How BYD is Upending the EV Market

Paris Marx: Paolo, welcome to Tech Won’t Save Us.

Paolo Gerbaudo: Thanks for having me.

PM: Very excited to chat with you. You have a fantastic new piece in Phenomenal World, digging into BYD and its particular model of automotive production that it has and this is a company that is becoming increasingly important as we have these discussions about the transition toward electric vehicles and what that is going to look like around the world. This is obviously a Chinese company, but for listeners who might not be very familiar with BYD, how would you describe what it is and how it works?

PG: BYD may be described as the most important car company no one knows about, or at least nobody knows about in the West, as indeed it’s not very well known until now. I mean, it’s now for the first time if you go around, say, big European cities or North American cities, you start noticing some dealerships or some BYD cars. I mean, some friends of mine who know me and my interest in this have been reporting back to me that they saw these cars and they kind of realized they remember the conversation they were in with me. I mean, it’d be in the same way, perhaps was the case with Tesla some years ago, right? I mean that nobody knew about this thing, but then suddenly there was a lot of interest on this new brand. I mean, it’s a company that has been around for 15, 20 years, at the beginning was more in the battery sector and it was founded by this material scientist working on chemistry, on new elements, which proved to be quite convenient, Wang Chuanfu.

Initially, he was focusing on batteries. So its core business was batteries. Of course, lithium ion batteries, which are this key revolutionary component, which is now ubiquitous, present in everything we use. We are using it now, right in our laptops and all our devices. It has become so naturalized that people actually don’t realize what a change it has meant when it was introduced in 1991 . If I remember correctly, BYD started in 1995, its operations. So it was precisely the right time to enter this business. But Wang Chuanfu’s dream, as he reports it in his book, I mean, there is a kind of a cottage industry of self- help books in China as well, with entrepreneurs of writing them as he describes it.

He always had this big dream of ultimately becoming a car producer. The coincidence was that ultimately these technology that he started working on at the beginning proved to be what innovation economists, I mean, economists specializing in technical innovation, would call the enabling technology for EVs, for electric vehicles. Initially he acquired a small state-owned car firm, as there are many in China, that was going bankrupt. And they started producing internal combustion engine cars, which they did for some time. And then they used that technological know-how on production of vehicles to then move as their core business, move to EVs, to electric vehicles. And so this trajectory is really interesting because it’s a rather different trajectory, I should say, from that of Tesla. I mean, the fact that they started with batteries and then moved to electric vehicles is one of the key factors in their competitive advantage vis a vis other firms, Tesla included.

PM: That’s a really interesting way to compare it as well because you think about Tesla kind of coming out of the tech sector and, these internet companies and building itself on this particular model, whereas BYD is coming out of the material sciences and this very different culture to be able to become the large automaker that it is today. You were talking about the founder’s dream and, of course, BYD literally stands for “Build Your Dreams”, which is what those three letters are supposed to mean in there. And I think you actually see those specific words on the back of some of the cars, not just BYD, but the actual kind of slogan or name of it.

PG: Well, apparently that is a more of a post-hoc rationalization in the sense that they went initially for this acronym and then they did a kind of reverse engineering of the acronym that they look for the convenient phrase that would stand for that acronym.

PM: Well, that’s very convenient. It worked very well for them.

PG: It captures something about the Chinese dream, which famously is a centerpiece seeing Xi Jinping’s thought, right? The president of China’s ideological vision of a new China, which is about farthering the path of economic development and crucially moving China from the production of consumer goods which are kind of medium technology productions. I mean, household goods, textiles, shoes, plastic goods, the thing is that Chinese people were famous for like a decade ago, and they were also in a way ridiculed for. Chinese products were synonymous with shoddy quality; cheap, but shoddy. And instead the dream being of scaling up, like moving up the ladder of technology, moving up in terms of technological complexity, which what we know from development economics is a rather challenging path because in a way you are fighting on two sides at that point, because you’re fighting against those below you who have cheaper labor, right? And therefore can have some cost advantages in terms of labor.

And you’re fighting against those above you, of course, who have the advantage of legacy technology. We have the advantage of the very complex know how the very complex kind of managerial techniques required for such complex production. So I think one also needs to understand it in terms of kind of national development, national history. BYD is an event of national pride because the car industry itself has been throughout history, very much connected with a sense of national competency and national pride. So it was strongly described as the industry of industries because of its extreme complexity.

It requires access to very different inputs. It requires an incredibly high level of knowledge and skills, scientists, managers, and so forth. Therefore, indeed it is in a way an incarnation of this dream of becoming a kind of technologically advanced country that indeed can compete and in certain sectors now outcompete Western countries.

PM: And I think that’s a really important thing to recognize, because one of the things you mentioned in the piece, which I’ve heard before as I’ve been following automotive stuff for a long time, is that a country being able to develop a car industry is seen as a very important marker of its stage of development or its ability to pull something like this off, in a way that China has. And I was wondering because when we think about Chinese production and its ability to move up the value scale, I often think back to Japan and Korea and the way that they were able to do something very similar by protecting their markets and, their automakers and their electronics industry in order to build them up so that they could become competitive globally. Did China learn from them in being able to do that, or did they take a bit of a different approach from what we saw in those cases in the past?

PG: The blueprint of what China is doing, I’d say the most important source for that is the so-called East Asian developmental states that have been discussed a lot, especially in the 80s and 90s. I think now it’s coming back to the fore, but it was really the time when debate started. Famously, Chalmers Johnson’s book on the minister of technology in Japan, the minister of munitions, MITI in Japan, and the role he played for as a central hub of industrial policy, and [Meredith] Woo-Cuming’s book on the developmental state. I think these were kind of two very defining books around the time. And to put it in very simple terms, ultimately, what the developmental state is, is a state that is neither completely capitalist, in a liberal capitalist sense, with a kind of fiction of a free market where entrepreneurship is left only to kind of private companies, nor it is a socialist system, say, again as two ideal types, extreme ideal types, but it is a variety of capitalism.

That is something in between these two things, where fundamentally you have an element of strong government disciplining of private actors, you have boards of planning, you have boards of industrial policy that basically tell capitalists what they should do and provides very strong incentives, negative and positive, to channel investment towards strategic sectors, often also by controlling credit.

So the credit is channeled to those sectors that are deemed to be the most strategic, ultimately productive in the long term for a country. And in so doing, it compensates for these short-term to long-term disconnects that often you have, namely that there are investments that are rational in the broad sense, but no private company would shoulder as they are too risky. And in fact, often capitalists are much more risk-averse than people think. And that is basically the model that led Japan to become a world power in automotive, in semiconductors, in electronics, in many of those areas and similarly, South Korea to become a world power. So it’s quite curious that in debates online, say typically flames on Twitter between kind of neoliberals and anti-neoliberals.

Often these are deemed to be examples of how good capitalism is, for example, like South Korea versus North Korea, of course being the same case, but it was a very different model of capitalism from, say, neoliberal capitalism or for many kind of idea of free market. It was a model of capitalism that actually often also involves some element of authoritarianism because it also required a very cohesive bureaucracy and a very powerful state apparatus able also to withstand popular pressure and pressure from trade unions in order to push for these long-term missions that ultimately often were impopular, not very popular in the short term.

PM: And in the case of South Korea and Japan, it was very clear that the United States was supporting that development model at the time, or at least for a certain amount of time until their industries started to become competitive with American industry in a way that they’ve probably not been so happy to see or excited to see in the Chinese case, I think.

PG: Of course. I mean, in the case of the US and Japan, there was this Japan shock. That’s the way it is described, like in the 70s and 80s, when basically there were all these new brands of cars nobody had seen, similarly to what is happening now with BYD. And then with many other brands that we shall see, I mean, Geely and all the specific brands Geely has and so on and so forth. So this was a time in the late 70s, beginning of the 80s, when suddenly Europe is basically flooded with Toyota and Nissan and other Japanese brands. And also around the time, of course, of the oil shocks and the stagflation crisis of the 70s. So it is the moment of a great economic angst and also great psychological angst because in a way Westerners feel challenged for the first time on the terrain of technology.

There is a very curious popular culture reference for that in the “Gremlins” movie, which is around, the first one, in the beginning of the 80s or mid 80s. There is this famous chauvinist guy who hates Japanese cars and is constantly grumbling about how bad Japanese cars are. There was also some element of right-wing populism emerging, like in response to this competitiveness of Japanese cars. The key element there was that the Japanese shock is very different from the EV shock because Japan was an ally, was a very strong ally and still is a very loyal ally of the US as South Korea is also a very loyal ally of the U.S.

So ultimately they could square political economic tensions. And they came to an agreement like the US and the UK and then other European countries in terms like quotas, in terms of how much market they would be allowed. So they found an agreement, which is not going to be the case with China. I mean, China is also a geopolitical adversary. So it’s technically described an economic competitor and a geopolitical adversary. Therefore, this is why there is such a big moral and economic panic around the emergence of these companies, right? Because they are seen as not just being signals of growing Chinese economic competitiveness, but also of growing Chinese geopolitical projection.

PM: Absolutely and I think that gives us a really good insight into the larger picture of how this model has arrived to this point, but your piece deals a lot with the specifics of the business model in the supply chain that BYD has set up, so can you talk to us a bit about its vertical integration and its approach to that and how it differs from the way that a lot of American automakers and other automakers outside of China are set up today.

PG: Yes. From a point of view of business management logic, which is something that I’m very interested in, the great novelty of this trend is the return of vertical integration in the sector of EVs and in particular in the case of BYD. So this is something that is present in many other firms in the sector. In fact, Tesla and other Elon Musk’s firms were also notable because of this, because of vertical integration. What is vertical integration? Vertical integration is a logic of organization where you try to control all the different stages of production of a given product, of the end product. So say the most famous case of that is the case of Ford and the term Fordism originated from that.

The Ford car company at its inception, say in the 20s, 30s and 40s until the 50s, basically it’s the golden era of vertical integration, was famous because it wanted to control the entire cycle of production of the car— from the raw materials, from the mining of it— of raw materials from the rubber famously of the tires of the Ford, which basically were originated from rubber plantations in the Amazon basin, down to the so called downstream aspect of the value chain, namely dealerships, maintenance of the car, and so forth.

So this led to a gigantism that was very visible in these enormous factories, most famously the River Rouge factory of Ford, where basically the idea is that on the one hand you had the raw materials entering, then you had metal foundries in the very factory, you had glass production in the very factory for the windows and windshield of the car, and ultimately at the end from one gate—to put it in very banal terms and exaggerated terms—raw materials enter the factory, at the other end the finished product exited the factory. Of course, it was never as simple as that. There were some intermediate and initial input components that came from other places, but say this was the logic. You try to integrate as much as possible of the production in the same company.

And sometimes even in the same site. And the idea of this was ultimately that this would give you a number of benefits in terms of control. Of course, you would be able to plan and examine and inspect every stage, every tiny detail of the production. It will give you more efficiency. You could apply Taylorist scientific method of production: the assembly line, being a famous kind of Fordist technique — splitting each element of production into tinier and tinier operations, therefore making the production more efficient. And also it would allow you to achieve some cost cutting as you would do away with middlemen that would otherwise be wasteful ultimately in production.

So the counterintuitive element of the fact that now companies like BYD and Tesla partly also are moving back to vertical integration was that during the neoliberal era, that model of vertical integration was abandoned. Companies tried to get rid of as many elements of production as possible, just keeping those that were at the highest added value—typically assembly production and so on and so forth. And the idea of that was to achieve more flexibility. The idea of that was focusing on core competencies. And the idea of that was this whole new spirit of capitalism. Boltanski and Chiapello famously spoke about that: creating a kind of network system of production where you would exploit as much as possible.

Every drop of blood and milk from your suppliers, forcing them in this Darwinian environment where they would fight tooth and nail, right? So basically that system is not working for the EV sector. This is really interesting, partly because of technology. So in a phase of very fast technological innovation, you need to control as much as possible of your production, because you need to accelerate as much as possible your innovation and you need to coordinate all these different stages in order to do it well.

PM: That’s so fascinating to hear. And of course, I feel like before BYD and before we got into this conversation about China, it was often talked about how Tesla was setting up its battery plant and how it was controlling its dealerships. And we’ve of course seen them making deals with mineral suppliers in order to ensure that it has the minerals for batteries. And I feel like to a certain degree, we’ve started to see that with European and American automakers as well. Making deals to ensure supplies of lithium and other minerals. That they’re going to need for the transition to electric vehicles.

But obviously when we look at BYD, this is much more advanced in the sense of having this vertical integration throughout the whole production of the electric vehicle. What benefits does that actually provide the company when it comes to churning out these electric vehicles, because one of the things that really stands out about BYD it feels like in a lot of these conversations is that its electric vehicles are so much cheaper than so many of the models that are available in Europe and North America right now. Is that a product of vertical integration solely? Or is that also just part of the fact that they’re producing in China rather than in these more expensive markets like Europe and North America?

PG: I’d say that partly it is an effect of vertical integration. Tesla is also using vertical integration, but for example, with batteries, it is producing them in partnership with CATL and Panasonic. So I think around two thirds of its batteries actually come from external suppliers. While ultimately, if you think about the electric vehicle in a way that the battery is the fuel tank of the car, but is the most important component it accounts for around one third of the weight of the car and similar share of the actual cost of the car, right? Producing that in-house, of course, has huge advantages when you scale up, and it’s called Wright’s law, meaning that as the scale grows, also the unit price of the product you produce decreases proportionally.

So there is one element. In the case of BYD, bYD basically claims that they only externalize two elements of their cars. These are the windows and windshield, the glass components of the car, and the tires, which for whatever reason, it’s a whole world onto itself because also very complex regulation connected to tires, insurance, blah, blah. I mean, perhaps that figure is too high, but in a New York Times report, they looked at the BYD Seal, which is one of the most convenient, more economic models that BYD is producing and they found that three quarters of the components in terms of value of the car are produced internally by BYD.

Also, there is an important difference there that I’ve made. Doing this research, I spoke to many automotive experts and one thing that’s really seemed important in the industry is the fact that this is not a so called substitution market, but it’s a kind of new introduction market or whatever the technical term is. What that practically means is that up to now, a very small share of the population had EVs. It’s like the first time washing machines, say, were sold. I mean, of course they are substituting partly internal combustion engines, but they are doing so by creating a new market that wasn’t there — the market for EVs, which actually also involves very different infrastructure, very different servicing, maintenance, supply, compared to internal combustion engines.

So going back to your main question, I would say that in this situation, when you have this new market for new products, having vertical integration allows to control very finely all this complexity, but also to scale up quickly so that you can achieve a lower cost per car, that’s what its doing. And indeed BYD, according to a UBS report, the cost lead of Chinese car firms vis a vis their European competitors is something like between 20 and 25%. So this just gives you a sense of how competitive they actually are — vis a vis their Western competitors.

PM: I was also interested in how, obviously you’re talking about how BYD has really significantly expanded the vertical integration in car production from what we’ve seen in a very long time, right? Kind of going back to the Fordist model. But many of the automakers operating today are based on that more kind of Toyota model, the outsourcing, all this sort of stuff. In the past few years, we’ve had a lot of discussions around supply chains and unstable supply chains, particularly during the pandemic and how that stopped automotive production in a lot of North American automakers and things like that throughout the pandemic, because they weren’t always able to get the components that they needed because the supply chains that they set up were disrupted.

Are we seeing — even beyond the Chinese automakers and beyond Tesla — are we seeing this kind of broader shift back toward vertical integration in a way that we haven’t seen in a long time within the automotive sector because of these larger supply chain risks and, the expectations from a lot of governments in, say, Europe and North America now that things should be increasingly reshored and that supply chains need to be dependent on trustworthy allies and things like that, but also just the need to create these EVs and the requirements of that? So are we seeing more of a move back toward vertical integration more broadly?

PG: That is actually a very important aspect. In contemporary fashionable terms, we would describe it as resilience: the ability of any organization, in this case, a company, to navigate uncertainty and deal with unexpected circumstances with chance and with emergencies, crises and all of that. And again, BYD provides a very good example of that, which is the fact that BYD also produces its own microchips internally. We know that there are very different types of microchips, where there is now famous companies, I mean, for example, TSMC produces very complex microchips and NVIDIA as well.

But then there are also microchips used for any product. Also the most trivial probably in the home, right? For washing machines, for cars and then electronics modules. There’s a lot of electronics elements in cars these days, right? And the fact that BYD produces internally semiconductors allowed it to cope with the global semiconductor shortage, which began in 2020 around the pandemic, precisely as you were saying. And then it’s continued after the pandemic because of this geopolitical tussle between the US and China and the US really understanding it is a good pressure point that they can use against China. God knows for how long, right? But they realize that for the time being, it’s a good pressure point.

And therefore, of course, if you produce that component, you’re not subject to this pressure, which for other car companies meant that they had to stop production literally because they had cars that could not be fitted with a necessary component. Another interesting element of that is another shortage that has taken place is a shortage in terms of car carrier ships. So to transport cars, you need specific merchant ships. They’re called RORO ships. And there’s been a shortage of these kinds of ships. So BYD has started building up its own fleet, also branded like BYD. The first one is called Explorer One. It’s already purchasing a further six to a total of seven.

Each one of these ships will carry, I mean, 5,000, 6,000 cars, and it would be used to ship to markets closest to China. So around Canada, East Asia, Southeast Asia, and then of course it’s also building factories abroad. I mean, it already has 30 industrial parks. Some of them are really gigantic in Shenzhen. It has four, some of them for producing components and some of them for assembly, but it is building now also car factories abroad, one in the region of Bahia in Brazil, for example. In Hungary, it is creating a huge factory.

So in this context, vertical integration is really good also at navigating this very uncertain world, this world of polycrisis, as it is sometimes described, compared, of course, with an externalized company. Like Stellantis, for example, is a very outsourced company, a company that relies a lot on outsourcing, where the Houthis, say, in the Red Sea or a Suez Canal incident or extreme weather events somewhere cut your supply line and you have basically no resort to solve the problem quickly.

PM: I feel like that export piece is really important as well, because when we think about BYD and, say, Chinese vehicle manufacturers and Chinese electric vehicles, traditionally, we think of those as serving the Chinese market. But in the past number of years, there’s been a significant increase in the number of exports from Chinese auto companies as they are sold in other markets, certainly in the Global South, as you say places like Brazil and South America and I’m sure Africa and places like that as well, but increasingly they are becoming available in Western markets as well.

I was in New Zealand earlier this year and saw BYD dealerships and BYD is being driven on the road down there, which I was surprised to see because I feel like I hadn’t seen them in Canada. But what are we seeing in the move to export and the availability of these vehicles in European and North America markets and the response that that is getting from politicians here?

PG: I mean, China was already the largest car producer in the world for some years, and now it’s become the largest exporter of cars, stealing the top place from Japan, which of course was the largest car exporter. They have produced manufacturing capacity that is so big and the projected one that can be absorbed by the Chinese internal consumption. Though the Chinese internal consumption is so huge that it provides a very solid base may the international climate become more protectionist. So this is also a very important correlate of vertical integration at the company level is vertical integration at the national level. BYD and other firms know that in the worst case scenario, they still have this huge Chinese market that they can continue denting away from foreign competitors and substitute for competitors there.

But of course they want to export. So in a way, partly the production is being reshored in China and others, and also the US is trying that, but the sale, the trade is still an element of globalization. I mean, you still need to have global trade to sell that. And in many respects, we know that Xi Jinping has become more a fan of globalization and China generally is these days more a fan of globalization than the US or Europe, though Europe still in a way strangely believes in globalization. So then the question there that is related to that, of course, is the response that is going to come from the US and the EU. We know that there have been these panicking headlines on The Economist, on the Wall Street Journal, on the Financial Times about this tsunami of Chinese cars.

Even Elon Musk has said that you need tariffs, you need barriers. And everyone who looks at trade, global trade says that the kind of the scenario going forward is an even more protectionist climate. I mean, already the climate now is more protectionist definitely than it was in the noughties and not to speak of the nineties. There is much more industrial policy, the IMF is recognizing that and is worried about that. But we are going towards an even more protectionist climate. So in the US, tariffs on Chinese cars stand at 27%, after the change made by Trump. We’re probably going to see an increase, perhaps as high as 50%. In Europe, tariffs are very low, 9%. Comparatively, the European Union is the most open trade area and very proud of that, despite the fact that it’s not really working much for the European economy.

In Europe, it’s very likely we’re going to see a move to a similar level as the US — 27%. But of course, these beggar thy neighbor, these protectionist s tactics often lead to a retaliation response. So China is going to raise barriers in retaliation against the EU. Germany is really worried about that, as it exports a lot to China. So you see, it’s a very complex scenario where they say the general picture is a move away from the illusion of a free trade world, which is probably going to be remembered, the kind of hyper globalization, as for example Danny Roderick describes it, of the late 90s, early noughties, is going to be remembered in the future as a blip in history, right? That’s a very short period of exceptional geopolitical stability under the hegemony of the US where there was indeed relatively free trade. But it’s not the world that we’re going to see in the future. And it’s going to shape very much the industry.

PM: It is quite notable, though, like as you described there, that for a long time, it was the United States and the European Union going around the world and saying: You need to open your markets, you need to drop your tariffs, you need to drop your trade barriers and allow our goods and our companies to flood your markets, even if that means that your domestic competitors cannot be competitive with our major multinational corporations. And now, of course, the Chinese are reaching this level where their companies are becoming competitive with the American and European dominant firms or previously dominant firms.

All of a sudden, very quickly in the course of a number of years, less than a decade, we’ve had this very significant reversal where the United States in particular, and as you say, to a lesser degree, Europe are all of a sudden flipping and saying, we’re bringing in these protectionist measures, we’re hiking the tariffs on these products that are coming in, we’re trying to create these blocs of countries that are allied to us that are going to follow a similar policies, whether it’s on chips or social media companies or EVs or, or whatever. What does that tell you about what is actually happening here? And I guess, how does that make us reflect on these free trade policies and these narratives that we’ve had for a long time?

PG: I mean, this is what economists such as Ha-Joon Chang, the famous South Korean economist, have been saying for a very long time, namely that the free market never exists in practice, and it’s a discourse that is sold by the leaders of a given market, of a given economy, until now say the US, the UK and other European countries, Japan, to the laggards, to so-called developing countries. Developing countries are always lectured to be free, open, not to have barriers, to allow free trade by the very people who used protectionist methods to get where they got in the first place.

Because if we go back to the history of early capitalism in the US and the UK, they were very heavy on protectionism, on industrial policy, on defending their markets, on developing their technology, and then of course, when they got on top and the free market say was working for them, they could use this fiction. So of course, what people in the US and the EU will tell you is that the Chinese are cheating, that they are using state aid. I mean, recently there was Ursula von der Leyen in the EU. I mean, the EU is really, the consensus is very ideologically against any form of state aid, but also Biden used similar terms.

And of course, I mean, they’re referring to the huge subsidies used by the Chinese government, which is a very important aspect that needs discussing to understand the automotive sector. Of course, behind this entrepreneurial miracle, there is a very strong element of state intervention, which takes the form of subsidies, which is the element that is most often criticized. These are very generous. For example, in the Chinese case, they were around double them all or what they are with the inflation reduction act, say $14,000 per vehicle, instead of the $7,000 you would get in the US. Because, and this is something many people don’t know about China, China is actually quite a decentralized country.

There is a lot of power at province level, the 23 territorial authorities, and these territorial authorities are doing their own industrial policy. So Beijing is giving subsidies, but then also the provinces are doing subsidies to their local champions, which are both private firms, sometimes state-owned firms. There are many car firms that are state-owned, but state-owned doesn’t mean state owned by the central states. Sometimes it’s state owned by local authorities. For example, SAIC Motor, which is the third largest producer or fourth largest producers of EVs after BYD and Tesla, is actually owned by the municipal authority of Shanghai.

So this tells you that there is another very important level of industrial policy, which is not just in terms of subsidizing companies, but literally owning a car company and forcing these car companies to employ people, to continue operating, or to guarantee that the local economy continues thriving, is heavily politicized, the automotive industry. And it also suffers from oversupply because of this. Overcapacity is a very key term because, in order to save jobs of companies that perhaps are facing bankruptcy, the central estate and local authorities often kind of bail them out or provide them subsidies to allow them to operate in ways that perhaps would not be possible in an idealized complete market system.

But a very important thing to understand there is this weird copenetration of capitalism and planning that happens there. I mean, I sometimes think of it as a Schumpeterian state, as a sort of engineered creative destruction created by the state. So what happens, it’s as if the state creates a sort of a rat race between companies and forcing them to fight violently against one another, creating artificially many actors at the beginning that then fight furiously against one another in terms of price, in terms of technology, and then only the fittest survive, only kind of three or four companies survive, but it is a rat race where entrepreneurs fight for life, right? So perhaps it’s not as brutal as the neoliberal rat race.

I mean, of course, in neoclassical neoliberal attempts, it would be seen as very wasteful because some of these companies disappear and only a few of them make it, but what it does in this decisive phase of emergence of an industry, it creates companies that are really tested by fire and can become export champions because they have managed to achieve incredible levels of efficiency, price efficiency, technological capability. So this happened already with the solar panel sector and now is happening with the EV sector.

PM: And I feel like when it comes to the solar sector, like we often say: Oh, it’s so good that China subsidized the production of solar panels because now they’re so cheap and we can roll out renewables so easily. But when it comes to other sectors, it’s a problem because it’s competitive with firms that are traditionally American or European or Japanese or something like that. One of the “traditional allies.””

I was wondering what you think about what this tells us about the economic model that the US and Europe have pursued for a long time because I just saw another story yesterday, so it’s on the front of my mind, where they were saying that Europe is uncompetitive because there’s too much red tape. And if we just cut the red tape, then Europe will be doing so much better when it seems like and the policy shifts in Europe and to a greater degree the United States seem to show this, that the problem is not so much red tape, but the fact that China is pursuing this industrial policy that has been so much more successful at being able to create these competitive industries and competitive firms that can now compete internationally in a way where it feels like European and American companies have been stagnant or not moving as quickly because of the set of policies that have been set up to encourage a particular type of development there.

Do you feel like in the United States that is starting to shift with the Inflation Reduction Act and the CHIPS Act and the recent move against TikTok and these more protectionist measures? What do you make of how Western states are responding to the threat of China?

PG: Yeah, I think that definitely the Chinese economy is really putting Western capitalism to shame as it is, in many respects, a more economically efficient system. I mean, Dengism, basically, revised by Xi Jinping, this weird hybrid, which really is a hybrid of market socialism. Many people sometimes have these opposite views that China is a communist. No, China is totally capitalist. No, I mean, the real secret of China, and it’s precisely this hybridization of these two models and the way they’ve mastered something that is quite unique. And it is superior, I think, to neoliberal capitalism, which has become very stagnant in terms of productivity. People like Aaron Benanav have shown, I mean, there’s been stagnant productivity for a very long time because I mean, when capitalists can revert to a rentier type, they would very happily do it.

Italy, Italian capitalism is the history of that. I mean, they very much prefer being parasites and wasteful and basically making money with real estate. Amazing! You don’t need to risk anything. It is a secure source of income. And actually neoliberal capitalism has created a perfect environment for the laziness of capitalists to thrive. Right now, though, there is this panic. So there are attempts to change the model. There is an outspoken desire to move away from neoliberalism. I mean, Jake Sullivan’s famous speech about the new Washington consensus. I mean, some economic historians or political economists just see it as a lot of empty rhetoric. And I don’t think that is the case.

I think that capitalism has come in very different shapes. Neoliberalism is an historical specific form of capitalism that has been prominent right between the 80s and say the beginning of the new century. And now it is not working for capitalism and they need something different. But it would be very hard for them to achieve that and to find legitimacy or the legitimacy for that as there is huge resistance from the capital sector. I mean, of course you need huge state resources to do something similar to that. You need taxes; you need taxation. Guess what? Capitalists don’t want to be taxed.

And of course, like the return of vertical integration, it also carries implications for trade unions. It gives workers and trade unions new pressure points, because that’s precisely why they abandoned vertical integration or a very big reason, because you couldn’t block anymore the entire cycle of production by blocking one stage of production. So this retreat of globalization creates serious issues of discipline, basically, of the workforce, of political legitimacy, which, I mean, in an authoritarian country as China, of course, can navigate them much better than allegedly democratic countries like the US and European countries.

PM: I think that’s a really important piece to understand. And to end off our conversation, I wanted to bring it back to BYD and the question of Tesla in particular. Tesla has really led the charge in EVs over the past couple of decades, has really been the standard bearer for that type of vehicle. And now so many other automakers are running alongside of it. But one of the really notable things about its vehicles and about a lot of, at least, North American EVs, I’m not as familiar with the European market, is that they’re quite expensive to buy.

And a lot of these models have remained very expensive. And the suggestions are that Tesla is probably not pursuing a cheaper model, which is what everyone assumed it would do at one point, whereas these Chinese automakers are making vehicles that are much less expensive, much more affordable to the broader public. And even though governments in the United States and Europe seem to be planning or using tariffs to try to keep them out, it does feel almost inevitable that these vehicles will arrive and will have lower price points than what the traditional automakers that we have right now are offering. So what do you think the threat is to Tesla from automakers like BYD as they increasingly seek out export markets and seek to move into Western markets?

PG: Something very important that many people say when they’re talking about EVs is that, I mean, that is the main barrier to people buying EVs. I think that is the upfront costs, for one thing, and the other thing is worrying about how you charge the car. So the dearth of charging points. These are the things that are mostly mentioned. Now, if we look at total costs, I mean, lifetime costs of a vehicle, namely how much it costs charging the vehicle, we’ll see that already EVs are on par, if not cheaper, than internal combustion engines, because recharging them compared with refueling them costs 50% less. So it’s really striking the saving that you can make by using an EV. Of course, up to now, it was basically a luxury section of the market, but what BYD and other Chinese companies are doing is precisely entering this cheaper segment of the car market where they will be able to offer cars that are below $30,000, which would appeal to a much broader set of consumers than currently Tesla and similar brands appeal to.

So this is going to be a result also of the scaling up of the industry and a scaling up of battery production. So as battery production expands and gains more and more efficiency, it will be much cheaper to produce EVs and ultimately, I think this is actually the very curious thing of the green transition more generally, is that ultimately green transition will prevail in some sectors more because of economic competitiveness than responsibility or concern about the environment or even say taxation or regulations giving negative incentives against pollution and so on and so forth, because ultimately EVs are a superior technology. It’s a more efficient technology. It is a more cost effective technology, and that is going to lead I think faster than we think to the entire car industry converting to to EVs.

PM: I feel like this is where I see the biggest comparison between now and what was happening in the 80s with the Japanese automakers as well. You had, especially in the United States, like automakers making vehicles that were not really responding to the needs of the consumers that required a lot of gas in order to power them, especially at a time when gas prices were shooting up because of the oil shocks.

And so the Japanese manufacturers could move in with these smaller, efficient cars and start to take over the market, and it feels like the Chinese automakers are setting themselves up for a similar move into Western markets where they have these EVs that are much more affordable, and as we’re being pushed to make this transition, that’s a model that potentially works, right?

PG: And it’s easier to maintain as well. This is another important aspect because they are less complex in the sense that they have less components because the engine and all the connected apparatuses involve a myriad of components that are not necessary anymore. The heat involving the internal combustion process raises all sorts of issues of maintenance that are eliminated basically altogether in the case of an EV. So there are many benefits besides the lifetime cost, besides the lower cost of recharging compared to refueling, there are also lower cost in terms of maintenance and perhaps soon also lower.

I mean, there being an advantage also in terms of the autonomy of the car. As batteries improve, they’ll get higher ranges than, so we’ll have to refuel them, to recharge them less often than it is the case with cars. But of course, up to that point, recharging is also going to be a very significant bottleneck, as in many countries. In China, the state grid, of course, again, the state intervention created very rapidly many charging points. But in other countries where there is not such a strong state intervention, it will take much longer to provide the same degree of charging points.

PM: Yeah, it’s a serious bottleneck that needs to be addressed for mass adoption. Paolo, this has been a really fascinating conversation. Thank you so much for taking the time to speak with me about BYD and, the broader geopolitical tensions at play here. I really appreciate it. Thanks so much.

PG: Thanks for inviting me.