Electric Vehicles, China, and the Industrial Strategies Reshaping Mobility in Emerging Economies

The developing world’s automotive market, when excluding China, is a fraction of that of the United States or Europe, but it is expected to drive passenger vehicle demand after 2030. Until recently, traditional automakers expected emerging markets to experience stable growth in internal combustion engine (ICE) vehicle demand and did not expect a strong demand for EVs outside Western markets. Thus, the rapid uptake of EVs in some key emerging markets has been a relative surprise.

The Energy Transition as an Economic Opportunity in the Global South

Several governments have identified the energy transition in general and EVs in particular as a historic opportunity for their countries to move up the value chain. Each country has its own complex political economy, which affects how industrial policies and EV promotion policies are developed and implemented. China’s rapid rise as an exporter of EVs is, however, a determining factor in many markets and has had a transformational effect (see Figure 2).

Indeed, exports from China are bringing a new range of options to markets where EVs were previously unavailable and increasing competition for producers based in other countries (see Figure 3). In many countries, much of the growth in EV sales is driven by the availability of new Chinese-made and often Chinese-branded models. There are some notable exceptions, such as Vietnam and Turkey, which have successful home-grown companies.

Growing exports of Chinese-made ICE vehicles, which are increasing in every region, are also challenging traditional automotive production in emerging markets (see Figure 4). Countries that are manufacturing hubs for foreign-owned companies, such as Indonesia, South Africa, and Brazil, are in particularly precarious situations as their industries are dependent on continued investment by incumbent players that are coming under increased competition from new companies, especially from China. Governments are at this moment either seeking to attract investment in the next-generation technology or trying to boost domestic EV manufacturers as a hedging bet to counter the potential decline of traditional production in ICE vehicles. The trend could pose a challenge for established manufacturers, including U.S. companies, if they do not adapt to competitive dynamics. On the other hand, it could also be an opportunity for providers of new technologies that meet local demands.

Initial Lessons from Emerging Markets

A survey of various countries reveals that there is no clear one-size-fits-all solution available for governments. Indeed, state capacity and budget constraints, combined with the existing economic structure of a country, can play a decisive role in what types of industrial strategies can be successful. However, the trends do provide some generalizable lessons and a potential blueprint on how to implement industrial policy in today’s automotive sector.

1. A solely export-driven strategy is unlikely to work for most countries that are seeking to develop an EV industry. So far, all countries with an emerging EV sector have also had rapidly growing domestic demand. The exception is for countries that benefit from deep value chain integration and access to a large market, especially if they are making components or are otherwise integrated into a regional manufacturing ecosystem with a large market. Mexico is a perfect example: its growing EV manufacturing base serves the U.S. market, where exports are covered by the United States–Mexico–Canada Agreement. The recent uptick in sales of EVs in Mexico is instead almost entirely fulfilled by Chinese-made cars.
2. Countries can succeed in exploiting their domestic market to establish an industry and then become exporters. However, this will require competing with Chinese manufacturing and avoiding increasingly protectionist measures introduced by some of the world’s largest markets to protect their industries. While many emerging markets succeeded in the past to serve as manufacturing hubs for ICE vehicles, mostly for export markets, the current level of global competition to secure EV value chains and Chinese overcapacity mean that it will be increasingly hard to carve out a place in international trade without a solid anchor in the domestic or regional market. Those with growing domestic demand, established manufacturing bases by producers that are already transitioning towards EVs, and that benefit from free trade agreements (as discussed in point 1) will perform better.
3. Economies that don’t have a domestic industry at risk can benefit from China’s EV export boom. Evidence from countries as diverse as Costa Rica, Brazil, and Indonesia shows that when tariffs are removed on EV imports, the market can, at least initially, grow relatively quickly. However, given the coinciding surge in low-cost ICE vehicles from China, governments that want to prioritize EV adoption for climate or energy security reasons will need to introduce dedicated measures. For example, governments can support the expansion of charging infrastructure, disincentivize ICE vehicle sales through trade or regulatory measures, require producers to introduce more EV models on the market, or even provide incentives to consumers, among other things.
4. Countries that have an automotive value chain to protect will need to utilize a mix of policies to maximize investment and prevent deindustrialization. Governments should leverage Chinese trade and investment, which can offer opportunities for upgrading and growth, while pursuing diversification strategies where possible. This may mean attracting investment from non-Chinese manufacturers and negotiating deals with Chinese firms to achieve desirable levels of localization. Some economies may also be able to take advantage of shifts in value chains and derisking requirements in third countries to attract new investments. At the same time, policymakers should recognize that there are costs associated with localization policies and limits on how quickly companies can move value chains.
    

What’s Next, and What Are the Implications for the United States?

Ultimately, trade defense and economic security measures, even if justified, create challenges in the diffusion of new technologies and innovation. The EV sector is no exception, and policymakers will need to tread carefully when evaluating tradeoffs. However, the experiences of countries in the developing world in the automotive sector provide helpful new insights into the conditions that determine the effectiveness of industrial policy and its implications for the energy transition. They also provide a new framework for understanding the growing popularity of Chinese companies around the world at a time when the traditional sources of U.S. soft power are retrenching.

The U.S. government should recognize that countries in the Global South are unlikely to agree to cutting their ties with China wholesale. Although there may be some economic and security downsides to trade with China, even countries with established automotive sectors are introducing measures to facilitate tech transfer and are still dependent on global value chains and components from China. Moreover, the United States seems increasingly unlikely to provide a technological alternative in the automotive sector. Indeed, U.S. companies could become even less competitive as the domestic policy environment now provides fewer incentives to compete internationally on EVs than before. This adds up to a significant challenge in the future for Washington. However, the first step in strengthening ties with the rest of the world will be to recognize the needs and interests of those countries and use that insight to develop engagement strategies that are feasible and effective.

Ilaria Mazzocco is deputy director and senior fellow with the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies (CSIS) in Washington, D.C.

This publication is made possible by support from ClimateWorks Foundation.