Analysts explain how China’s electric vehicle sector can cope with protectionist backlash and subsidy removal

But the threat of a flood of cheap electric vehicles is spooking foreign governments. Last year, the European Union launched an anti-subsidy investigation against Chinese electric vehicle companies, which could lead to higher tariffs on Chinese electric vehicles. The US, which considers Chinese cars a threat to national security, warns that “overcapacity” in China could crush global markets.

But at the Fortune Innovation Forum in Hong Kong last week, Roger Atkins, founder of Electric Vehicles Outlook, an electric vehicle consultancy, noted that previous car exporters had found a way to cope with the protectionist backlash.

“We’ve been here before,” Atkins said. “Japan experienced an export onslaught to the US and Europe back in the 1970s and 1980s. The Europeans and Americans imposed tariffs, and then the Japanese got around it by putting manufacturing plants in these places.”

Atkins then pointed to BYD’s new plant in Hungary as an example of how the Chinese automaker is now expanding its global manufacturing presence. (BYD is also building factories in Thailand And Braziland is considering setting up new production facilities in Indonesia and Mexico.)

Christopher Beddor, deputy director of China research at Gavekal, saw parallels with previous Beijing-led campaigns to encourage the solar and wind energy industries. “China is essentially doubling down on its industrial policy,” he said.

“Central management will say: we want to target a certain industry. Everyone is focusing on this, it is being carried out in a propaganda style,” he explained later.

Beijing is now beginning to worry about excess capacity in the system, with one official vowing in early January to take “forceful measures» to address new electric vehicle projects that were not supported by demand.

According to Beddor, this push-pull is part of China’s industrial policy. “[Officials] walk straight, [then] at some point there is recognition [they’ve] went too far. They’re pulling him back,” he said.

Beijing began offering tax and infrastructure incentives in the early 2010s, helping to create up to 500 electric vehicle companies at a time. That number has since dropped to about 100 companies.

China is now withdrawing support for the sector, which could lead to further consolidation of the sector as electric vehicle companies, many of which have yet to turn a profit, exit the market.

However, Paul Gong, executive director of automotive research at UBS, told the Forum last week that “fierce competition” in the sector – between start-ups, legacy automakers and even tech giants – has benefited the industry.

Thanks to market competition, Chinese “automakers have actually reduced the cost of electric vehicles to levels [internal combustion engines]” he said. “It was this market force that led to innovation [and] a game of efficiency.”

BYD and Tesla

Gong at the Forum last week also discussed the differences between BYD and Tesla, which are vying for the position of the world’s largest electric vehicle seller.

After tearing down the Tesla Model 3 five years ago, Gong said the UBS team was “shocked by how ahead Tesla was in terms of technology leadership.” However, a similar dissection of a BYD car just a few years later showed that the company’s level of technological sophistication was approaching that of Tesla.

“There is a slight gap [in] technology, but just different priorities,” he said. Tesla prioritized top speed and autonomous driving, while BYD focused on space and 5G connectivity, he continued.

However, Gong noted one important difference: BYD’s vehicle, comparable to the Model 3, cost 15% less to produce at Tesla’s Shanghai plant.

Unlike Tesla, BYD makes its own proprietary Blade Battery, so it doesn’t have to rely on an external supplier like CATL or LG Energy Solutions. (The battery can account for up to 40% of the cost of an electric vehicle.)

“We were shocked at how quickly BYD caught up with us,” Gong said.