Learning from China to compete with China

Not long ago, the idea that Western and developed East Asian countries had much to learn from China seemed fanciful. Recent developments indicate that in a growing array of industries, China is a couple of years or even just months behind the cutting edge.

In others, China is ahead – sometimes, far ahead. Electric vehicles (EVs) and batteries stand out as two sectors where China has leapfrogged foreign rivals to take a clear technological lead. To survive Chinese competition, Western, and especially European, companies find themselves in the unprecedented position of tapping into Chinese engineering, battery, and software expertise.

China is now, at times, in a position that the West once occupied. Beijing wants to keep as much value and jobs onshore as possible, whilst minimizing technology leakage. But the EU’s ever more assertive regulatory agenda shows Brussels has no intention of becoming merely the pitstop for the final assembly of Chinese EVs and batteries. Europe wants more of the value chain for itself. There is much at stake for Brussels, not least Europe’s ability to decarbonize and remain globally competitive whilst avoiding the hollowing out of its automotive sector.

Emerging from the fog of lockdown

China’s dominance of EVs and batteries now feels like a natural feature of the modern automotive industry.

The speed of this transformation surpassed even the most optimistic expectations of Chinese officials. The surprise of Western automotive executives was likely even greater. Ford Chief Executive Officer Jim Farley recalled his astonishment upon visiting China in early 2023 after lockdowns were finally lifted.

A brief ride in an electric sport utility vehicle (SUV) produced by Ford’s local joint-venture (JV) partner Changan Automobile Co. was all it took for the realization to dawn upon Farley that "these guys are ahead of us".² Changan, a previously unassuming state-owned automaker and Ford student, had become the master.

State largesse and discriminatory trade and procurement practices helped China’s lead. However, the clock cannot be wound back. China’s tech and cost advantages are now a reality that competitors must adapt to.³

If you can’t beat them, join them

Foreign car makers are trying to on-shore the Chinese advantage, but running into political problems at home. While some politicians say they want other countries to increase investment in the US, they aren’t making it easy for American companies who try to do just that.

Soon after Farley’s post-lockdown trip, Ford imported several EVs to Michigan where they were disassembled and studied in forensic detail. Farley then created a team to explore procurement opportunities from China’s vast low-cost supplier network. Matching the technological standard of Chinese EVs was set as the guiding strategic priority for Ford’s EV division.⁵

The uncertainty of President Trump’s tariff agenda will invariably have complicated Ford’s strategy. Ford’s attempts to license CATL’s technology to manufacture LFP batteries in Michigan have also become deeply politicized.

The now 60% complete facility, initially planned for Virginia, has faced accusations of being a Chinese Trojan Horse. In reality, the factory will be owned and operated by Ford. Recently proposed changes to the Inflation Reduction Act will preclude any facility using Chinese components from receiving tax credits. This threatens to derail the Michigan facility.⁶

Europe’s turn towards China

Europe has generally taken a much more pragmatic approach to learning from China. Regulators and businesses are warier of China Inc.’s growing penetration of the EU auto market – a problem the US doesn’t yet face – and yet meet progressively stricter vehicle emissions standards.

Stellantis has chosen a more direct embrace of China and its lower-cost manufacturing. In late 2023, Stellantis took a 20% stake in Hong Kong-listed Zhejiang Leapmotor Technology Co. In explaining the partnership, former CEO Carlos Tavares’ pointedly argued that "We don’t want to be the victims of the Chinese offensive on the world…we want to be …controlling it".⁸

The subsequent JV between Stellantis and Leapmotor has begun selling Leapmotor vehicles in global markets including Europe, leveraging Stellantis’ extensive distribution network. Whilst the preferred option was to import Leapmotor vehicles from China into Europe, a contingency plan was devised in the event of EU tariffs on Chinese EVs – which ultimately came in October 2024. After tariffs were imposed, the JV began assembling Leapmotor EVs in Europe at underutilized Stellantis plants.

Despite having signaled a focus on software-defined vehicles as far back as 2016, VW has struggled to adapt its mastery of 20th-century technology to the demands of modern consumers. VW ranked a middling 13th out of the 22 global automotive companies assessed on digital performance in the Gartner 2024 Index.

This is a big problem in China, where consumers are demanding ever glitzier software features. VW still commands around 10% of the Chinese market – unlike Renault and Stellantis whose market share has atrophied to relative insignificance. The optimism of 2019 when VW’s market share stood at nearly 20% has been replaced by dread at what seems to be an inexorable decline. Long the company’s golden goose, VW’s China operations are now looking decidedly more jaundiced.

As part of its strategy to catch up, VW has invested US$700 million in local car maker XPeng. The Guangzhou-based company ranks third in Gartner’s Index and is rapidly closing the gap with leader Tesla.⁹ VW will be hoping that embedding hundreds of its engineers alongside XPeng colleagues will provide its software efforts with a much-needed fillip.¹⁰ Although public details of the collaboration have been kept scarce, it has been reported that software developed with the assistance of XPeng engineers undergird VW’s new fleet of Chinese EVs.

Chinese batteries made in Europe

With batteries comprising between 30-40% of EV’s cost, producing batteries at cost will be critical to meeting the EU’s EV adoption goals.

Prominent figures from the EU’s battery materials industry have used the cautionary tale provided by Northvolt to argue against any impulse to "start from scratch" without taking advantage of China’s head-start.¹¹ Europe’s major battery start-ups Verkor, VW-owned PowerCo and Stellantis and Mercedes-backed Automotive Cells Company (ACC) appear to be listening. All have recently scaled back production plans. ACC recently revealed that it was in discussions with an unnamed Chinese partner to help it scale up production.¹²

One interesting development to watch will be whether European companies chase Chinese talent as China’s EV and battery manufacturing landscape consolidates. Korean companies, particularly in the semiconductor and display industries, have been victims of state-backed intellectual property theft and staff recruitment efforts.¹³ It was likely with some ironic satisfaction that LGES early this year poached the core team of stricken Chinese battery maker JEVE to help accelerate its own LFP production plans.¹⁴

Mind the politics

There are more than a few tripwires which could see Sino-EU automotive and battery partnerships come unstuck – or at least curtailed.

Brussels has yet to take a firm position on how to regulate software-defined Chinese vehicles. Technology supply chains may nonetheless already be bifurcating. VW’s bet on US EV start-up Rivian could suggest that the company believes integrating XPeng software outside China – including in the EU – will be prohibitively difficult politically.¹⁶

There are the fundamental tensions between Brussels and Beijing’s respective industrial visions.

Beijing’s current growth model envisages maximizing manufacturing exports and keeping higher value-added production and technology onshore. Offshore investment is tolerated to circumvent tariff barriers. But Beijing has made clear that its preference is for foreign investments to focus on final assembly. Export controls have recently been proposed to limit the creation of complete battery supply chains outside China.¹⁷ With youth unemployment stubbornly high and a sensitive issue politically, Beijing has no incentive to repeat what it sees as the mistakes of the West in offshoring manufacturing jobs.

Concurrently, Brussels is wielding an array of defensive trade tools to shape Chinese investment. One prominent EU Commission official plainly warned that the EU is “not interested in investments that are simple assembly operations without added value and without technology transfer”.¹⁸ The European Commission’s investigation into BYD’s EV investment in Hungary under the Foreign Subsidies Regulation (FSR) was widely understood to be a shot across the bow of Beijing’s preferred final assembly model.

Brussels has also proposed through its March 2025 Automotive Action Plan to institute local content requirements for EV batteries, as well as making approval of Chinese automotive investments contingent on technology transfer. Dangling access to a vast internal market to force technology transfer is a tactic that would be intimately familiar to Chinese policymakers of years past.

Conclusion

Brussels is keenly aware that what’s good for the bottom-line of individual European car companies is not necessarily good for the European auto industry writ large. Beijing also clearly has its own reservations about Chinese companies’ European tie-ups. The corollary of recent interventions suggests that politics will play a much stronger role in shaping the permissible contours of these partnerships.

Brussels is having to grapple with fraught policy trade-offs between decarbonization, automotive jobs, foreign dependencies, trade openness, and technological competitiveness. Beijing faces similarly complex equations around jobs, European market access, the interests of some of its most innovative companies, and the integrity of supply chains.

Both sides have something the other wants. But there is little to suggest a pragmatic compromise is going to be a likely outcome.

***
[1] Chen, "Grading Day", The Wire.
[2] Colias, "What Scared Ford’s CEO in China", The Wall Street Journal.
[3] Kennedy, "The Chinese EV Dilemma: Subsidized Yet Striking", CSIS.
[4] Tanabe, "Toyota, Nissan EVs draw back Chinese drivers with local designs", Nikkei Asia.
[5] Colias, op. cit.
[6] Huang & Chen, "Ford-CATL battery deal faces US political pushback", DigiTimesAsia.
[7] Xue, "Renault leverages Shanghai development centre", South China Morning Post.
[8] White & White, Stellantis to invest €1.5bn for 20% stake in Chinese EV maker Leapmotor", Financial Times.
[9] Inagaki, "Toyota and Volkswagen fall further behind in the software race", Financial Times.
[10] Staff writers, "VW, Xpeng Deepen Software Collaboration Across EVs in China", Bloomberg.
[11] Hodgson, "Europe should abandon efforts to rival China’s battery industry", Financial Times.
[12] Johnston & Bounds, "Europe’s battery makers seek a different growth path after Northvolt’s collapse", Financial Times.
[13] Chen, "Seoul’s Big Switch", The Wire.
[14] Staff writers, "South Korean battery giant LGES pursues LFP technology", Trivium China.
[15] Staff writers, "Stellantis stops making Leapmotor EV in Poland", Reuters.
[16] Raymunt, Rivian’s Software Chief on Architecting Volkswagen 2.0", Bloomberg.
[17] McMorrow et al., "China tightens grip on tech, minerals and engineers as trade war spirals", Financial Times.
[18] Bounds et al., "EU probes BYD plant in Hungary over unfair Chinese subsidies", Financial Times.

© The Hinrich Foundation. See our website Terms and conditions for our copyright and reprint policy. All statements of fact and the views, conclusions and recommendations expressed in this publication are the sole responsibility of the author(s).