The Electric-Car Lesson That China Is Serving Up for America

Beijing’s push to build an entire industry from scratch helps inform how the White House should proceed.

Would you drive an electric sedan with a single-charge range of more than 400 miles and automated driving functions, one that costs less than a Tesla Model 3 and, at least according to the manufacturer, can pull off a 2,000-mile road trip along chaotic highways during which the person behind the wheel needed to steer only about once every 60 miles? Those are the advertised specs of the P7, the sleek new model launched last year by China’s hot start-up XPeng.

The Chinese government would certainly be pleased if you did: Another important feature of XPeng cars is ample state support. In the past year, the company has signed deals with investment funds linked to the city of Guangzhou, Xpeng’s hometown, and the surrounding province, Guangdong, worth $700 million. XPeng has also gotten preferential terms on land, low-interest loans and tax breaks, and state subsidies that have helped it reduce the P7’s showroom price.

“The government is actually a lot more open to allow some of the innovative ideas of businesses to … push forward with their research and test their technologies,” Brian Gu, XPeng’s vice chairman, told me.

That’s exactly what worries Washington. Fueled by government largesse, China’s electric-vehicle sector has raced ahead of America’s, sparking fears that the United States has fallen dangerously behind its chief rival in a crucial future industry. China’s “state capitalism” (Beijing prefers “socialism with Chinese characteristics”) is rewriting the rules of how countries and companies compete in the global economy. All governments place their thumb on the scale to favor homegrown firms—recall the Obama administration’s bailout of General Motors—but China bends entire markets to a degree unimaginable in the more laissez-faire U.S. By offering funds and protection for nascent, high-tech industries including electric cars, as well as chips, AI, and a host of other futuristic sectors, the Chinese government could potentially swamp the world with subsidized products.

Beijing’s goal is to leapfrog Western powers into the forefront of next-generation technologies, dominance that could hand China’s leaders the political clout to shove the U.S. aside and become the world’s premier superpower. In the process, they would pulverize a key tenet of the American worldview—that free markets and free people are inseparable, and the sole route to national success—and thus legitimize Beijing’s illiberal policies and practices. The contest over electric cars is therefore a proxy war between the West and China, between their economic models and political ideologies.

This challenge from China has convinced some U.S. policy makers that the business of America can’t just be business. During her 2020 presidential campaign, Senator Elizabeth Warren suggested harnessing government resources to aid targeted industries based on a China-style national plan. Jake Sullivan, now President Joe Biden’s national security adviser, last year advocated for a more active government role in shaping the national economy. Noting that Beijing’s subsidy programs “have already paid off handsomely in several areas,” he and his co-author, Jennifer Harris, a fellow at the Roosevelt Institute, argued that “U.S. firms will continue to lose ground in the competition with Chinese companies if Washington continues to rely so heavily on private sector research and development.”

Biden is listening. His gargantuan infrastructure bill includes a China-like $174 billion program to jump-start the transition to electric vehicles by funding the construction of a charging-station network, aiding automakers, and offering rebates and tax breaks to buyers. The bill also earmarks $50 billion to support semiconductor manufacturing and research, another essential sector heavily subsidized by Beijing. “China and other countries are eating our lunch,” Biden said, and the bill will “put us in a position to win the global competition with China.”

But will it? Do Chinese state programs actually work?

Despite Beijing’s much-heralded capitalist reforms since the 1980s, bureaucrats have never stopped meddling with markets. State direction, state money, and state enterprises remain core features of the Chinese economic model. President Xi Jinping has even reversed the trend toward greater economic freedom, notably with a hefty dose of state-led programs aimed at accelerating the progress of specific sectors.

In 2015, Xi and his team unveiled the “Made in China 2025” initiative, specifying certain advanced industries for special state support, ostensibly to upgrade Chinese manufacturing, but actually for a much grander goal: to use the muscle of government to race out in front in cutting-edge technologies. The program rang the alarm in Washington, and the Chinese government’s subsidization of domestic tech companies was added to the lengthy list of American grievances over Beijing’s discriminatory business practices. To deflect criticism, Chinese policy makers no longer use the “Made in China” name, but its substance (and subsidies) have very much remained in place.

Electric vehicles were one of the plan’s primary targets. Part of Beijing’s motivation was to clear the stifling smog hanging over Chinese cities and reduce the country’s dependence on imported oil. The major impetus, though, was to realize a four-decade dream of building an internationally competitive automobile industry. Although Chinese manufacturers have made inroads against their established American, European, and Japanese rivals in recent years, they never became the world conquerors Beijing desired.

The transition to electric offered China a fresh opportunity: With all automakers at the same starting line with a new type of product, the country “saw an opening to lead, not follow,” Michael Dunne, the chief executive officer of the consultancy ZoZo Go and former president of General Motors in Indonesia, told me.

Waiting for the market to work its mysterious magic could blow China’s chance, though. The government had “to subsidize the hell out of this industry,” in Dunne’s words. “It was a giant gamble on a future technology,” he said.

What followed was a smorgasbord of supportive policies: Manufacturers received subsidies to reduce prices to encourage sales; the state spent on R&D, direct investments into electric-vehicle companies, and charging infrastructure; drivers received other enticements, such as preferential access to license plates, which are restricted in many big cities to control traffic. (Subsidies were offered for foreign-branded cars made in China too—the more companies that joined in, the faster the sector would develop.) The Center for Strategic and International Studies, in a November study, estimated that the Chinese government has lavished more than $100 billion on the sector overall, mostly in subsidies. In 2019 alone, the study noted, government support was equivalent to almost a third of the sector’s total revenue.

The result is an industry built practically from scratch. In 2016, 336,000 electric passenger vehicles were sold in China, according to data from S&P Global Platts. Last year, the number topped 1.2 million, four times greater than in the U.S. An entire supply chain has sprung up too: CATL, headquartered in Fujian province, is now the world’s largest manufacturer of batteries for electric vehicles.

Even more impressive, the program has spawned some nifty start-ups, including XPeng, founded in 2014. Last year, the company’s car sales more than doubled compared with the year before. It already owns one factory capable of churning out 150,000 cars a year, is building a second, and in April, agreed to a third.

Investors clearly have high expectations. XPeng, which debuted on the New York Stock Exchange last year, has a market value—when combined with two other New York–listed Chinese start-ups, Nio and Li Auto—greater than that of General Motors or Ford.

The big taxpayer bill “was totally worth it,” Tu Le, the founder of the Beijing-based consultancy Sino Auto Insights, told me. “China has become a leader in a short period of time.”

The sheer enormity of the electric-vehicle industry in China is already being felt around the world. GM’s surprise announcement in January that it would produce only electric cars by 2035 is widely believed to be linked to its large business in China, where it sold more than 40 percent of its cars last year.

There’s more to success than size, though.

Catching up to China in mere sales is not complicated: The Europeans have already done it. The real test of Beijing’s state program is whether it is creating competitive companies that make cars the world wants to drive. It’s early, but indications so far are discouraging.

Despite the taxpayer cash lavished on Chinese electric-vehicle companies, Tesla’s Model 3 was the best-selling battery-powered passenger car in China last year, while the runner-up was a low-tech, low-priced micro-car produced by a GM joint venture. As the CSIS report noted, “at this stage it appears Chinese firms have not leapt ahead of their foreign rivals.”

Part of the problem facing XPeng and other Chinese newcomers is poor brand recognition compared with Tesla and other established nameplates. A bigger hurdle, however, is that China’s companies don’t have clear technological advantages over their foreign rivals. XPeng is considered one of China’s most advanced outfits, with its well-engineered and good-looking cars, but as Sino Auto’s Le told me, the company is “still a ways away from Tesla’s capabilities, from a technology and software standpoint.” (Tesla founder Elon Musk has accused XPeng of stealing his technology, a charge the Chinese company denies.)

If XPeng is facing an uphill climb, imagine the challenge for other businesses. And there are a lot of them. In a way, Beijing’s industrial policies were too successful, attracting more players—119, by CSIS’s count—than even the giant Chinese market can possibly sustain. Yet more keep joining the race anyway: The cellphone maker Xiaomi plans to enter the sector with a $10 billion investment.

In a more market-oriented economy, the inevitable consequence would be a loss-inducing shakeout, with many companies shut down or absorbed. In China, though, state-led development may do more harm than good. Each provincial or city government wants its own piece of the EV action, and is willing to pay for it. That could prevent weak or financially troubled entrants from failing. One of XPeng’s competitors, Nio, got rescued from probable ruin last year by a $1 billion investment organized by the city of Hefei, where the company agreed to base some of its operations. Many Chinese carmakers are state-owned enterprises, which are unlikely to be allowed to close. The result could be a kaleidoscope of small players fighting it out with one another and (usually better-equipped) foreign brands for slivers of market share.

In theory, Beijing’s coddling should allow Chinese firms to gain scale and gorge on profits at home, which they can then leverage to attack foreign markets. (This strategy launched the telecom giant Huawei into the world.) But in practice, once China’s electric-car companies venture away, they lose their government protections and have to compete based on their brand, technology, services, and marketing—all areas in which they possess no special advantages. Persuading the Chinese to drive a P7 over a Model 3 is difficult enough; wooing Americans, Europeans, and others will be harder. Rather than a cutting-edge new export industry, overrunning the old-timers of the West, the Chinese electric-vehicle sector could become an industrial island; companies and brands would hold great influence at home but marginal sway in major international markets.

What all this means is that government intervention can be supportive, but not decisive. In China’s case, its industrial policies helped create conditions for the sector to thrive, but they can’t on their own generate the innovation that leads to ultimate commercial success. That’s why China’s industrial program has resulted in a lot of production, but only questionable competitiveness.

Even Beijing’s spendthrift bureaucrats seem to have awoken to that—sort of. They’ve been rolling back direct subsidies to carmakers, with an eye on eliminating them. XPeng’s Gu believes that Chinese policy makers have come to realize the program “may not be the most efficient way to support this industry,” adding that “they have given a lot of subsidies, but it did not really build world-class companies or world-class products.”

Still, at least some state support is likely to continue. Scott Kennedy, a senior adviser at CSIS, told me in an email that “with the U.S. heavily focused on the sector, there’s now an international competitive dynamic that was not there before,” which could compel Beijing to keep the cash flowing. China’s latest five-year plan, released in March, doubles down on the drive for technological development, and likely the industrial policies meant to spur it. The plan “seeks above all to promote a large and hi-tech manufacturing sector,” Julian Evans-Pritchard, an economist at the research firm Capital Economics, wrote in an analysis. But, he warned, “technological progress is complex and unpredictable … Attempting to dictate it from above may continue to bear less fruit than hoped for.”

If Washington does head down China’s state-heavy road, Beijing’s experience offers crucial lessons. Subsidies to automakers and their customers might be necessary to give the industry the initial push it needs, but excess generosity could prop up failing firms. Taxpayer money might be more productively spent supporting R&D and building infrastructure such as charging stations, because in the end, the electric-vehicle war will be won in research labs and car showrooms, not the halls of Congress.

But perhaps the most important lesson is geopolitical: The Chinese won’t give up. XPeng’s Gu, for example, told me his company is preparing to go global, possibly rolling out showrooms in major European cities this year.

“Yes, there will be a lot of challenges,” Gu said. “But I think as long as we have a unique and differentiated way of producing attractive and technologically advanced products, and really something that the consumer likes, I think those challenges can be overcome.”