Fwd: The China EV boom is bonza for Australia (AFR)

This article is from the December 19 issue of Australian Financial Review Digital Edition. To subscribe, visit https://www.afr.com.

Richard McGregor
Electric vehicles Thanks to the boom in demand for lithium, Australia has been able to profitably surf in the slipstream of China’s ascendancy.
An old joke about trade policy in Brussels, as recounted by the Financial Times, goes something like this.
European trade policy is set by Germany, whose trade policy in turn is set by German exporters, whose trade policy is set by the German car industry, whose trade policy is set by Volkswagen.
It is a caricature, as the paper pointed out, but a decade or so ago, it wasn’t an entirely useless formulation for understanding who wielded power over policy in Europe.
As in many advanced economies, however, the old verities about once seemingly impregnable industrial giants are being upended by China’s rise – in this case, Volkswagen’s status as a car colossus.
Europe’s geopolitical and energy strategies have already been scrambled by Russia’s invasion of Ukraine. Now its industrial heartland faces the threat of a similar devastation.
In 2021, China overtook South Korea as a car exporter, and in 2022, beat Germany into second place. This year, Chinese manufacturers surged past Japan to become the largest.
In part, China’s growth has been opportunistic, as it rushed into a Russian market abandoned by Europe, Japan and South Korea after the invasion of Ukraine. In part, it is because of a rapid growth in electric vehicles, a segment that China dominates.
But the surge in Chinese exports is also structural. Chinese domestic sales peaked around 2017. With massive subsidies producing excess capacity of about 25 million vehicles at home, Chinese manufacturers have looked abroad for markets. Europe is in China’s sights, and the continent is deeply conflicted about how to handle the challenge.
The German car industry is in many respects the central European car industry, with supply chains winding their way through the Czech Republic, Poland, Slovakia and Hungary.
You might think, then, that Germany and its partners are swinging behind the recent announcement from Brussels that the European Commission is considering imposing duties on Chinese EV imports.
As it turns out, German companies are being swamped by Chinese rivals in more than just export markets.
For many years, German car makers, especially Vokswagen, have sourced the bulk of their global profits from making and selling cars in China. The focus of German policy for years was to protect and expand that market.
But that model is unravelling with the EV boom, which VW was slow to pick up on. In the early 2000s, VW and its local joint venture partners in China had a market share of about 50 per cent. Now it is hovering at around 10 per cent.
VW has lost a million units of annual sales in the past five years. BYD, the Chinese EV maker, this year surpassed VW to become the bestselling brand in China, the world’s biggest car market.
For its many critics, Germany is getting its just desserts. Berlin ignored warnings about the dangers of relying on Russian gas, and paid the price. With China, it finds itself exposed to another unyielding autocracy determined to establish a new industrial ascendancy.
When Washington and Tokyo had rolling clashes in the 1980s over Japanese car exports, a solution was eventually found. Instead of shipping cars, the Japanese made them in factories in the US.
Such a solution is not at hand here. China has too many car makers to accommodate, and relocating a few plants to Europe wouldn’t make much difference. Plus, Beijing has no interest in exporting any local jobs.
Where does Australia fit into this narrative?
As with waves of Chinese industrial booms over the past quarter of a century, Australia has been able to profitably surf along in the slipstream.
In 2022-23 , Australia’s raw lithium exports were expected to surpass $18 billion, up from just $1 billion a few years ago, according to the Australia China Relations Institute.
China buys nearly all of these minerals, making Australia by far the largest supplier of lithium to the country.
The steel used in making Chinese cars is also boosting iron ore prices for Australian miners.
On the other side of the ledger, the Teslas on Australian roads are made in Shanghai, where the US company has its biggest factory. China’s biggest EV manufacturer, BYD, is marketing aggressively in Australia. Polestar, another player in the Australian market, is owned by Volvo, which is in turn owned by Geely, a private Chinese company.
All this has happened – the Australian boom in lithium exports to China for use in EV batteries and buying back the finished Chinese product – at the same time that Beijing was punishing Canberra over political differences.
Germany and Australia are like-minded countries and in recent years have shared notes regularly about their experiences with China.
Both countries enjoyed China booms, but whereas Germany’s is abating, Australia’s is just starting, for the moment, to get frothy again.
If Australia has an EV boom, it will one way or another be a made-in-China one. The cheaper, the better.
If we are smart, we might end up processing the lithium onshore.
But Australia shouldn’t lose sight of the bigger picture.
The mighty German car industry might have been too slow to react to the revolution in global car markets. But no matter what VW might be telling Brussels, Europe and Germany, it could have never matched the Chinese subsidies and their huge distortionary impact, which aren’t in anyone’s interests.
Richard McGregor is a senior fellow at the Lowy Institute in Sydney.