Combined with lower production costs and government supports, that should give China the boost it needs to overtake Japan as the world’s largest car exporter by end-2023.
In a report, Moody’s Analytics noted that the Asia-Pacific region is home to some of the world’s largest auto exporting countries, namely Japan, China, and South Korea.
"Since 2019, Japan has been number one globally for auto exports. However, China made heads turn through the pandemic as it strutted past South Korea in 2021 and Germany in 2022, making it the second-largest car exporter," said the firm which provides financial intelligence and analytical tools.
"China is now closing in on Japan, with the shortfall averaging around 70,000 cars per month in the June quarter, compared with almost 171,000 over the same period a year ago. At this pace, China is on track to overtake Japan by end-2023," explained Moody’s Analytics.
Surging demand for electric vehicles has sent overall auto exports from China and South Korea beyond pre-pandemic levels.
In the first half of the year, China’s export receipts from EVs almost doubled from the same period of 2022.
South Korea’s exports of EVs and hybrid vehicles jumped 70% in value terms over the same period.
By contrast, shipments of overall auto exports, comprising EVs and traditional vehicles from Japan and Thailand were still shy of pre-pandemic levels.
China’s competitive advantage in lithium-ion battery cell production gives its carmakers an edge in terms of EV production costs.
"China is estimated to produce more than half of the global supply of lithium, with that advantage only compounded by the country’s lower labour costs relative to its closest neighbourhood rivals, Japan and South Korea," said Moody’s Analytics.
Understandably, some of the world’s largest brands have set up production facilities in China. Examples include Tesla, which opened its Shanghai factory in 2019, and BMW, which opened its new Shenyang-based EV plant in 2022.
Still, those foreign brands do not eclipse local brands. In the opening months of the year, it was reported that the top export brands were China-based Chery and SAIC.
Tesla, while third, was immediately followed by other Chinese carmakers, including BYD, Geely and Changan.
"Indeed, the speed at which China has embraced new technologies in the automobile industry is unparalleled," noted Moody’s Analytics.
EVs made up almost 30% of all passenger cars sold worldwide in 2022 and have hovered around 25% to 30% over the first half of this year. That figure was just less than 5% before the pandemic.
"The uptick in EV demand over the last year is in part due to the large price cuts by Chinese manufacturers and generous government supports," noted Moody’s Analytics.
EVs have been exempt from a 10% sales tax on the purchase of new cars since 2014, with that exemption regularly extended. In July, the latest extension pushed the tax break out to 2027.
Meanwhile, EVs make up a much smaller share of worldwide vehicle sales in other Asia-Pacific countries, including South Korea, Japan, Australia and India.
Of particular note is the divergence between China and India.
Given that they are home to the world's biggest populations, the shift in reliance away from traditional internal combustion engine vehicles in China and the lack thereof in India will impact the global oil market.
For China, oil demand growth will soon ease, but the slower adoption of EVs in India will see its oil demand growth run for longer.
"Europe is emerging as China’s greatest export market for EVs," noted Moody’s Analytics.
Since 2021, Belgium and the U.K.have been the two largest destination markets.
"There are a few reasons why Europe tops the list. First, the tariff imposed on imported cars into the EU is relatively low at around 10%," explained Moody’s Analytics.
Second, government subsidies on the purchase of clean-energy vehicles includes imports.
Third, the EU and U.K. are set to ban the sale of new ICE vehicles from 2035, so auto retailers need to phase out traditional ICE vehicles.
All in all, the global shift to cleaner energy options will support long-term demand for EVs.
Combined with lower production costs and government supports, that should give China the boost it needs to overtake Japan as the world’s largest car exporter by the end-2023.
That said, not all commercial decisions are based on the financials.
"Increasingly, the U.S. and Europe are looking to "de-risk” from China, which could create barriers to Chinese imports, even if production costs are lower. This could see China’s current acceleration in the auto export race run out of puff," opined Moody’s Analytics.
