(Bloomberg): China has become a world leader in electric vehicles by generously subsidizing its companies, a criticism that is being increasingly heard in the United States and Europe and has become a central refrain in the escalating trade war.

If it were that simple, China would have champions in everything from aerospace to semiconductors. Despite efforts by U.S. and European politicians to thwart them, China’s unique rise in electric vehicle makers is fast taking the world by storm and offering lessons to other countries about how to engineer successful industrial policy.

Recognizing that EVs are crucial to the environment and the economy, the Chinese government has poured billions of dollars into them, but the driving force behind the country’s EV industry has been foreign companies. Wan Gang, China’s minister of science and technology, was an early proponent of China’s investment in EVs to overcome the advantage of foreign brands, but when Tesla began local production in China in 2019, it sparked a real craze among consumers, spurring the building of an entire EV supply chain.

Innovation has become the watchword in China, spawning a slew of electric vehicle makers that have sought to outdo their rivals with design, software and other high-tech features, but many have been eliminated. The ones that survived are efficient and hungry for more. China’s electric vehicle market this year has been marked by fierce price wars and cutthroat competition.

A unique EV industry

The United States and Europe are now emulating the policies adopted by Chinese leaders, using subsidies and other means to boost domestic electric vehicle makers’ competitiveness. But China’s government’s willingness to let companies go bankrupt while boosting the new energy vehicle (NEV) sector as a whole makes the EV industry unique. By contrast, China has been trying for decades to build its own planes to compete with Boeing and Airbus, but Commercial Aircraft Corporation of China (COMAC) has yet to challenge those strongholds.

Gerard DiPippo, senior geo-economic analyst at Bloomberg Economics, said China isn’t trying to create a particular domestic champion in the EV sector. “China wanted winners, but they didn’t want to pick them,” he said. He called it a “let a hundred flowers bloom” approach, allowing a variety of EV companies to emerge and compete freely.

Such strategies have allowed electric-vehicle makers such as BYD to offer electric hatchbacks with rotating touchscreens starting at just 73,800 yuan ($14,500). Li Auto’s L-series car, with its spacious interior and premium on-board entertainment, has catapulted itself to the top of the electric SUV rankings. While Apple Inc. has abandoned its electric project, smartphone maker Xiaomi Inc. has fans lining up to buy its recently released SU7 electric vehicle.

Some of these EV makers could even become the next Toyota Motor Corp. BYD is expected to produce more than 3 million vehicles in 2023 and overtook Tesla to become the world’s top seller of electric vehicles in the fourth quarter of last year.

Technological innovation in EVs is also spreading to surrounding fields such as battery and supply chain optimization.

When the EV industry was still developing, the Chinese government effectively barred foreign battery makers from the market and set up a “white list” of battery companies that could supply local EV makers, but the list was abolished in 2019. BYD and Contemporary Amperex Technology Co. Ltd. (CATL) held a combined 53.1% share of the global EV battery market in the first four months of this year, according to Seoul-based SNE Research.

And Commerce Ministry officials boasted at a recent press conference that electric vehicle makers in the Yangtze River Delta near Shanghai can get all the parts they need within four hours.

The electric-vehicle industry is reaping the rewards as Beijing seeks to shift economic growth away from real estate and infrastructure. Bloomberg Economics estimates the industry is on track to contribute 2.7% of gross domestic product by 2026, nine times what it was in 2020 but still not enough to fill the gap left by the collapse of China’s housing bubble.

In the long term, EV makers could make a bigger contribution from here, but they face obstacles to expanding globally. The Biden administration has raised tariffs to about 100%, effectively shutting Chinese makers out of the U.S. market, and the European Union announced plans this month to impose tariffs of up to 48%. Both cite the Chinese government’s financial support for EVs and the resulting overproduction as the reason.

Herbert Crowther, an analyst at Eurasia Group, said China’s particular strength in batteries was a key reason why Chinese electric vehicle makers have a cost advantage over their rivals.

“Chinese battery companies are reaching price levels that are surprising even major international competitors, potentially upending the traditional economics of EV input costs,” Crowther said, adding that the success is down to programs to secure the raw materials needed for EV batteries, an area “where Chinese policies have been effective and where Western industrial policies will likely continue to struggle.”

From artificial intelligence to renewable energy to biopharmaceuticals, there are many promising areas where China could make great strides in the future. Whether they will happen depends not on Chinese authorities but on Chinese scientists and entrepreneurs.

Scott Kennedy, a China expert at the Center for Strategic and International Studies, said winners will emerge from “governments that foster an environment for innovation” so that “companies that have the potential to break new ground can ultimately find a home in the market.”

Original title: China’s EV Success Story Built on Price Wars, Tesla Factor (excerpt)

–With reporting assistance from Linda Lew, Chunying Zhang, James Meigha and Danny Lee.

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