China has become the second largest car exporter, a milestone that will likely shift the balance of power for existing manufacturing countries and ignite simmering tensions with current rivals. Exporting 3.11 million vehicles in 2022, China has surpassed Germany and is second only to Japan in number of car exports.
The country looks to maintain its status as a manufacturing powerhouse. According to the China Association of Automobile Manufactures, it aims to export 8 million cars by 2030, more than double Japan’s current number. 
The surge of Chinese exports has happened without many in the U.S. noticing. While the world was wrestling with the coronavirus pandemic, China was increasing its car exports at a staggering rate. In 2020, China exported 172,000 cars to Europe, tripling that number to 523,000 cars in 2021. Exports to Latin America have followed a similar trajectory. In 2021, China exported about 1.98 million vehicles to Latin America, up 143% in one year.
As Europe and Latin America have been quickly transitioning to EVs, it’s no surprise that China is succeeding in these regions. China is the obvious beneficiary of the transition to EVs. As a result of generous government subsidies, tax breaks, procurement contracts, and other policy incentives, China now dominates the global EV market. 
China Beats Germany in Volume, But Not in Value
Home to several of the most highly regarded luxury and performance brands, Germany’s automobile industry is regarded as the best in the world, though German carmakers have outsourced some of their production to other countries. Of all the German-branded vehicles sold in the U.S., 28% were made in the U.S., though most are still made in Germany.
The types of cars that Germany specializes in are much more expensive than those that China produces. With the average price of a Chinese-made car at 13,700 USD, the average German-made car is about 3 times more expensive. The two countries are evidently playing in different markets. Though China intends to tackle the high-end market eventually, the lower end of the market is currently in its crosshairs, meaning that Germany’s top position in the luxury space looks secure, for now. The value of German car exports in 2021 was $139.1 billion, compared to $22.4 billion for Chinese exports.
China To Overtake Japan’s Car Industry
Japan’s car industry rose to prominence by making cars of higher quality at lower prices than American cars. A confluence of factors helped Japan dominate manufacturing in the 1980s. U.S. interest rates reached as high as 21.5% while the cost of borrowing for Japanese firms was low. Japanese companies were able to hold more debt than their American counterparts while paying less interest. 
While the factors that lead Japan to dominance in the 1980s have lessened, Japan remains a premier manufacturing country. Japan’s prowess for manufacturing is observed not only in volume, but also by the complexity of the country’s products, as seen by Japan ranking number one on Harvard’s Growth Lab Economic Complexity Index since 2000. But China aims to confront Japan’s status by pushing forward in EVs.
Japan has lagged China in its transition to EVs. Japanese automakers have made massive investments into gasoline-electric hybrids and are looking to take advantage of those investments for as long as possible, leading to a meager effort in fully electric vehicles. Toyota, dragging its feet on its transition to EVs, produced its first battery-powered electric vehicle in 2020 and released it only to China. This apprehension makes the country vulnerable to missing out on the EV transition and having to play catch up with China down the road.
Another concern for Japan is that Chinese-made cars are less expensive than Japanese-made cars. According to UN Comtrade, Chinese cars cost 13,700 USD, about 30% less expensive than the average Japanese car. Japan will have to maintain its quality over Chinese cars to sustain its pricing premium. However, JD Power reports that Chinese carmakers have been quickly closing the quality gap with their global rivals. 
EVs to Determine the Future of the Industry
China is serious about transitioning to EVs. For example, in a push to foster more EV production, China allowed Tesla to build a factory in Shanghai without the company needing a local partner, the first time the country loosened the requirement. Along with more than a decade of subsidies, investments, and infrastructure spending, the Chinese EV market leads the rest of the world. For laggards like the U.S. and Japan, there may come a reckoning with how to transition into a market that China already dominates. 
Written by: Kristopher Jones, CFA®
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