 80 percent of the global graphite mining (IEA 2022b: 29).

Table 6 Key Chinese component suppliers

Chinese supplier	Input	Global market share (if available)
Zhuhai Enjie New Material Technology	Separator membranes	n/a
Shanghai Putailai New Energy Technology	Separator membranes	n/a
Jiangxi Tinci Central Advanced Materials	Electrolyte salts	35%
Zhangjiagang Guotai-Huarong New Chemical Materials	Electrolyte salts	n/a
Shenzhen Capchem Technology	Electrolyte salts	n/a
Ningbo Shanshan	Electrolyte salts	n/a
Ningbo Shanshan	Anode material (graphite)	50%
Shanghai Putailai New Energy Technology	Anode material (graphite)	50%
BTR New Energy Materials	Anode material (graphite)	50%
Chinese suppliers	Manganese sulfate	~90%
Chinese miners	Natural graphite mining	80%
Chinese recyclers	Recycling	~50%

Source: Author compilation based on IEA (2022b).

4.2.1 Batteries

Figure 5 shows that the majority of EV production costs are due to Li-ion batteries. Because of the centrality of the battery in an EV, this section is necessarily short. In less than a decade, China went from being relatively backward and an unimportant actor in the vehicle battery industry to the global leader in production, though China continues to lag behind its Asian competitors in patenting (Gong & Hansen Reference Gong and Hansen2023). The two main Chinese battery firms are CATL and BYD (which, along with Tesla, is now the largest EV producer in the world). The Chinese firms became leaders partly because of their shift in battery materials (e.g., Prius used nickel manganese cobalt) to lithium-iron-phosphate (LFP) and, perhaps later, to sodium (see Figure 6).

Figure 5 EV cost structure 2022

Source: www.foreverev.com/2022/12/ev-li-ion-battery-cost-structure/

Figure 5Long description

Two pie charts are presented. The first pie chart, labeled Breakdown of E V costs, shows the lithium ion battery to be about 40 to 50% of the cost, followed by Motor and powertrain, Others, and Development. The second chart, labeled Breakdown of lithium ion battery costs, shows Cathode to be about 40 to 50% of the cost, followed by Separator, Others, Container, Electrolyte, and Anode.

Figure 6 EV battery manufacturing capacity, by region

Source: www.precedenceresearch.com/insights/electric-vehicle-battery-market

4.2.2 Electric Motors

In 2023, EV motors were produced in-house by OEMs or purchased from various suppliers. For example, BYD produces not only its own batteries but also electric motors. Although not many EV assemblers appear to have done the same, according to a McKinsey (2023) report, those that make more than 100,000 vehicles per year are expected to move powertrain production in-house. Many EV powertrain producers are operating in 2024, including non-Chinese Tier One automobile parts suppliers, such as Bosch, Denso, Magna, and Valeo, and several startups. Chinese assemblers and various parts suppliers (including battery firms, such as CATL) produce EV motors. However, R&D in the battery space has intensified globally and new battery designs are frequently highlighted in industry related publications.

Foreign EV drivetrain manufacturers, including major European OEMs and Tesla, have invested in both production and R&D operations in China. For example, in 2017, Magna, a giant premier Canadian automotive supplier, established a joint venture with Huayu Automotive Systems to support Magna’s first e-drivetrain business in China, which is intended to supply a German automaker (Magna 2017). Similarly, Punch Powertrain, a Belgian company purchased by the Chinese Yinyi Group, built significant production capacity and R&D facilities in China for the development of EV drivetrains.Footnote ⁴⁴

China has become the center of electric motor R&D, because of the size and diversity of the Chinese market for electric motors to power not only automobiles but also all kinds of vehicles, from buses to bicycles. It is not yet clear whether, in the long term, a large independent electric motor industry will exist or the industry will be absorbed by auto assemblers or battery producers, such as CATL or BYD, which have battery expertise and might be able to optimize the relationship between battery packs and electric motors.

4.2.3 Semiconductors

EVs use more and more sophisticated semiconductors than traditional ICE vehicles (Deloitte, 2021). Although these semiconductors are not extremely sophisticated compared to those in computers and smartphones, they have been largely designed and produced by US and European manufacturers. Because of increasing trade tensions between the United States/Europe and China and the volume of Chinese EV production and their importance in the Chinese economy, it is not surprising that China has begun to implement policies for replacing foreign semiconductors with Chinese products.Footnote ⁴⁵ EVs use a large number of semiconductors, so this is an enormous market, in which, as mentioned earlier, the incumbent (foreign) ICE-related semiconductor firms might not have a powerful historical advantage.

4.2.4 Infrastructure: Charging Stations

The transition to EVs obviously requires the construction of charging infrastructure. In contrast to the available infrastructure necessary for the adoption of ICE vehicles more than a century earlier, most of the infrastructure for charging EVs already exists, in the sense of an electrical grid for distributing electricity. Thus, the final node, the charging station, had to be built. Very early on, the Chinese government recognized the need for this infrastructure and charged local governments with installing it in 2015.Footnote ⁴⁶ As a result, by 2025 China had installed over 60 percent of the global EV charging stations. But, more important, China had 90 percent of the fast chargers and an installed base of 760,000, compared with 70,000 in Europe (IEA 2023). As a result, “range anxiety” is far less problematic in China than in the United States or the EU, as it has so many charging locations.

The economics of infrastructure are different for EVs than for ICE vehicles, in the sense that fuel for ICE vehicles could be accessed only at gas stations that were eventually built in large numbers across the country to ensure that fuel would be widely available. Moreover, ICE vehicles required an entire supply chain, from oil drilling and refining to delivery to the end user. The transition to EVs presented fewer complex issues than the adoption of ICE vehicles, as the electrical grid had already been built, that is, the problem of energy delivery was already solved. Not only was it necessary to have charging stations at home, but public charging stations also needed to be built – a nontrivial task as can be seen by the shortage of public charging stations in the United States.Footnote ⁴⁷ Thus, developing the infrastructure presents different issues because demand will be lower for recharging stations than for gas stations, as most EVs can be charged at home, thereby changing the economics of “refueling.” Also, the increasing range of newer EVs decreases demand for charging away from home.

China has built the world’s largest network of charging infrastructure, and Chinese firms are also beginning to build the charging infrastructure in other countries, such as Mexico and countries in Southeast Asia.Footnote ⁴⁸ The sheer volume of Chinese charging infrastructure production suggests that these firms will also be able to improve charging times and lower costs due to economies of scale. This might enable Chinese firms to increase exports of infrastructure as well and compete with European and US producers (Cao Reference Cao2024).

4.2.5 CATL Supply Chain

BYD, which began as a battery producer and also supplies batteries to other auto assemblers, largely integrated the supply chain. CATL, the world’s largest battery producer, developed its own supply chain and supplies an increasing number of auto assemblers, including Tesla, Toyota, BMW, and myriad Chinese assemblers. Finally, it also built battery factories around the world (see Table 7).

Table 7 Location of global CATL factories, date established, and ownership

Facility	Location	Date established or planned opening	Ownership
Battery factory	Erfurt, Germany	2019	Wholly owned
Battery factory	Debrecen, Hungary	2025	Wholly owned
Cathode materials	Morocco	2024	Wholly owned
Battery factory	Spain	2024	JV Stellantis
Battery assembly	Thailand	2024	JV Arun Group
Mining, processing, battery manufacturing and recycling	Indonesia	2022	JV ANTAM and IBI
Battery factory	Michigan, US	2025	JV Ford (cancelled)
Factory equipment	Nevada, US	2025	Tesla factory

Source: Author compilation, 2024.

As the largest battery producer in the world, CATL has developed its own supply chain. According to incomplete data from the Chinese online newspaper 21st Century Business Herald, since 2017 CATL has invested in 49 battery-related firms (see Appendix Table A1) in a wide variety of areas, essentially forming a business group, as do many successful Chinese firms.Footnote ⁴⁹

CATL has been the largest beneficiary of the transition to LFP batteries and is preparing for a potential transition to sodium-based batteries. CATL (2023) invested $2.3 billion in R&D in 2023, an increase of 18 percent over the level in 2022.Footnote ⁵⁰ The transition away from nickel-based batteries has eroded the patent advantage of the Korean and Japanese producers. Moreover, CATL is rapidly building a global production footprint that will soon enable the firm to compete with the incumbent Korean and Japanese producers and circumvent potential trade-related restrictions. CATL is the global leader and appears to be increasing its advantage; its greatest competitor is BYD, which suggests that China is likely to become the future center of battery production.

5 Globalization of the Chinese EV Industry

In a 2018 Management and Organization Review (MOR) article, David Teece (Reference Teece2018: 504) argued that “success in China … is not necessarily a good predictor of success globally.” This observation was accurate before a massive shift among Chinese consumers to EVs, dramatic growth in EV manufacturing capacity, domestic market price competition, and continuing rapid improvements in battery technology. These developments were driving down the cost of Chinese-made EVs to the point at which they became less expensive to purchase and to operate than ICE vehicles. The rapid building of manufacturing capacity and accompanying fierce price competition that began in 2020 led both Chinese and Western automakers manufacturing EVs in China to look toward export markets (see Figure 7). At the time that this Element was written, Chinese manufacturers had no access to the US market, and the largest export destination for gasoline-powered vehicles from Japan, South Korea, and Germany remained the United States – a situation that Trump’s newly enacted tariffs may affect.

Figure 7 China has become an auto export powerhouse

Source: https://snippet.finance/china-car-exports/

Figure 7Long description

This is time series data on automobile exports from 2010 to 2023, showing the number of automobiles exported by the United States, Germany, Japan, South Korea, and China. It also shows that China began an exponential rise around 2019 to 2020, and surpassed Germany and Japan in 2023 to become the world’s largest automobile exporter.

An overlooked phenomenon is that Japanese used cars are popular in emerging markets in Asia, the Middle East, Africa, and Central and South America (excluding Mexico). This longtime market remains substantial, for example, the number of used Japanese cars exported to Africa in 2023 was 255,000, far exceeding the 92,000 new cars exported from China. And yet, as Figure 8 shows, Chinese exports continued to increase in 2024. The globalization of the Chinese EVs continues to be driven by exports. More recently, Chinese EV manufacturers followed Korean and Japanese ICE manufacturers by investing in assembly and manufacturing facilities in other countries.

Figure 8 Monthly exports of automobiles from China, 2022–March 2024.

Source: China Association of Automobile Manufacturers, as reported in Wondee Autoparts, Analysis of China’s automobile exports in March 2024, April 22, 2024, www.wondee.com/Analysis-of-China-s-automobile-exports-in-March-2024-id48827486.html

Figure 8Long description

The x-axis marks the 12 months, while the y-axis marks vehicles exported in multiples of 10,000, ranging from 0 to 60. Data for 2022, 2023, and 2024 are provided (only January, February, and March for 2024). The graph reads as follows. January: 22; 30; 45. February: 17; 32; 37. March: 15; 36; 50. April: 12; 37. May: 24; 38. June: 25; 38. July: 28; 38. August: 30; 40. September: 29; 44. October: 34; 48. November: 37; 47. December: 36; 48. All values are approximate.

As shown in Figure 9, China is exporting cars to a wide variety of countries. Some of these exports are produced in China by European manufacturers or by Tesla, destined for Europe and third countries. Norway is especially noteworthy, as in 2024, Chinese imports captured 15 percent of its market, according to Mallikka (Reference Mallikka2024). For example, Automotive News Europe (2024) reports that the BMW ix3, which is produced in China, is exported to Europe. Similarly, Tesla exports vehicles produced at its Shanghai Gigafactory to many countries. Further, Chinese exports to Oceania, especially Australia, are increasing rapidly (Kankai Reference Kankai2023). Also, helping Chinese exports are the Western sanctions on Russia.Footnote ⁵² In addition, in 2023 BYD entered the Japanese market, which has long been dominated by Japanese producers. Finally, Chinese firms are exporting commercial vehicles, especially buses to a number of countries. For example, electric buses produced by BYD operate in more than sixty countries and regions worldwide and have captured about 20 percent of the EV bus market in Europe, 70 percent in Japan, and more than 80 percent in the United States.

Figure 9 Top destinations of Chinese vehicle exports, 2022.

Source: General Administration of Customs of China and China Association of Automobile Manufacturers, June 20, 2023

As Chinese firms push to achieve economies of scale, they are turning to exports as an outlet for this capacity. Responding to this export tsunami is difficult not only because of the low Chinese prices but also because of the size and speed of growth in this industry. The transition of the Chinese EV industry from an unimportant exporter to the largest exporter took only four years.Footnote ⁵³

On the other hand, Figure 10 shows that it is not EVs but internal combustion engine (ICE) vehicles that have made China the world’s largest exporter of automobiles. According to the China Automobile Dealers Association, ICE vehicles accounted for 64.9 percent of China’s total vehicle exports (passenger cars plus buses, trucks, and vans) in 2023, significantly higher than the 33.3 percent share of EVs. This unique fact confirms our view in Section 3 that the success of China’s electric vehicles was not driven by the global export market, but was first and foremost aimed at the domestic market and had received strong support from the government. This is also in contrast to other Asian counterparts such as Japan and South Korea. In these countries, one of the main triggers behind the success of their auto industry as a global player was the large-scale export of automobiles, particularly to the North American market.

Figure 10 China’s auto exports by category

Source: Miura (Reference Miura2024)

Figure 10Long description

The x-axis notes the years 2019 to 2024. The left y-axis notes sales in multiples of 1 million units from 0 to 400, while the right y-axis notes the export ratio expressed in percentage. The data given is for internal combustion engine (I C E) vehicles, electric vehicles (E V), I C E exports ratio, and E V exports ratio, respectively. The graph reads as follows. 2019: 95 million, 25 million; 75%; 24%. 2020: 90 million; 20 million; 75%; 23%. 2021: 150 million; 50 million; 71%; 26%. 2022: 220 million; 110 million; 65%; 35%. 2023: 340 million; 175 million; 63%; 35%. 2024 (January to June): 215 million; 120 million; 61%; 35%. All values are approximate.

Chinese EV and battery firms are not only expanding exports but building or exploring production facilities in other countries. The clear leader in offshoring production is BYD, which opened a bus factory in Lancaster, California, in 2017 and in Newmarket, Canada. Three factories are making various products in Brazil and, in 2019, two in Europe (Hungary and France). BYD has also expressed interest in an auto factory in Mexico as an entry into the North American market – but in 2025 this was put on hold due to the uncertainty created by the Trump administration. In 2010, the Zhejiang Geely Holding Group acquired the Swedish-based Volvo brand as well as Lotus and operates factories in Sweden, and SAIC owns the MG brand (formerly a British brand). These developments suggest that Chinese EV manufacturers are rapidly gaining experience in operating in overseas markets.

The rapid growth of EV production in China and exports has also led Chinese firms to open production facilities in other countries. This is surprising because, as late as 2018, Teece and others argued that overseas operations require dynamic capabilities, rather than ordinary capabilities, to overcome the “liability of newness” (Stinchcombe Reference Stinchcombe and March1965) and speculated that Chinese firms might find it challenging to do so. They believed that Chinese automakers, most of which at that time were focused on their domestic ICE market and had relatively weak global brands, would require many years to establish recognition of their brands in other countries. However, the intense domestic competition and cost advantages incentivized Chinese EV manufacturers to expand into the global market. In response, both the United States and the European Union have adopted defensive strategies intended to give domestic manufacturers time to catch up. These strategies consist of punitive tariffs and the exclusion of imports of Chinese-made cars – to the point that even exports to their home countries by German automakers and Tesla are likely to be banned.

At the same time, Chinese EV producers are working rapidly to export to and even manufacture in developing countries in Southeast Asia, Latin America, and Africa that lack a domestic auto industry and have large and growing markets (Tanabe Reference Tanabe2024). The number of new gas-powered cars exported from China in 2020 was a mere 570,000, compared to 2.414 million exported from Japan.

However, the EV disruption has changed the landscape and made it possible for Chinese EV firms to bring EVs to market with prices at or below those of ICE vehicles. As the transition to EVs continues, the potential for China to become the global leader in manufacturing motor vehicles is a development that established ICE producers and their home countries must address, given the economic and political consequences, such as the growing impact on high-wage auto workers. However, it may be too early to predict the takeover of overseas automotive producers by Chinese-made EVs. Most of the cars exported overseas are manufactured in China. Due to overcapacity and domestic competition, Chinese auto manufacturers are being forced to expand their overseas manufacturing bases, but most of these initiatives are still in the planning or knock-down (CKD) manufacturing stages. In this sense, the prediction by Teece (Reference Teece2018) may still be accurate.

6 Conclusion: The Transformation of the Global Automotive Industry

The precipitous growth of the EV industry in China and its rise to global leadership have been nothing short of astounding and could not have been predicted a decade ago. In this Element, we show that this growth was propelled by a series of Chinese central government initiatives embedded in several five-year plans that directed attention and initially modest resources to a vaguely defined idea of “new energy” vehicles. These initiatives interacted synergistically with the emergence of a large number of new entrepreneurs and intense interprovincial competition, which drove local governments’ NEV support. This complex combination of initiatives by the central and local governments and the surge of entrepreneurial initiative enabled China to become a leader in both production and increasingly innovation in this rapidly developing industry. It also is leading to the obsolescence of industries that have relied on the ICE, even as batteries have become one of the most important general-purpose technologies of the early twenty-first century.

Although China’s EVs were initially introduced by BYD at around the same time as the appearance of the first Tesla model, Tesla attracted far more attention in both China and the United States. Before 2018, Tesla was publicly well known, even though few Teslas were on the road, but around 2018, commercialization of EVs began to accelerate. It is now evident that China has emerged as the epicenter of the global EV industry and its supply chain. More important, China is becoming a major driver of R&D advances in every aspect of EVs, as acknowledged in a report by the European Union (EU) (Bielewski et al. Reference Bielewski, Pfrang and Quintero Pulido2023). Beginning in 2023, the reaction in the EU, the United States, and Japan to Chinese success became one of panic.

Given the massive scale of corporate investment and central government incentives in China as well as its dynamic scientific and engineering innovation ecosystem, Chinese firms, led by CATL and BYD and joined by Xpeng and other less-well-known suppliers, are charging ahead and, in the process, defining various aspects of EV technologies. Hence, China is increasingly leading the transition to what might be called the “battery era.” Initially, the established ICE manufacturers in Europe, Korea, Japan, and the United States had announced aggressive strategies for producing EVs, but in 2024 they changed course, adopting defensive measures to slow the penetration of their markets of Chinese EVs. In Germany, the unanticipated and rapid global adoption of EVs drove down sales by Volkswagen, which announced its urgent need to lay off workers and close factories.Footnote ⁵⁴ Honda, Nissan, and Toyota are shuttering ICE factories in China and elsewhere. Ford has gone through several strategies in its attempts to counter Chinese competitors. According to a confidential interview with a longtime president of one of the largest Ford dealers in the US Southern states, the company asked leading dealers to carry Ford EVs and required them to invest $1 million to be able to sell and service these EVs. Soon, Ford reversed its optimistic sales forecast and reverted its product mix to ICE vehicles, representing the abandonment of its EV strategy just as Chinese EV producers were ramping up their plans for global market expansion.

As Ford began to retreat, General Motors and Stellantis pivoted their emphasis to plug-in hybrids (PHEVs), which became attractive because of range anxiety. The lack of charging infrastructure in the United States made range a major disincentive for many prospective purchasers of EVs, a problem that was mitigated by PHEVs. Chinese manufacturers had also recognized the upside of PHEVs and offered a broad variety of them in the domestic and foreign markets. As a stop-gap measure, Toyota introduced an engine of much lower weight than that of a standard ICE vehicle and that can continuously charge the car battery, thereby accommodating larger battery packs with the engine as a backup if the batteries fully discharged.Footnote ⁵⁵ Having an EV that can be powered by both batteries and internal combustion is inherently costlier than having one powered only by batteries – hence, it is likely to be a transitional technology in the evolution to vehicles that overcome the driving range of EVs.

These developments are occurring in the context of increasingly severe shocks from climate change and the global goal to achieve “net zero” scenarios, which is increasing the belief that zero-emission vehicles will be necessary. It is the goal of many countries in the EU as well as states such as California that by 2038 sales of ICE cars will end in many leading markets. According to Bloomberg (2024), almost every country will actively adopt or consider decarbonization solutions by the early 2030s. EVs are vital for the success of this effort. As a result of global economic and political changes, increasingly significant markets for EVs are being created not only in developed countries but in Latin America, Africa, and Asia and in countries such as India, Mexico, Russia, and South Africa. Many Chinese companies (e.g., BYD, Geely, Chery, SAIC, and Chang’an) offer low-cost EVs and have become large-scale exporters to Brazil, Chile, and Mexico as well as countries in Eastern Europe. The impact on Germany, Japan, and South Korea, the major auto exporters, is already considerable and will increase.

In addition, Chinese manufacturers are actively exploring the opening of manufacturing operations in the EU (e.g., in Spain and Eastern Europe) and Mexico (for the Mexican market and exports to the United States and Canada). Moreover, Tesla and some European ICE automakers with production facilities in China are leveraging China’s cost advantages to export not only to their home markets but also to third countries in Southeast Asia and the Middle East.

China and its EV manufacturers are rapidly changing the geopolitical configuration of global auto production. To illustrate, BYD was transformed from a battery company into a vertically integrated EV manufacturer. In many respects, BYD’s growing global presence symbolizes the auto industry’s shift to EVs and the emergence of many new Chinese brand names as well as new supply chains of Chinese EV component providers. In June 2024, BYD’s sales jumped 35 percent in China as it initiated price competition by introducing successive price reduction strategies across its entire product line; as a result, Honda and other foreign competitors that could not match these reductions experienced double-digit slumps in sales.

The challenge is not confined to China. For example, Honda plans to cut its manufacturing capacity by 50 percent in Thailand, where BYD is emerging as a market leader. BYD is also planning to open several overseas plants as it expands its global manufacturing footprint and seeks to circumvent prohibitive tariffs. For example, in 2024 it opened its first plant in Thailand, and plants are in place or under construction in Hungary, Spain, Brazil, Turkey, Mexico, and Pakistan.Footnote ⁵⁶ Michael Dunne, a veteran of the automotive industry, stated apocalyptically that, in 2024, China had initiated a global car blitzkrieg.Footnote ⁵⁷ China was expected to export as many as six million passenger vehicles (made by both Chinese and Western firms) to more than a hundred countries in 2024, cementing its position as the world’s number one auto exporter and the global leader in EVs.

If the current trajectory continues, the rapid growth and increasing global centrality of the Chinese EV and battery industries will change the configuration of global automotive production. The transition to EVs has enabled Chinese firms to launch a wide range of cars, including luxury vehicles, supercars, and entry-level models, effectively upending the established ICE manufacturers, which are in the unfamiliar position of having to catch up with China in EVs. None of the established ICE automakers have formulated or expressed a strategy for gaining an advantage over China. Moreover, the emergence of the Chinese EV industry is most remarkable for the speed with which it has attained global prominence.

In 2018, few would have predicted such success by 2024, at a time when European and US automakers saw Tesla as a curiosity, not as a future competitor, and considered the transition to a dominant EV industry many years in the future. However, in 2024 it became glaringly obvious that China was unconcerned about complaints by the industries and governments elsewhere concerning what they believed was Chinese excess capacity and size as the world’s largest auto exporter. Therefore, concerns in the United States, the EU, South Korea, and Japan shifted dramatically to a fear that the transition to a renewable future would be dominated by Chinese industry and that the manufacturing of automobiles, an important pillar of the G-7 economies, would be overtaken by China.