Horizon Advisory - China's Head Start, June 2021 by horizonadvisory

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Actionable Geopolitical Insight

June 2021

CHINA’S HEAD START CCP Industrial Policy for Global Automotive Ascendance

HORIZON ADVISORY Horizon Advisory, an independent strategic consultancy, helps businesses, investors, and government actors understand and respond to geopolitical, economic, and technological change. Visit us at www.horizonadvisory.org to learn more. Reach us at nate@horizonadvisory.org or emily@horizonadvisory.org.

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Table of CONTENTS

EXECUTIVE SUMMARY

INTRODUCTION

POSITIONED TO LEAPFROG

AUTO INDUSTRIAL POLICY

CRISIS INTO OPPORTUNITY

COVID-19 INVESTMENT

CONCLUSION

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ABOUT

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Horizon Advisory

Horizon Advisory brings a new approach and unparalleled sources and methods to understanding geopolitics. Horizon Advisory was formed with the mission of analyzing Chinese industrial strategy and implications for critical security and economic competitions. Decision-makers across sectors – national security leaders, stakeholders from the private sector, investors – face uncertainty associated with geopolitical, technological, and economic changes activated or impacted by China. Leveraging unprecedented primary sources, we apply updated strategic frameworks and novel analysis techniques to generate differentiated insights for clients including businesses and investors grappling with uncertainties.

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Executive Summary The United States and its global partners are grappling with the dual disruptions of COVID-19 and a transition away from fossil fuels in transportation. As they do so, they face an electric vehicle (EV) landscape increasingly dominated by China – and an asymmetric Chinese industrial policy fueling that domination. The Chinese Communist Party’s (CCP’s) industrial policy is designed to take advantage of global crises. Beijing developed a playbook for doing so during the 2008-2009 financial crisis. Now Beijing applies that playbook to the COVID-19 international environment, in order to lock in EV advantage. This time, the stakes are higher. A new automotive landscape is taking shape, with it a new hierarchy. This hierarchy is poised to last. As Chinese auto industry leaders put it in 2008, “whoever can take the initiative in this wave of innovation is likely to become a leader in the global automotive industry for a long time.” A decade later, Beijing appears to have successfully captured the initiative: China leads across the EV value chain – from critical mineral inputs to battery production to vehicle manufacturing and even, increasingly, to EV brands. China uses this leadership to cement access to global innovation. The global transition to EVs already relies on Chinese inputs and consumption. Chinese champions are also poised to capture the high-end segments of the EV industry. Beijing’s positioning is no accident. The CCP prioritizes the auto industry as source of jobs and of technology, including military-relevant technology; an “industry of industries” at the intersection of the real economy and the high-tech revolution. And Beijing sees EVs as an opportunity to leapfrog the international automotive incumbents. Other developed countries have long dominated the auto sector. China has been unable to break into the high-end. But as the electric motor disrupts the auto industry, Beijing projects that industry-wide reshuffling will even the playing field. For over a decade, the CCP has subsidized EV production and purchases, positioned to establish Chinese control over critical EV inputs ranging from cobalt to batteries, and aggressively invested in emerging EV technology. Beijing has deployed a four-pronged industrial strategy to take advantage of the EV disruption: • • • •

Building low-cost domestic production (e.g., through subsidies and preferential policies); Inflating domestic demand (e.g., through consumer-side subsidies and incentives); “Bringing in” foreign technology, expertise, and brands (e.g., through joint ventures that dangle China’s government-bolstered domestic market as bait); and “Going out” to acquire foreign resources, technology, expertise, and brands – and, ultimately, market share (e.g., by targeting distressed assets and suppliers abroad).

In the United States, the auto sector is – and long has been – a key driver of innovation, employment, and industrial base capacity. Right now, it is under threat, with severe implications for US national and economic security. The US must compete, immediately. It must do so in a 1

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fashion that accounts for the positions of global dependence China has already secured, as well as the non-market subsidization, regulatory arbitrage, and mercantilism that feed China’s model. The US must also learn from the 2008-2009 playbook that Beijing has now reactivated.

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Introduction Since the beginning of COVID-19’s global spread, Beijing’s policy response has focused on “seizing the opportunity” and “turning crisis into opportunity.”1 The Chinese Communist Party (CCP) has deployed a crisis industrial policy designed to take advantage of international stall, chaos, and transformation to capture market share, depreciated assets, capital, and influence. This effort has been particularly obvious – and comes with particularly high stakes – in the automotive sector: There, China’s bid to profit from COVID’s global crisis combines with the electronic vehicle (EV) revolution to tee up a CCP leapfrog. Beijing wants global leadership over the EV industry. China’s industrial planning apparatus values the automotive industry as a source of jobs and of technology, including military-relevant technology. At the intersection of the real economy and the high-tech revolution, the auto sector is an “industry of industries” – a driver of, and contributor to, other industries, jobs, and supply chains.2 In 2008, China’s National Bureau of Statistics (CNBS) calculated that one dollar of investment in the domestic auto manufacturing industry drove 2.64 dollars of value-add in related upstream and downstream industries. CNBS also found that the auto and related industries supported almost 10 percent of China’s national GDP growth.3 In 2007 the National Development and Reform Commission found that about one in every six employed workers in China was engaged in work related to automobile production.4 The automobile industry is also a source of dual-use technology. Beijing consistently recognizes advances in domestic automotive technology as military-relevant breakthroughs and automotive companies as core contributors to China’s national-level strategy of military-civil fusion.5 Accordingly, China seeks leadership over the global automotive sector. 6 However, breaking incumbent leaders’ control over the legacy automotive market is no easy task. Instead, Beijing 1

Emily de La Bruyere and Nathan Picarsic, “Viral Moment,” Horizon Advisory, March 15, 2020, https://www.horizonadvisory.org/coronavirus-series-viral-moment. 2 “The automobile industry chain drives the development of more than 100 industries. From the upstream perspective…these include steel, machinery, rubber, non-ferrous metals, petrochemicals, electronics, and textiles; from the downstream perspective, insurance, human finance, sales, leasing, training, maintenance, gas stations…A car is composed of approximately 15,000 to 20,000 parts and components, involving 34 industries.” (汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2008) [Annual Report on Automotive Industry in China (2008)] (Beijing: Social Sciences Academic Press, 2008). 3 汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2008) [Annual Report on Automotive Industry in China (2008)]. 4 汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2008) [Annual Report on Automotive Industry in China (2008)]. 5 See: 国防科技工业军民融合发展成果展将于 7 月中下旬举行军工集团 [The National Defense Technology Industry Military-Civil Fusion Development Achievement Exhibition will be held in mid-to-late July], China Central Government Portal, July 1, 2015. 6 In September 2019, the Central Committee of the Chinese Communist Party and the State Council jointly issued the “Outline for Building a Transportation Great Power:” “By the middle of this century, China will be fully built

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targets EVs: As the electric vehicle disrupts the auto industry, Beijing projects that industry-wide reshuffling will even the playing field. The CCP deploys a deliberate industrial policy to take advantage of this disruption. For over a decade, the CCP has promoted consumer-side subsidies and incentives to encourage domestic demand, then leveraged that demand to attract, or “bring in,” foreign automotive companies. Inflated demand also fuels national production: The CCP has paired consumer-side policies with producer-side support (e.g., subsidies, preferential policies, trade barriers, and regulatory arbitrage) across auto and auto parts manufacturing, therefore underpricing and out-producing foreign competitors until international auto players come to depend on Chinese inputs. China has also supported its enterprises as they “go out,” buying up international assets (e.g., sources of technology, critical raw materials, brand value) that offer resources, influence, and leverage. Now, as the long-projected global transition to EVs arrives, it risks doing so dependent on China. Beijing maintains outsize influence over the critical materials necessary for EV production, the supply chain that turns those into batteries and then vehicles, and, as a result, the EV innovation ecosystem. Chinese champions are also poised to capture the high-end of the EV industry: In a manner that was decidedly not the case in the legacy automotive sector, China is competing for global EV brands and high-end manufacturing. This report explores China’s efforts to leapfrog in the automotive industry, and, especially, in EVs. The report does so through the lens of China’s positioning in 2008 and 2009, when Beijing took advantage of the global financial crisis to expand its automotive footprint. Today, the CCP is drawing on the same playbooks as it strives to take advantage of new global crisis to capture a new foundational global industry. China’s 2008-2009 bid was successful. Its manifestation today is poised to be successful, as well – unless the US responds competitively. This time, the stakes are higher. Leadership over a critical future industry is at stake. The auto sector is a key US driver of jobs, industrial base security, and innovation. EV battery technology will be applied across other industries, including national security relevant ones. Battery capacity will influence industrial capacity, including, again, in national security relevant areas. The auto sector is, to echo Beijing, an industry of industries. The first section of this report assesses China’s positioning along the EV value chain. The second offers a brief introduction to China’s automotive industrial policy; the third documents the manner in which China accelerated that policy to take advantage of the 2008-2009 financial crisis. The fourth section finds that Beijing is deploying similarly to take advantage of the global COVID-19 crisis. That section previews the gains China is poised to make, at an industrial inflection point, if the US and other major auto nations do not learn from the past. into the world’s top transportation power.” ( “交通强国建设纲要 [Outline of Building a Powerful Transportation Country],” State Council of the People's Republic of China, September 23, 2019.) In April 2017, the Chinese Ministry of Industry and Information Technology (MIIT), the National Development and Reform Commission (NDRC) and the Ministry of Science and Technology published the "Medium and Long-term Development Plan for the Automobile Industry." That plan explicitly states that China will “strive to become the world's auto power after 10 years of hard work.” ( “汽车产业中长期发展规划 [Medium and Long-term Development Plan for the Automobile Industry],” April 2017.)

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Methodology This report surveys a range of credible and authoritative Chinese-language, primary sources better to understand the underlying motives of Chinese industrial policy for the automotive industry. Chinese automotive industry “Blue Books,” a series of annual reports initiated in 2008, serve as a foundation for assessing trends and changes in official policy toward the industry over time. This research reviewed the 12 volumes published to date, covering 2008 through 2019. These texts are published by China’s Social Sciences Academic Press (社会科学文献出版社), the publishing house of the Chinese Academy of Social Sciences. They are written by the Automotive Blue Book Research Group (汽车蓝皮书课题组),which is currently led by Shi Yaodong, deputy minister of the Development Research Center of the State Council’s Industrial Economic Research Department.7 Additional sources of credible Chinese strategic discourse have been mined and leveraged in this analysis for context. This analysis is not exhaustive: A range of sources unaddressed in this analysis would provide further insight into Chinese policy ambitions, processes, and execution. However, this analysis does reflect key trends and potential turning points that likely correlate with strategic priorities within CCP industrial policy.

“《汽车蓝皮书》探究突破新路径 ["Automobile Blue Book" Explores New Breakthrough Paths],” Sohu News, October 16, 2019.

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Positioned to Leapfrog: China and the EV Industry Chain The EV revolution is underway. Beijing is poised to win it. China’s is the world’s largest and fastest growing market for EVs. Chinese manufacturers account for over 50 percent of global EV production. China also leads global battery production and has developed outsize control over the critical materials inputs (e.g., cobalt, lithium, graphite). In other words, China has secured control over the resources on which the EV production depends, in terms of both inputs and demand. To this dominant hand, China adds an industrial foundation and sector-wide influence built in the legacy automobile sector that applies equally well to EVs. China is not generally viewed as an automobile powerhouse: We see Ford, Toyota, Volkswagen, and Fiat on the highway – not Chang’an. Yet over the past decade, China has become the world’s largest automobile producer.8 China has also begun to acquire foreign brands, including Volvo and Lotus. China has further established powerful positions at key nodes of the international automotive parts industry (e.g., auto safety features, interiors, and tires) that will remain relevant in the EV era. Moreover, China’s influence over and integration into the automotive value chain lock in access to foreign innovation. Beijing Institute of Technology’s Center for Energy and Environmental Policy Research summarized China’s EV position in 2020: By the end of 2019, the total national new energy vehicles reached 3.81 million, making it the world’s largest new energy vehicle market ... China's new energy automobile industry has a certain first-mover advantage and excellent scale. China has achieved a leading position in the Internet of Vehicles, autonomous driving and EV batteries, and is actively participating in the development direction of future automobiles.9 The below sections document China’s position along key steps of the EV supply chain, from critical materials to battery production to EV manufacturing itself. Already, the transition to EVs depends on Chinese production and inputs. Chinese champions are also poised to capture the highend of the EV industry: In a manner that was decidedly not the case in the legacy automotive sector, China is competing for global EV brands and manufacturing.

China manufactures approximately 30 percent of global vehicles, including both gas and electric. “后新冠肺炎疫情下我国新能源汽车产业发展形势与对策 [The Development Situation and Countermeasures of My Country's New Energy Automobile Industry After the COVID Epidemic],” March 3, 2020.

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Critical Materials EV batteries are made with basic and critical raw materials of limited, and relatively consolidated, global supply – notably graphite, cobalt, and lithium. Through its own natural resource advantages, as well as strategic investment in foreign reserves and in processing capacity, China has developed control over these minerals’ global supply. Graphite Anodes for most lithium-ion batteries are made out of graphite. China benefits from about 25 percent of known global natural graphite reserves. In 2019, China accounted for about 64 percent of the world’s natural graphite output.10 2020 output figures are not yet available, but Chinese producers were able quickly to increase their production after COVID-19’s onset, while other global players were ramping down. This appears to have allowed China to expand its total market share and to slow attempts at diversifying supply.11 Global Mined Graphite Production by Country, 201912 Madagascar 4%

Other 13%

Brazil 9% Mozambique 10%

China 64%

No natural graphite production was reported in the United States in 2019 or 2020 – though US firms consumed about 35,000 metric tons, worth about 21 million USD.13 Thirty-three percent of the graphite the US imported for that consumption came directly from China. That figure does not factor in trans-shipment. It therefore risks belying the extent of US dependence on graphite produced in China. For example, the third largest source of graphite imports was Canada (17 percent). Canada itself relies on graphite imports from China– and appears to re-export some quantity to the United States.14 10

“Mineral Commodity Summaries 2021,” US Geological Survey, January 29, 2021. https://pubs.usgs.gov/periodicals/mcs2021/mcs2021.pdf 11 “Mineral Commodity Summaries 2021,” US Geological Survey, January 29, 2021. 12 “Mineral Commodity Summaries 2021,” US Geological Survey, January 29, 2021. 13 “Mineral Commodity Summaries 2021,” US Geological Survey, January 29, 2021. 14 Canada imports about five times as much natural graphite as it exports, by weight, with about 74 percent of those imports coming from China. (UN Comtrade: International Trade Statistics Database. United Nations.)

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Cobalt China does not have the same natural resource advantage in cobalt or in lithium. However, China has invested in those players that do – as well as in the downstream stages of the value chain. Most new energy vehicle batteries are cobalt-based lithium-ion batteries. 15 The Democratic Republic of Congo (DRC) produces about 68 percent of global cobalt. 16 The overwhelming majority (86.5 percent, by value, in 2018) of the DRC’s cobalt ore and concentrate exports go to China.17 Chinese players also invest in the DRC’s cobalt production, helping to lock in this export relationship: Chinese companies – most of them State-owned – own or invest in at least 12 of the DRC’s major mines with cobalt reserves.18 Feeding off of those inputs, China controls the next steps of the global cobalt value chain that feeds into EV production. After mining, this chain moves to production first of refined compounds and then of lithium-ion battery cathodes and batteries. China accounts for over 65 percent and 55 percent, respectively, of global capacity at those two steps.19

Though alternative cathode technology may be sparking a shift away from cobalt. “Mineral Commodity Summaries 2021,” US Geological Survey, January 29, 2021. https://pubs.usgs.gov/periodicals/mcs2021/mcs2021.pdf 17 UN Comtrade: International Trade Statistics Database. United Nations. 18 See: Emily de La Bruyere and Nathan Picarsic, “Two Markets, Two Resources: Documenting China’s Engagement in Africa,” US-China Economic and Security Review Commission, November 2020, https://www.uscc.gov/sites/default/files/202011/Two_Markets_Two_Resources_Documenting_Chinas_Engagement_in_Africa.pdf; Emily de La Bruyere and Nathan Picarsic, Absolute Competitive Advantage: Rare Earth Elements in China’s Strategic Planning, Horizon Advisory, June 2020. 19 “Battery Critical Materials Supply Chain Opportunities,” US Department of Energy Office of Energy Efficiency and Renewable Energy, June 29, 2020. https://www.nrel.gov/transportation/assets/pdfs/battery-critical-materialspresentation.pdf 16

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Global Division of the EV-Relevant Cobalt Industry Chain20 80 70 60 50 40 30 20 10 0 Mining and Preprocessing

Refining

DRC

China

Cathode, Battery, and Metal Manufacturing Europe

Other

Electric Vehicles

USA

US cobalt production is marginal, at best. In 2020, the US Geological Survey pinned cobalt import dependence at 76 percent. Lithium A similar story holds for lithium – a critical, and eponymous, input into cathodes for lithium-ion batteries. As with cobalt, global lithium production is dominated by a single player, this time Australia. China imports the majority of Australia’s lithium. 21 Those imports feed China’s dominant posture in the lithium value chain: China accounts for over 60 percent of global lithium refining, as well as over 60 percent of lithium battery and cathode applications. At the next step, lithium inputs into EV manufacturing, China controls just under 60 percent of the global market share.22 The only lithium production in the US takes place at a brine operation in Nevada.23

“Battery Critical Materials Supply Chain Opportunities,” US Department of Energy Office of Energy Efficiency and Renewable Energy, June 29, 2020. f 21 Priscilla Barrera, “Top Lithium Production by Country,” Investing News, August 20, 2020. https://investingnews.com/daily/resource-investing/battery-metals-investing/lithium-investing/lithium-productionbycountry/#:~:text=Kicking%20off%20our%20lithium%20production,MT%20from%20the%20year%20before.&text =It%20is%20worth%20noting%20that,exported%20to%20China%20as%20spodumene. 22 “Battery Critical Materials Supply Chain Opportunities,” US Department of Energy Office of Energy Efficiency and Renewable Energy, June 29, 2020. https://www.nrel.gov/transportation/assets/pdfs/battery-critical-materialspresentation.pdf 23 “Mineral Commodity Summaries 2021,” US Geological Survey, January 29, 2021. https://pubs.usgs.gov/periodicals/mcs2021/mcs2021.pdf

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Global Division of the EV-Relevant Lithium Industry Chain24 70 60 50 40 30 20 10 0 Mining and processing

Refining

Australia

China

Battery and cathode manufacturing Europe

Other

EV Manufacturing

USA

Battery Production Building on critical material dominance, Chinese companies have developed a leading role in global EV battery production. China’s Contemporary Amperex Technology Co., Ltd (CATL) produces more EV battery power than any other player: It claimed a global market share of 28 percent in 2019. Chinese companies BYD and Envison AESC took an additional 9 and 3 percent respectively that year, making China the world’s largest source of EV battery power. AESC was originally Nissan’s EV battery unit. China’s Envision Group acquired the company, which continues to supply Nissan’s Leaf, in 2019.25 Market Share of Global EV Battery Power Capacity Production, 201926 Company

Country

Market Share (%)

Output (GWh)

CATL

China

32.31

Panasonic

Japan

29.11

LG Chem

South Korea

13.95

BYD

China

10.78

Samsung SDI

South Korea

4.02

Envision AESC

China

3.72

Others

21.32

“Battery Critical Materials Supply Chain Opportunities,” US Department of Energy Office of Energy Efficiency and Renewable Energy, June 29, 2020. https://www.nrel.gov/transportation/assets/pdfs/battery-critical-materialspresentation.pdf 25 “Envision AESC Completes Acquisition of Nissan Motor’s Power Battery Unit, Xinhua, April 2, 2019. http://www.xinhuanet.com/english/2019-04/02/c_137942498.htm 26 “Battery,” MarkLines.

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As a result, Chinese battery inputs are near-omnipresent in the EVs that major car companies, legacy and emerging, develop and produce. CATL has more partnerships with original equipment manufacturers (OEMs) than any other EV battery player.27 This certainly does not mean that non-Chinese international battery manufacturers are out of the picture: Most of the major non-Chinese OEMs have multiple battery partners. BYD, CATL, LG Chem, Panasonic, Samsung SDI, and SK Innovation all figure. A scramble is very much under way to define the EV battery playing field. In that scramble, China benefits from an asymmetry in international automakers’ battery relationships: While most OEMs have partnerships with suppliers from a range of countries, Chinese automakers tend to rely exclusively on Chinese battery suppliers. Volkswagen partners with CATL, LG Chem, Samsung SDI, and SK Innovation. By contrast, BYD produces its own batteries and Nio partners with CATL. Top Global Automakers by Market Cap and Battery Partners28 Automaker

Country

External Battery Partners

Market Cap (billions USD) 673.63

Tesla Toyota

Japan

213.97

BYD, CATL,29 Panasonic

Volkswagen

Germany

188.6

CATL,30 LG Chem, Samsung SDI, SK Innovation

Daimler31

Germany

94.37

CATL, LG Chem, SK Innovation

86.52

CATL, LG Chem

BYD

China

75.41

BYD

Nio

China

69.77

CATL

BMW

Germany

67.56

CATL, Eve Energy (China), Samsung SDI, Northvolt (Sweden)

China

56.3

CATL, LG Chem

Stellantis

Netherlands

65.15

ACC (France), LG Chem, Samsung SDI

Honda

Japan

52.91

Blue Energy Co., Ltd, CATL, Panasonic

Ford

50.48

BYD, Panasonic, SK Innovation, Vehicle Energy Japan (Japan)

Volvo 32

CATL, LG Chem, Panasonic

Including Tesla, BMW, Geely, Great Wall, Honda, Hyundai, Volkswagen, and NEVS. See: Pedro Palandrani, “Four Companies Leading the Rise of Lithium & Battery Technology,” Global X ETFs, December 9, 2020. 28 Battery partners are listed in alphabetical order. Country information is provided for those battery companies that have not already been mentioned in this report. Market cap data is sourced from https://companiesmarketcap.com/. Battery partner data is collected from MarkLines (https://www.marklines.com/portal_top_en.html), as well as from aggregated media and company reporting. 29 Toyota has a joint venture, GAC-Toyota, in China, which sources its batteries from CATL. (MarkLines) 30 Volkswagen has a joint venture, FAW-Volkswagen, in China, which sources its batteries from CATL. (MarkLines) 31 In 2019, Beijing Auto announced that it would acquire a five percent stake in Daimler. (Keith Bradsher and Jack Ewing, “Beijing Auto Buys Daimler Stake, Bolstering German Carmaker’s Ties to China,” The New York Times, July 23, 2019. 32 Stellantis was formed in 2021 by the merger of Fiat Chrysler Automobiles (FCA) and Groupe PSA: External battery partners are surmised based on existing partnerships on the part of FCA and Groupe PSA separately.

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This asymmetry takes on new implications when one factors in emerging, EV-focused companies, and China’s place among them. The list of top automakers by market cap primarily includes legacy OEMs – now diversifying into EVs, but not fundamentally or originally focused on them. Chinese players have been hard-pressed to penetrate this line-up.33 However, there is another force in the EV landscape: New companies, like Tesla and BYD, focused on EV production from the point of design. Top Global EV Automakers by Fundraising and Battery Partners34 Automaker

Country

HQ of Most Recent Lead Investor China (state-owned)

External Battery Partners

Funding (billions USD) 20.2

Tesla Rivian

8.2

Nio

China

5.4

China (state-owned)

CATL

WM Motor

China

4.9

China (state-owned)

CATL

Xpeng Motors

China

4.6

China (state-owned)

CATL

Nikola Motor Company

2.5

Romeo Systems Inc (US)

Faraday Future

2.3

China

LG Chem

Mitsubishi Motors

Japan

2.2

Japan

Lithium Energy Japan Corporation (Japan)

BAIC BJEV

China

1.7

Germany

CATL

Youxia Motors

China

1.3

China

Li Auto

China

1.2

China

LG Chem, Panasonic, Shenzhen Waterma Battery Co., Ltd (China) BYD, CATL

Byton

China

1.2

Japan

CATL

CATL, LG Chem, Panasonic

When it comes to these new, EV-focused entities, China’s leapfrog bid is unignorable. Of the top twelve start-up EV automakers by fundraising, seven are Chinese. With the exception of Youxia, every one of those sources its batteries from Chinese players. In addition, a Chinese investor has led the most recent fund-raising round for two of the non-Chinese companies: Tesla (the Industrial and Commercial Bank of China) and Faraday Future (Zhejiang Geely Group Holding Company).35

Access to Innovation China’s positioning along the EV supply chain grants access to international sources of innovation. This innovation might allow China’s emerging EV companies to leapfrog their legacy competitors. For example, CATL has established an R&D center in Germany to support its engagement with

Geely’s acquisition of Volvo is the exception that proves the rule. Battery partners are listed in alphabetical order. Country information is provided for those battery companies that have not already been mentioned in this report. Fundraising data is sourced from Crunchbase. Battery partner data is collected from MarkLines (https://www.marklines.com/portal_top_en.html), as well as from aggregated media and company reporting. 35 “Post-IPO Debt, Tesla,” Crunchbase, https://www.crunchbase.com/funding_round/tesla-motors-post-ipo-debt-24a0d3e2; “Corporate Round, Faraday Future,” Crunchbase, https://www.crunchbase.com/funding_round/faradayfuture-corporate-round--8529036c. 34

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key European customers.36 BYD has joined forces with Toyota to establish an EV-focused joint venture, BYD-Toyota EV Technology Co., Ltd. (BTET).37 Notable Partnerships with and Investments in EV-focused Manufacturers Year

Car Company

Chinese Partner

Country

Chinese Partner's Role

2009

Lucid Motors

China Fund

Investment

2013

A123 Systems

Wanxiang Group

Ownership

2013

London EV Company

Geely

Ownership

2014

Fisker (and subsequently Wanxiang Group Karma)

Investment

2014

Emerald Automotive

Geely

Ownership

2017

Rimac

Camel Group

Croatia

Investment

2017

Polestar

Geely

Sweden

Ownership

2017

Faraday Future

Geely

Investment

2017

Enevate

Investment

2017

InEVit Inc.

2019

Canoo

Tsing Capital US Chongqing Sokon US Industry Group Co Ltd Beijing Zhaode US

2019

National Electric Vehicle Evergrande New Energy Sweden Sweden (NEVS) Vehicle Group

Ownership

2019

Automotive Energy Supply Envision Group Corporation

Japan

Ownership

2019

Protean Electric

China Evergrande Group

Ownership

2020

Tesla

CATL

Strategic Partnership

Environmental

Ownership Investment

Zheng Lichun and David Kirton, “CATL to Supercharge Investment in German R&D Center,” Caixing, June 26, 2019, https://www.caixinglobal.com/2019-06-26/catl-to-supercharge-investment-in-german-rd-center101431838.html 37 “BYD, Toyota Launch BYD TOYOTA EV TECHNOLOGY Joint Venture to Conduct Battery Electric Vehicle R&D,” Toyota Global Newsroom, April 2, 2020, https://global.toyota/en/newsroom/corporate/32126024.html.

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Automotive Industrial Policy China’s advantageous positioning across the EV industry chain is not an accident. It stems from decades of deliberate industrial policy in the automotive sector. With that policy, the CCP has worked first to establish control over key nodes within the automobile industry chain, both legacy and emerging; second to use the resultant resource access and leverage to capture the emerging EV revolution. China’s automotive industrial policy orients around four primary prongs:38 • • • •

Building up low-cost domestic production through subsidies and other preferential policies, trade barriers, and forced joint ventures, as well as through strategic industrial consolidation;39 Inflating domestic demand through consumer-side subsidies and incentives; “Bringing in” foreign technology, expertise, and brands, including through joint ventures that dangle China’s government-bolstered domestic market and/or low-cost domestic production as bait; “Going out” to acquire foreign resources, technology, expertise, and brands – and, ultimately, market share – including by targeting distressed assets and suppliers abroad.40

Across all four prongs, Beijing focuses on the EV industry as a leapfrog domain: This industrial policy rests on the calculus that incumbents will maintain control over the legacy auto sector, but that the EV disruption provides an opportunity to overtake the incumbents. The 2008 Blue Book offers context for these lines of effort and illustrates their longevity.41 Domestic Production To foster domestic production, the Blue Book describes “joint promotion of the government and the market in order to enhance international competitiveness,” with particular focus on EVs. The 38

For early examples, see “汽车产业发展政策 [Automobile Industry Development Policy],” National Development and Reform Commission, May 21, 2004. 39 The 2008 Blue Book explains the value of consolidation: “Optimizing the market structure through mergers and alliances [are]… an important direction to improve the international competitiveness of the automotive industry,” it notes, pointing to success stories in the joint venture between SAIC and Nanqi, Sinotruk’s reorganization, and the joint venture between Dongfeng and Kia that formed Dongfeng Kia. The Blue Book also describes industrial clusters as “the ‘engines’ for the improvement of industrial competitiveness,” because they fuel “economies of scope, technology spillover, centralized procurement, direct exchange of knowledge and experience, lower transaction costs, etc.” (汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2008) [Annual Report on Automotive Industry in China (2008)].) 40 The 2008 Blue Book further made clear that the Chinese automobile industry “is changing direction from satisfying the domestic market to ‘exporting, Going Out, and internationalizing.” “Internationalization is the only way for China to become a world power,” reports the 2009 Blue Book. (汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2008) [Annual Report on Automotive Industry in China (2008)].) 41 Broadly, the text explains that “China’s medium- and long-term development strategies for the auto industry mainly include independent technology strategy; world-class enterprise cultivation strategy; industrial cluster strategy; energy conservation, environmental protection, and new energy vehicle strategy; talent cultivation strategy; auto parts support system strategy; and international expansion strategy.” (汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2008) [Annual Report on Automotive Industry in China (2008)].)

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Blue Book outlines government measures taken to that end, including “guiding auto companies to merge and reorganize,” generating efficiency and scale, resource and technology sharing, and vertical integration. The Blue Book also describes the automotive parts sector as a ready opening through which to integrate into the global industry chain: The supporting strategy of the parts system is an important guarantee for continuously improving the international competitiveness of the automobile industry…It is necessary to take advantage of my country’s production capacity and market scale…to accelerate the formation of a group of powerful parts backbone enterprises and brand-name products for domestic and foreign automobile enterprises, and gradually establish a complete automobile parts support system.” That system would provide the foundation or “long-term strategic partnerships with vehicle companies.” It would be used “actively to participate in the division of labor” and improve China’s position therein. And by 2020, China would become “the world’s auto parts powerhouse.” Domestic Market With respect to the domestic market, the Blue Book explains that “China has an advantage in domestic market demand that no other country can match…It is only a matter of time before it becomes the world’s largest automobile consumer market.” As a result of that market advantage, “the world’s major auto companies have increased their investment” in China. Take for example, General Motors’s plans to “continue to invest in China at a rate of 1 billion USD per year.” The Blue Book also cites the National Development and Reform Commission’s 2004 Automobile Industry Development Policy, which outlines a program through which Beijing might not only cultivate the domestic market, but also focus it strategically on the EV domain.42 Bring In The 2008 Blue Book outlines a concept of “independent innovation under open conditions;” a focus “not only on original innovation, but also on integrated innovation, introduction, digestion, absorption, and re-innovation” of developments from abroad. Accordingly, the Blue Book suggests partnerships – including forced joint ventures and technology transfer – with developed global automotive players as a means to resolve China’s relative technological lag: Compared with Western developed countries…the R&D scale of my country’s auto companies is limited…My country’s automobile industry must make full use of the opportunities brought about by economic globalization and international industrial transfer, take the road of open innovation….to develop into an automobile power as soon as possible…It is unrealistic to catch up with the world’s advanced level under closed conditions…Companies should make use of both internal and external resources and use both internal and external market channels…Independent innovation does not mean

“汽车产业发展政策 [Automobile Industry Development Policy],” National Development and Reform Commission, May 21, 2004.

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excluding foreign technology. Nor does it mean having to research everything from scratch. It means using learning and re-innovation based on technology introduction.43 This “Bring In” effort leverages the appeal of the State-inflated domestic market. For example, in order to access the Chinese market, the diversified Canadian automotive parts and research enterprise Magna established a joint venture in 2017 with a subsidiary of Chinese industrial giant AVIC.44 Magna is a dominant North American auto parts supplier. It enjoys strategic partnerships with a diverse range of cutting-edge automotive businesses. In the past several years alone, it has acquired key auto suppliers based in Germany, Italy, and Spain. Magna’s role as a critical node in North American supply chains could offer valuable information on global markets and technologies to its Chinese partners – whether the company realizes or not.45 Go Out “Encourage auto companies to Go Global and continuously improve their position in the international auto industry division of labor value chain…The automobile industry is changing direction from satisfying the domestic market to ‘exporting, Going Out, and internationalizing,’” reports the 2008 Blue Book. In the next five to ten years, my country’s auto industry’s Go Out trend will become more obvious and the degree of participation in globalization will deepen. My country’s auto industry will expand its role in the global division of labor, improve international competitiveness through the use of comparative advantages, and claim a place in the cycle of international trade and investment in the auto industry.46 To that end, the Blue Book outlines a program of internationalization driven by government incentives for “product exports, foreign investment, licensing trade, international subcontracting projects, overseas joint ventures, and overseas cooperative operations.” EVs

汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2008) [Annual Report on Automotive Industry in China (2008)]. 44 The ultimate parent company in this transaction, AVIC, has been designated by the US Department of Defense as a Chinese military-linked company. “Magna Enters Joint Venture with Chinese Seating Supplier,” April 28, 2017. https://www.prnewswire.com/news-releases/magna-enters-joint-venture-with-chinese-seating-supplier620714533.html 45 And Magna’s established production presence in Canada, the US, and Mexico could also present a challenge for US government oversight mechanisms. Magna sees new opportunities emerging in the USMCA trade deal; the logic and negotiating terms that produced the USMCA trade deal do not register that Magna’s rise may confer indirect benefits to Chinese players. John Irwin “Magna CEO says USMCA will mean 'more jobs, more investment' in Canada,” Auto News, February 13, 2020, https://canada.autonews.com/canada-congress/magna-ceo-says-usmcawill-mean-more-jobs-more-investment-canada 46 汽车蓝皮书课题组 [Automotive Blue Book Research Group].

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And the Blue Book turns consistently to the EV opportunity ahead. The objective is straightforward: To dominate the future automobile industry. The Blue Book calls for Innovative research and development of new energy vehicles to achieve the leapfrog development of the automotive industry…The development of energy-saving, environmentally friendly, and new energy vehicles should be regarded as an important opportunity for the leap-forward development of my country’s auto production – a way to seize the commanding heights of the new round of auto innovation. Over a decade ago, Beijing identified a new technological revolution underway in the automobile industry. New energy vehicles were the future. “A new wave of innovation centered on new energy has swept the global automotive industry,” claims the 2008 Blue Book. “Whoever can take the initiative in this wave of innovation is likely to become a leader in the global automotive industry for a long time.”47 And while the legacy sector might have been a difficult one to break into, Beijing projected that it had a fighting shot at this new wave of innovation. The EV sector offered leapfrog opportunity. It lacked the industrial, technological, and standards hierarchies of legacy autos that forced China to the bottom of the totem pole. In fact, the new energy vehicle industry’s dependence on large-scale infrastructure systems and critical material supply chains played to China’s strengths. Per the 2009 Blue Book: In new energy vehicles, the gap between Chinese and foreign companies is not large. In some aspects, such as electric vehicles, Chinese companies are leading the way…All sectors of society have high expectations for government policies to support enterprises’ commercial competitiveness and speed up construction of related infrastructure (such as charging facilities)…My country’s new energy automobile industry not only has policy and technical support, but also has a large-scale industrial support system that takes uses complementary advantages of enterprises, which will enhance my country’s international competitiveness in new energy vehicles…Chinese companies are indeed facing an opportunity for “cross-over” development. The question is whether this opportunity will be seized.48

汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2008) [Annual Report on Automotive Industry in China (2008)]. 48 汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2009) [Annual Report on Automotive Industry in China (2009)].

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Turning Crisis into Opportunity Beijing’s automotive ambitions are competitive. The goal is to outpace other international players and become the “world's auto power.” 49 Accordingly, the CCP has refined and deployed its industrial policy to take advantage of moments of global change and upheaval. As the 2008-2009 financial crisis knocked developed economies off their feet, Beijing calculated that government subsidies and regulatory adjustments – targeted at domestic consumers and producers as well as at foreign companies and capital – could keep the Chinese market relatively insulated, thus positioning China to capture market share surrendered during the crisis. “Compared with the United States, Germany, Japan, and other countries, [China’s] domestic automobile demand is less affected by the financial crisis,” reports the 2009 Blue Book.50 Beijing also saw the chance to buy up international resources. The international liquidity crunch and depreciating assets allowed China to capture foreign technology and brands at relatively low cost: As the 2009 Blue Book explained, China could “buy the dip” of the global auto industry while also attracting foreign production and talents to China:51 With the intensification of the global financial crisis, some world-renowned automobile companies are encountering disaster. Taking this opportunity, Chinese automobile companies can obtain international competitiveness through joint development with foreign companies, participation in commissioned development, and direct technological introduction…They can also expand their automotive research and development team by introducing foreign talents.52 Beijing flexed its automotive industrial policy accordingly to, as the 2009 Blue Book puts it, “increase the international competitiveness” of the Chinese auto industry.53 To ensure relative stability and appeal of domestic industry, the CCP amplified State support of domestic automotive production and consumption (e.g., through subsidies, investment in R&D, industrial planning), 49

Ministry of Industry and Information Technology, the National Development and Reform Commission, and the Ministry of Science and Technology, “汽车产业中长期发展规划 [Medium and Long-term Development Plan for the Automobile Industry],” April 2017. 50 汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2009) [Annual Report on Automotive Industry in China (2009)]. 51 汽车蓝皮书课题组 [Automotive Blue Book Research Group]. 52 汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2009) [Annual Report on Automotive Industry in China (2009)]. 53 汽车蓝皮书课题组 [Automotive Blue Book Research Group].

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with a particular focus on the new energy vehicle industry.54 To take advantage of global hardship, Chinese champions set about purchasing depreciated assets globally. And to capture newly available market share, the CCP accelerated support for Chinese automotive exports – including through direct financial support as well as by developing favorable technical standards. Throughout, Beijing worked to build an industrial foundation for the EV sector, preparing to leapfrog while the rest of the world stalled. These lines of effort are evident in a flurry of policies issued between 2008 and 2009. The most comprehensive is the Auto Industry Adjustment and Revitalization Plan promulgated by the State Council in March 2009.55 Domestic Market The first task for Beijing in the wake of the 2008-2009 financial crisis was to ensure that the domestic automobile industry not fall victim to global downturn. To that end, the CCP continued, and in some cases augmented, its producer-side industrial support policies, including subsidies, research and development (R&D) support, and credit for companies.56 Beijing also increased its efforts to encourage domestic industrial cooperation and consolidation and, with it, vertical and horizontal integration: “If the powerful Chinese automobile wants to participate extensively in the international market competition,” argues the 2009 Blue Book, “it must form a joint force through reorganization and mergers.”57 The State Council’s Auto Industry Adjustment and Revitalization Plan of 200958 raised industrial reorganization to a national-level strategy, outlining intentions to create two to three automobile enterprise groups producing more than 2 million vehicles and 4 to 5 companies producing more than 1 million.59 Beijing applied a similar tack to the auto parts industry, encouraging companies 54

汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2009) [Annual Report on Automotive Industry in China (2009)]. 55 The Plan was part of a series of industrial plans in ten key areas issued between January and February 2009 “to prevent the accelerated decline of China’s economy under the influence of the international financial crisis and achieve the goal of ensuring economic growth.” The other plans’ focuses included the steel, equipment manufacturing, textile, electronic information, petrochemical, non-ferrous metal, logistics, and light industries. ( “汽车产业调整和振兴规划 [Auto Industry Adjustment and Revitalization Plan],” State Council of the People's Republic of China, March 20, 2009.) 56 汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2009) [Annual Report on Automotive Industry in China (2009)]. “汽车产业调整和振兴规划 [Auto Industry Adjustment and Revitalization Plan],” State Council of the People's Republic of China, March 20, 2009. 57 汽车蓝皮书课题组 [Automotive Blue Book Research Group]. 58 The first strategic restructuring project of the Chinese automobile industry after the Plan came in May 2009. Changfeng Group transferred 29 percent of its equity in Changfeng Motor to Guangzhou Automobile Group according to a “government-led, market-oriented transaction” model that made the latter the largest shareholder.58 Just days later, three listed companies – Weichai Power, Shantui Co., Ltd, and Shandong Juli – announced their joint establishment of Shandong Heavy Industry Group to focus on auto parts. And on November 10, 2009, in what at the time was the largest strategic reorganization in the automotive sector, Bingzhuang Group and AVIC jointly established China Chang’an Automobile Company, which became China’s third largest automobile company after SAIC and FAW. (Lei Li, “2009 年中国车企重组评论 [Review on the Restructuring of Chinese Car Companies in 2009],” Motor Times Magazine, March 5, 2010.) 59 State Council of the People’s Republic of China, “汽车产业调整和振兴规划 [Auto Industry Adjustment and Revitalization Plan],” State Council of the People’s Republic of China, March 2, 2009.

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“to expand their scale through mergers and reorganizations and increase the domestic and foreign auto market share.”60 In short, according to the 2009 Blue Book: “The State plays a very important role in the strategic reorganization of the cross-ownership acquisitions and mergers of automobile companies.”61 Beijing also promoted strategic alliances, joint research and development, and industrial clusters. These allowed Chinese companies to cooperate in developing integrated industrial chains. The 2009 Blue Book highlights the Shanghai International Automobile City Parts and Components Industrial Park, featuring 13 Fortune 500 companies – including Delphi, Lear, and Magna International – and forming an automotive chain covering body, door, chassis systems, security systems, and interior systems.”62 China’s Share of Global Auto Production (%) and China’s Auto-specific Fixed Asset Investment (billion RMB), 2001-2018 35

1.50 1.40 1.30

1.20 1.10

1.00 0.90

0.80 0.70 15

0.60 0.50

0.40 0.30

0.20 0.10 2018

2017

2016

2015

2014

2013

2012

2011

2010

China's share of world car production

2009

2008

2007

2006

2005

2004

2003

2002

0.00 2001

Fixed asset investment in China's auto industry

China started the 2000s hovering around 5 percent of the share of global automobile production. Steady growth in the 2000s gave way to a step leap from 2008 to 2009 when China’s aggressive financial crisis moves allowed it to claim over 20 percent of global automobile production. That share has resumed steady growth over the past decade, approaching 30 percent. 60

汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2009) [Annual Report on Automotive Industry in China (2009)]. 61 Certification and Accreditation Administration of China, “Certification and Accreditation Administration of China 关于汽车产品强制性认证执行有关国家标准的公告 [Announcement on the Implementation of Relevant National Standards for Compulsory Certification of Automotive Products].” 62 汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2009) [Annual Report on Automotive Industry in China (2009)].

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Domestic Consumption Beijing also deployed targeted policies throughout the financial crisis to preserve, and increase, domestic automotive consumption, insulating the Chinese market from the global downturn – and making it a rare source of growth in a barren international landscape. Beijing reduced taxes on vehicle purchases, lowered regulatory barriers on purchases, and simplified the process of obtaining consumer credit for auto purchases. Beijing also allocated five billion RMB to a “cars to the countryside” program that subsidized farmers’ purchase of vehicles and increased subsidies for the trade-in of old cars from 600 million RMB in 2008 to 1 billion in 2009.63 And Beijing accelerated government procurement of Chinese-produced and branded automobiles.64 At a more systemic level, Beijing instituted programs to streamline traffic and parking systems in order to develop an environment more favorable to automobile use.65 As will be discussed later in this section, Chinese government support for domestic automobile consumption included special incentives for EVs. Bring In: The Insulated Chinese Market as Bait State support for domestic industry and consumption offered China access to international investment, technology, and joint ventures. Beijing calculated that the shrinking demand overseas – compounded by government-backed consumption in China – would force foreign companies into partnerships and joint ventures with Chinese companies. “With the outbreak of the US financial crisis,” explains the 2009 Blue Book, “multinational companies have adjusted their strategic deployment toward China… Multinational companies’ investment in China can accelerate the cultivation and flow of talents and help technology spillover; it can introduce technology and innovation processes to China and speed up product development cycles.”66

汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2009) [Annual Report on Automotive Industry in China (2009)]. State Council of the People's Republic of China, “汽车产业调整和振兴规划 [Auto Industry Adjustment and Revitalization Plan].” 64 汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2009) [Annual Report on Automotive Industry in China (2009)]. State Council of the People's Republic of China, “汽车产业调整和振兴规划 [Auto Industry Adjustment and Revitalization Plan].” 65 65 汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2009) [Annual Report on Automotive Industry in China (2009)]. China’s industrial support measures are often described as inefficient, especially because they risk creating overcapacity. Chinese sources dismiss this concern. The 2009 Blue Book explains that this topic of “overcapacity” has recently been discussed in the auto, and other, industries. But that discussion must “distinguish between ‘cyclical excess’ and ‘structural excess.’ The production capacity formed during the period of economic upsurge will mean surplus in the low period. In the next period of upsurge, this ‘surplus’ will come to be insufficient. The meaningful variable is the peak capacity…China’s current production capacity of tens of millions of vehicles cannot be said to have reached its peak capacity. Even in the recent economic downturn, some hot-selling models have experiences insufficient production capacity…Taking into account the matter of structural surplus, it is not meaningful to talk about overcapacity in general terms. The important thing is to look at the scale of ‘effective production capacity.’” (Ibid) 66 汽车蓝皮书课题组 [Automotive Blue Book Research Group].

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This flow of auto-relevant resources to China might have occurred naturally as a result of government support for domestic industry. But Beijing was not inclined to leave things to chance. The CCP implemented policies designed further to encourage such technology transfer. Across the board, Beijing sought to, as the 2009 Blue Book puts it, “support the introduction of technology and innovation by auto companies.” 67 To that end, the government used subsidies, State investment, and policy loans to enable the purchase of intellectual property rights in manufacturing technologies, patent implementation licenses, technology licenses, and software licenses when purchased from abroad and used in domestic or foreign markets for the first time. The government also provided preferential land, infrastructure, taxation, and other policies to companies undertaking technology transfer.68 Go Out: Buying the Dip A host of Chinese discussions of the auto sector during the 2008-2009 financial crisis describe a government-supported effort to “buy the dip,” or acquire depreciated international assets at low cost.69 “Since the US subprime mortgage problem caused the world to fall into economic crisis,” explains an article in China Industry News, “the global auto industry structure has undergone great changes. The US General Motors and Chrysler are facing restructuring, and many auto parts companies are facing bankruptcy.” The result? “This allows domestic auto and parts companies that seek to become bigger and stroker to see ‘business opportunities.’ They are gearing up to initiate mergers and acquisitions.”70 The 2009 Blue Book focuses on such opportunity in the auto parts sector. The Blue Book projected that the crisis would drive more than half of the auto parts suppliers in the United States to file for bankruptcy protection. “Therefore, Chinese auto parts companies have great opportunities to obtain international high-quality resources. The opportunities to enter the international market are increasing.”71 The text continues: In the past two years, bankruptcies of North American auto parts manufacturers abound, and many famous brand parts manufacturers, including Delphi, have experienced operational difficulties…For Chinese auto parts companies, it may be an opportunity to seek cooperation with European and American manufacturers and directly to acquire them. In March 2008, Ningbo Huaxiang Company…announced that it would launch a global strategic plan before the end of 2008 to promote foreign mergers and acquisitions – making use of the company’s domestic advantages while deploying into the European and US markets.72 67

汽车蓝皮书课题组 [Automotive Blue Book Research Group]. 汽车蓝皮书课题组 [Automotive Blue Book Research Group]. 69 汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2009) [Annual Report on Automotive Industry in China (2009)]. 70 Zeng Caihao, “中国汽车企业应警惕海外盲目“抄底” [Chinese Auto Companies Should Be Wary of Blindly "Buying the Dip" Overseas],” Auto Weekly, June 27, 2009. 71 汽车蓝皮书课题组 [Automotive Blue Book Research Group]. 72 汽车蓝皮书课题组 [Automotive Blue Book Research Group]. 68

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The chart below shows tangible ramifications of this approach, featuring both Delphi and Ningbo Huaxiang. In many cases, the companies executing the buying the dip strategy were State-owned or Stateinvested. Across the board, they benefited from favorable government policies that incentivized buying the dip. In March 2009, the Ministry of Commerce promulgated Measures for the Administration of Overseas Investment to “encourage domestic enterprises to actively go global.”73 The Chinese government and industry associations also helped companies to conduct cross-border mergers and acquisitions, including through financial, credit, legal, regulatory, and strategic support.74 Geely Automobile Holdings offers an early example of Chinese companies buying the dip. In March 2009, Geely announced its successful acquisition of Australia’s Drivetrain Systems International (DSI), the world’s second largest auto automatic transmission company.75 A year later, in March 2010, Geely reached a deal with Ford to take over Volvo Cars. The deal was completed in August 2010. Geely had initiated the conversation in mid 2008. Selected Chinese Acquisitions and Majority Ownership Investments in Developed Market Auto Parts and Equipment Businesses, 2009-2020 Year

Company

Chinese Acquirer

Country

2009

Drivetrain Systems International (DSI)

Geely Automobile Holdings

Australia

2009

Beijing West Industries Co., Ltd.

US/UK

Weichai Power

France

2010

Delphi Corp. Société Internationale Baudouin Nexteer Automotive

Beijing Gov't

2011

Preh GmbH

2011

KSM Castings Gruppe

2011

Inalfa Roof Systems

Joyson Investment Holding Ningbo Germany Citic Dicastal Wheel Manufacturing Germany Co. Beijing Hainachuan Automotive Parts US

2012

Wescast Industries

Sichuan Bohong Industry Co. Ltd.

2012

HIB Trim Part Solutions Group

Ningbo Huaxiang (NBHX)

2013

Meridian Lightweight Technologies

Wanfeng Auto Holding Group

2009

des

Moteurs

Elecronics

Canada Co.

Germany Canada

Zeng Caihao, “中国汽车企业应警惕海外盲目“抄底” [Chinese Auto Companies Should Be Wary of Blindly "Buying the Dip" Overseas],” Auto Weekly, June 27, 2009. 74 汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2009) [Annual Report on Automotive Industry in China (2009)]. 75 “China’s Geely to Pay up to $40 Million in DSI Purchase,” Reuters, March 27, 2009. https://www.reuters.com/article/geely/chinas-geely-to-pay-up-to-40-mln-in-dsi-purchase-idUSHKG6622220090328

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2013

A123 Systems

Wanxiang Group Co

2014

Hilite International

AVIC Electromechanical Holdings Co., Ltd.

Systems

2014

ABC Group Fuel Systems Inc.

Rongshi International Company Ltd.

Holding

2015

NYX

Shanghai Shenda Co., Ltd.

2015

WEGU Holdings GmbH

2015

Henniges Automotive

2015

Pirelli

Anhui Zhongding Sealing Parts Germany AVIC Automotive Systems Holding US Co. Ltd. ChemChina Italy

2015

Vgage

Wuxi Vgage Technology

2015

Air International Thermal Systems

2016

Prestolite Electric

2016

Key Safety Systems

Aotecar New Technology US Zhongshan Broad-Ocean Motor Co. US Ltd. Joyson Investment Holding Ningbo US

2016

TechniSat Digital Global GmbH

Joyson Investment Holding Ningbo

Germany

2016

The Paslin Company

Wanfeng Auto Holding Group

2016

Arc Automotive

Yinyi Group

2016

Druckguss GmbH & Co KG

Anhui Zhongding Sealing Parts

Austria

2016

ConForm Automotive

Wuxi Gissing Auto Parts Co., Ltd.

2016

Kuka

Midea Group

Germany

2017

Incodel Holding LLC

ZYNP Corp.

2017

Robert Bosch GmbH Generator business unit)

2017

HTI Cybernetics

Chongqing Nanshang Investment

2017

Terrafugia

Zhejiang Geely Holding Group

2018

Takata Corp

Joyson Investment Holding Ningbo

Japan

2018

ZF TRW Global Body Control Systems

Luxshare Limited

2018

Grammer AG

Germany

2018

Federal Mogul (Lighting)

2018

Motus Integrated (Visor)

Ningbo Jifeng Auto Parts Co. Chongqing Rebo Lighting Electronics Shanghai Daimay

(Starter

US Germany US US

and Zhengzhou Coal Mining Machinery Germany Group

US US

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2019

SAM Automotive Group

Fuyao Glass Industry Group

Germany

2019

Power Solutions International

Weichai

2020

ABC Umformtechnik GmbH & Co KG

Fawer Automotive Parts Limited

Germany

The transactions listed here are not comprehensive. The acquisitions support global positioning and gradual upgrading of Chinese technological and production capacity. China’s international automotive acquisitions, during and after the financial crisis, appear to have focused on areas outside of internal combustion engines (ICEs) – and, therefore, on elements of the industry chain that will remain relevant in the EV era. This could be intentional. It could also be an accidental byproduct of China’s relatively low value-add position in the industry. Yet that position itself is an element of the leapfrog logic behind Beijing’s EV ambitions.76 The 2009 Blue Book dwells in particular on the case of China’s mid-crisis bail out of General Motors (GM).77 Near bankruptcy in 2009, GM turned to China’s State Administration for Industry and Commerce for a 400 million USD lifeline.78 The Blue Book explains that “the international financial crisis has affected the real economy of developed countries and the automobile industry is the first to bear the brunt. GM’s bankruptcy is a landmark event; other auto companies are not doing well.”79 In what may have been a prid quo quo related to that bail-out – and that, at the least, reflected additional buying the dip cases -- GM also sold a series of assets to Chinese State-owned entities in the wake of the financial crisis. In December 2009, China’s State-owned Beijing Automotive Industry Holding Co. announced its acquisition of core intellectual property assets of General Motors’s Saab unit.80 In November 2010, GM completed the sale of Nexteer, its powersteering component subsidiary, to the Beijing government. The next year, a subsidiary of China’s State-owned Aviation Industry Corporation of China (AVIC) acquired a controlling share of

For a snapshot of market reactions and framing of Chinese overseas acquisitions in 2017, see Trefor Moss, “How China Plans to Take Over the Car Industry,” The Wall Street Journal, July 18, 2017, https://www.wsj.com/articles/china-aims-to-take-over-car-industry-one-part-at-a-time-1500370204. 77 The Blue Book also cites Prudential. “The financial crisis continues. The international auto giant Prudential has been hit hard. Selling its uncompetitive brands has become a natural choice. This has provided a rare opportunity for Chinese automakers to reorganize overseas.” (汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2009) [Annual Report on Automotive Industry in China (2009)].) 78 For additional context, see: Edward Niedermeyer, “The Secret History of GM’s Chinese Bailout,” Quartz, January 24, 2016, https://qz.com/594984/the-secret-history-of-gms-chinese-bailout/; Edward Niedermeyer, “How GM’s Bailout Became China’s Bonanza,” Bloomberg, November 13, 2015, https://www.bloomberg.com/opinion/articles/2015-11-13/how-gm-s-bailout-became-china-s-bonanza. 79 汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2009) [Annual Report on Automotive Industry in China (2009)]. 80 Fang Yan and Edmund Klamann, “China's BAIC Buys Saab assets; Spyker Still in Talks,” Reuters, December 13, 2009. https://www.reuters.com/article/us-saab-baic/chinas-baic-buys-saab-assets-spyker-still-in-talksidUSTRE5BC0I220091214

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Nexteer.81 AVIC has since been identified by the US Department of Defense as tied to the Chinese military.82 In discussing the GM case, the Blue Book points to an important nuance in the buying the dip strategy: It did not entail keeping production, and jobs, abroad. “With GM, the problem lies in wages and benefits that are too high…There is not much comparative advantage in the US auto industry…For the automobile industry and most manufacturing within it, it is most advantageous to transfer production to China.”83 For China, the value of these international acquisitions compounds. They provide footholds into foreign markets, supporting continued acquisitions. For example, China’s Joyson Ningbo acquired Key Safety Systems in 2016. Key Safety Systems then became a vehicle for subsequent investments, including the acquisition of Takata, the global leader in airbags and related safety systems. Key Safety registers as a US-domiciled operation, not a Chinese one. This could confer advantages in terms of regulatory approvals. Finally, the Blue Book also applies the logic of buying the dip to human capital. “If international companies lay off a large number of employees, then Chinese brands will have an excellent opportunity to recruit outstanding talents.”84 Go Out: Internationalization The ultimate goal of “Go Out,” and of Beijing’s automobile strategy, is not only to acquire foreign technologies. It is also to use those technologies in order to develop a critical role in the international division of labor. Beijing seized on the financial crisis to expand the place of its companies in international automotive supply chains – with a particular focus on auto parts. With budgets tightening internationally, China could offer low-cost products and production, thus making itself essential for international auto supply. According to the 2009 Blue Book: The State should encourage parts and components companies to Go Out and Bring In, learn and draw on the advanced experience and technology of multinational auto parts companies…and improve their position in the international division of labor. Enterprises should optimize their export markets and products…and actively expand into the auto market of developed countries…The State can provide more favorable export seller credits and export credit guarantees to provide the necessary support for my country’s export products.85 81

Nick Bunkley, “G.M. Sells Parts Maker to a Chinese Company,” The New York Times, November 29, 2010. https://www.nytimes.com/2010/11/30/business/30gm.html 82 Chad J.R. Ohlandt et al., Chinese Investment in U.S. Aviation, Rand Corporation, 2017. https://www.rand.org/content/dam/rand/pubs/research_reports/RR1700/RR1755/RAND_RR1755.pdf 83 汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2009) [Annual Report on Automotive Industry in China (2009)]. 84 汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2009) [Annual Report on Automotive Industry in China (2009)]. 85 汽车蓝皮书课题组 [Automotive Blue Book Research Group].

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Or, simply, “Chinese auto companies are actively seeking opportunities to enter developed countries.”86 Once more, this prong of the Chinese strategy was well supported by industrial policy. Some of the Chinese policies are obvious in their intentions, including the Opinions on Promoting the Sustainable and Healthy Development of China’s Auto Product Exports. Issued in November 2009,87 these Opinions declared that “by 2015, exports of [Chinese] automobiles and parts will reach 85 billion USD, with an average annual growth rate of about 20 percent; by 2020, China's exports of automobiles and parts will account for 10 percent of the world's total automobile product trade.”88 As of 2019, China had claimed 8.6 percent of the market.89 Other export-supporting industrial policies are more subtle. Take, for example, the Announcement on the Implementation of Relevant National Standards for Compulsory Certification of Automotive Products, issued by the Certification and Accreditation Administration of China in August 2009. This announcement outlined a new Chinese standards regime for the auto industry, oriented around fueling China’s exports.90 Foreign standards, uninfluenced by and at odds with Chinese ones, constituted non-tariff trade barriers. To penetrate the international auto industry, Beijing needed to harmonize with, or better yet to set, the world’s automotive standards. As the 2009 Blue Book explained the policy: There is a certain gap between us and European standards…An example is the emission standard. Due to technical reasons, it is difficult for most of our independent cars to meet the EU’s strict emission standards. In addition, in terms of safety, operational stability, NVH technology, and other standards, we have a great gap with developed countries…Trade and technical barriers increase the difficulty for domestic companies to develop international markets.91

汽车蓝皮书课题组 [Automotive Blue Book Research Group]. By the Ministries of Commerce, Industry and Information Technology, and Finance, as well as the National Development and Reform Commission, General Administration of Customs, and General Administration of Quality Supervision, and Quarantine. 88 Ministry of Commerce, the Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Finance, the General Administration of Customs and the General Administration of Quality Supervision, Inspection and Quarantine, “关于促进我国汽车产品出口持续健康发展的意见,” November 2009. 89 Daniel Workman, “Automotive Parts Exports by Country,” World’s Top Exports, http://www.worldstopexports.com/automotive-parts-exportscountry/#:~:text=Car%20parts%2C%20accessories%20Global%20sales,were%20valued%20at%20%24351.9%20bi llion 90 Certification and Accreditation Administration of China, “Certification and Accreditation Administration of China 关于汽车产品强制性认证执行有关国家标准的公告 [Announcement on the Implementation of Relevant National Standards for Compulsory Certification of Automotive Products],” August 2009. 91 汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2009) [Annual Report on Automotive Industry in China (2009)]. 87

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Value of China’s Auto Parts Imports and Exports (100 mm USD), 2001-2017 800 700 600 500 400 300 200 100

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The rise of Chinese players in the parts supply chains have awarded the Chinese auto industry global influence. The net export profile of China’s auto parts segment reflects the returns that investment into domestic industry has generated in markets outside of China. As these examples indicate, China’s internationalization efforts emphasized the auto parts sector.92 An easier area to penetrate than the higher end of the value chain, the parts sector is often overlooked in assessments of the global automobile industry. The major OEMs treat the parts sector as an area for cost reduction. However, their brands depend on parts. The parts sector also provides returns in terms of employment, as well as a foundation for Chinese OEMs to grow, and – perhaps most critically for China’s larger industrial ambitions – access to steps farther up the automotive value chain. China has used its growing auto parts power to launch strategic partnerships and joint ventures with leading North American and German parts businesses that further cement its place in supply chains, as well as access to foreign markets, technology and resources. 93 Moreover, China’s role in the auto parts industry may support its bid to set international technical standards.94 China can use the scale of its domestic market and production to influence the technical standards that govern particular manufacturing approaches and safety 92

Among other things, the 2009 Auto Industry Adjustment and Revitalization Plan calls for “support[ing] the key auto parts enterprises to expand their scale through mergers and reorganizations and increas[ing] the domestic and foreign auto accessory market shares” as well as “speed[ing] up construction of the national automobile and parts export base.” (State Council of the People's Republic of China, “汽车产业调整和振兴规划 [Auto Industry Adjustment and Revitalization Plan].”) 93 This comes with national security implications: As Chinese players -- like AVIC’s subsidiaries -- amass cuttingedge automotive technology, it is possible that those inputs might be translated to military utility according to the Chinese strategy of military-civil fusion. 94 For additional background, see Emily de La Bruyere and Nathan Picarsic, “China’s Next Plan to Dominate International Tech Standards,” TechCrunch, April 11, 2020, https://techcrunch.com/2020/04/11/chinas-next-plan-todominate-international-tech-standards/.

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protocols in order, ultimately, to benefit Chinese players. In sum, Chinese players’ positions within supply chains for OEMs generate profits; provide access to external markets and innovation; permit acquisition high fidelity information, including IP information, on the downstream players they supply; and permit leverage over the larger auto industry. Eyes to the Future: New Energy Vehicles Even as Beijing deployed policies designed to take advantage of the immediate crisis in 2008 and 2009, it was also actively preparing for the next frontier, honing its EV leapfrog. China’s emphasis on this leapfrog predated the crisis. But global instability injected new momentum into the effort. The world was on hold. Beijing could seize the moment to leap ahead. Chinese industrial discussion calls 2008 the “first year of China’s new energy vehicles.” 95 “Recently,” explains the 2009 Blue Book, two crises are being discussed internationally: The financial crisis and the climate crisis.”96 The Blue Book argues that the “connection between the two” lay in new energy and environmentally friendly industry. This would emerge as the salve for environmental degradation and also the new engine of economic growth. And within the environmental industry, “the development of new energy vehicles is a key point.” It therefore fell to China to “speed up the top-level design of the new energy vehicle strategy and seize the commanding heights of the new round of international competition.”97 In January 2009, the Ministries of Finance and of Science and Technology issued the Notice on Carrying out the Pilot Work of Demonstration and Promotion of Energy-Saving and New Energy Vehicles.98 Thirteen major cities99 were to carry out pilot projects to promote, demonstrate, and build infrastructures supporting new energy vehicles. 100 Government branches, including the postal and sanitation services, were to procure and lead in the adoption of new energy vehicles. And the state would grant subsidies to government and corporate entities for the purchase of new

Beijing Institute of Technology, “后新冠肺炎疫情下我国新能源汽车产业发展形势与对策 [The Development Situation and Countermeasures of My Country’s New Energy Automobile Industry Under COVID],” March 3, 2020. 96 汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2009) [Annual Report on Automotive Industry in China (2009)]. 97 汽车蓝皮书课题组 [Automotive Blue Book Research Group]. 98 Ministry of Finance and the Ministry of Science and Technology, “关于开展节能与新能源汽车示范推广试点工作的通知 [Notice on Carrying out the Pilot Work of Demonstration and Promotion of Energy-Saving and New Energy Vehicles],” January 2009. 99 Beijing, Shanghai, Chongqing, Changchun, Dalian, Hangzhou, Jinan, Wuhan, Shenzhen, Hefei, Changsha, Kunming, Nanchang 100 Seven additional cities were added to that the list in 2010. Tianjin, Haikou, Zhengzhou, Xiamen, Suzhou, Tangshan, and Guangzhou. Ministry of Industry and Information Technology, Ministry of Finance, Ministry of Science and Technology, National Development and Reform Commission, “关于扩大公共服务领域节能与新能源汽车示范推广有关工作的通知 [Notice on Expansion of Energy-Saving and New Energy Vehicle Demonstration and Promotion Public Service],” June 2010.

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energy vehicles.101 At the same time, the Ministries of Finance, Science and Technology, and Industry and Information Technology joined with the National Development and Reform Commission to launch a pilot program through which individuals would receive subsidies for the purchase of new energy vehicles. That program also obligated Shanghai, Changchun, Shenzhen, Hangzhou, and Hefei to invest in building charging station infrastructure, purchasing new energy vehicles, and developing battery scrap and recycling systems.102 The final two sections of the State Council’s 2009 Auto Industry Adjustment and Revitalization Plan sum up Beijing’s policies on new energy vehicles. They outline a new national, energy-saving and new-energy vehicle project, government subsidies to support local level government promotion of new energy vehicles, construction of a charging network, formulation and revision of new energy vehicle product standards and test methods.103 The policies implemented during the financial crisis all stemmed from long-standing priorities and approaches: State support for the automobile industry, Go In and Bring Out, and a focus on emerging automotive technology were all evident in Beijing’s pre-2008 policy and ambitions. But these took on new momentum, and scope, in the financial crisis context. The CCP seized the crisis opportunity to accelerate its timeline for industrial leapfrog. And the CCP maintained these policies and priorities after the financial crisis. They have continued to characterize China’s automobile strategy over the past decade – as reflected in the 2010 Strategic Emerging Industries Initiative,104 the 2015 “Made in China 2025” plan,105 and the 2019 “Transportation Great Power” program,106 as well as more targeted efforts like the CCP’s subsidies for new energy vehicles.

101

Ministry of Finance and the Ministry of Science and Technology, “关于开展节能与新能源汽车示范推广试点工作的通知 [Notice on Carrying out the Pilot Work of Demonstration and Promotion of Energy-Saving and New Energy Vehicles].” 102 汽车蓝皮书课题组 [Automotive Blue Book Research Group], 中国汽车产业发展报告 (2009) [Annual Report on Automotive Industry in China (2009)]. 103 “汽车产业调整和振兴规划 [Auto Industry Adjustment and Revitalization Plan],” State Council of the People’s Republic of China, March 20, 2009. 104 State Council, Guiding Opinions on Promoting the International Development of Strategic Emerging Industries ( 关于促进战略性新兴产业国际化发展的指导意见), October 25, 2011. 105 State Council of the People’s Republic of China, Made in China 2025 (国务院关于印发《中国制造 2025》的通知), May 8, 2015. 106 交通强国建设纲要 [Outline of Building a Powerful Country for Transportation], Central Committee of the Communist Party and the State Council, September 2019.

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COVID-19 Investment Today, a new crisis wreaks global havoc. And China is in the process of re-applying its 2008-2009 playbook to the pandemic economic environment. Beijing’s language, since the beginning of COVID-19’s global spread, has returned to the narrative of “seizing the opportunity” and “turning crisis into opportunity” that characterized 2008-2009 industrial planning.107 Once more, foreign assets are depreciated, market share is up for grabs, and Beijing projects a narrative of stability to attract foreign investment. Some of the CCP’s earliest, and most concentrated, recovery investment has oriented around the automobile industry, and in a fashion reminiscent of 2009 investment. Beijing is propping up the domestic legacy auto industry as that industry falters globally, is courting foreign investment and expertise to exploit this crisis in order to lock in gains and is positioning for a decisive leapfrog in new energy and intelligent vehicles. The stakes are higher today than they were in 2008. China is in a stronger position. And the auto sector is grappling, in real time, with the EV disruption. As early as March 2020, Beijing began implementing consumer side incentives to “stabilize traditional consumption” in automobiles, textiles, and appliances. Beijing also stepped in directly to ensure that the auto sector resumed production, arranging for coordination along the supply chain, streamlining access to supplies and labor, and easing regulatory and credit obstacles.108 Beijing liaised among companies, too, as well as between companies and local governments, facilitating transportation of materials, parts, and even labor; delivering personal protective equipment; opening up test sites for vehicles; and adjusting product review processes and timelines. And, of course, Beijing provided capital. By March 30, the government reported having “organized and sorted out the capital needs of more than 260 automotive-relevant enterprises in 11 provinces.”109 Overall, the Chinese government implemented 320 national policies related to the auto sector between January 1 and June 12, 2020.110 One group of these policies focused on inflating domestic consumption, especially of EVs – as in the 2008-2009 scenario. On April 28, 2020, the National Development and Reform Commission joined with a host of other central government ministries to issue the Notice on Several Measures to Stabilize and Expand Auto Consumption. That measure relaxed emissions standards, improved subsidy and taxation support policies for the purchase of

107

Emily de La Bruyere and Nathan Picarsic, “Viral Moment,” March 15, 2020. “国务院联防联控机制 2020 年 3 月 30 日新闻发布会 [State Council Joint Prevention and Control Mechanism Press Conference on March 30, 2020].” 109 “国务院联防联控机制 2020 年 3 月 30 日新闻发布会 [State Council Joint Prevention and Control Mechanism Press Conference on March 30, 2020].” 110 “2020 年上半年汽车产业政策及下半年展望 [Automobile Industry Policy in the First Half of 2020 and Outlook for the Second Half of the Year],” Yangtze River Nonferrous Metals, July 13, 2020. 108

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new energy vehicles, reduced taxes and fees for the second-hand car market, and streamlined auto finance policies.111 A second bucket focused on internationalization, both “Bring In” and “Go Out.” As early as February 2020 the Ministry of Commerce issued measures to “stabilize foreign trade and foreign investment” in face of COVID. Those included promotion of the export of cars, specifically, as well more broadly as subsidies for industrial production focused on “developing international markets,” strengthened export credit support and use of free trade zones, and new measures to “innovate and optimize” ways of attracting foreign investment. The Development and Reform Commission’s March 9, 2020 “Notice on Further Deepening Reform in Response to the Epidemic” prioritized supporting the resumption of work of foreign-invested and -funded enterprises. It also implemented incentives and reduced regulatory obstacles to encourage foreign investment. On March 20, the foreign investment catalog was revised to include new energy and intelligent vehicles. And a third bucket focused on the future vehicle industry, including both EVs and intelligent vehicles. On February 24, a cross-government group of 11 ministries and commissions issued the “Smart Car Innovation Development Strategy,” laying out a strategic and industrial plan for intelligent vehicle development. The plan projected that 2025 would be the watershed year for mass, market-oriented production of self-driving cars. 112 On April 23, 2020, the Ministries of Finance, of Industry and Information Technology, and of Science and Technology, as well as the National Development and Reform Commission extended subsidies for new energy vehicles that had been set to expire at the end of 2020, implementing a new end year of 2023. At the same time, a number of local governments implemented their own policies to promote consumption of new energy vehicles. 113 Intelligent vehicles constitute an additional question, at the intersection of China’s auto and information technology (IT) ambitions: This issue -- and in particular the role that China’s new infrastructure construction (e.g., Internet of Vehicles, EV charging stations) might play in shaping the future of mobility – demand further examination. At the same time, Chinese companies in the automotive sector have also benefited from US COVID-19 recovery investment. For example, Nio USA, owned by China’s EV champion Nio, received between 5 and 10 million USD of Paycheck Protection Program (PPP) loans, as did Yapp USA, owned by Yangzhou-headquartered YAPP Automotive Systems, itself majority owned by Chinese State-owned SDIC High-Tech Investment.114 In some cases, the benefiting entities are the very same ones that used the 2008-2009 financial crisis to buy US assets at fire sale prices: BWI Indiana Inc. and BWI North America together received between 6 and 12 million USD in PPP 111

National Development and Reform Commission, Ministry of Science and Technology, Ministry of Industry and Information Technology, Ministry of Public Security, Ministry of Finance, Ministry of Ecology and Environment, Ministry of Transport, Ministry of Commerce, Ministry of Commerce, People’s Bank of China, “关于稳定和扩大汽车消费若干措施的通知 [Notice on Several Measures to Stabilize and Expand Auto Consumption],” April 2020. 112 “2020 年上半年汽车产业政策及下半年展望 [Automobile Industry Policy in the First Half of 2020 and Outlook for the Second Half of the Year].” 113 “2020 年上半年汽车产业政策及下半年展望 [Automobile Industry Policy in the First Half of 2020 and Outlook for the Second Half of the Year].” 114 “China’s Protection Racket,” Horizon Advisory, August 2020.

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loans. Both are owned by Beijing West Industries (BWI Group), a Beijing-based and State-backed supplier of brake and suspension systems. In 2009, BWI Group acquired Ohio-headquartered Delphi Ride Dynamics and Brakes, with it, a portfolio of machinery and equipment, intellectual property, and physical property, as well as the jobs of some 3,000 workers in the US, Poland, China, and Europe.115 Beijing seeks to seize the COVID opportunity to emerge the decisive leader in the global automobile industry – and, in particular, the next-generation automobile industry and the broader mobility revolution into which it docks. This, now, could prove an even more decisive moment than that of the financial crisis. Beijing operates from a position of greater strength than that of 2008. And the emerging areas that Beijing targets – new energy and intelligent vehicles – are more foundational and strategic, from commercial, technological, and security perspectives, than the legacy automobile industry.

115

“China’s BWI Acquires Delphi’s Ride Dynamics and Brakes Business,” Global Times, November 3, 2009.

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Conclusion As COVID-19 has devasted the global economy, China – owing to its usual mix of industrial policy and predatory practices – was one of very few national economies to see economic growth in 2020. China’s economic planners now look to lock in the advantages they have claimed from the crisis; to use the moment of international upheaval as an opportunity to leapfrog the incumbent global order. The auto sector is among the prime targets for such a leapfrog. Over the past two decades, China has deliberately propped up its traditional auto sector while actively facilitating and financing its integration into the global system. The CCP has incentivized vertical integration within global supply chains and cultivated foreign dependency. Beijing has prioritized the high-growth EV segment with an eye toward the opportunities afforded by the disruption of massive industry changes. From raw materials to downstream strategic partnerships that provide access to cutting-edge technology, China’s champions are positioned: The legacy industry increasingly depends on China for parts and for production; the emerging EV industry depends on China for batteries and battery inputs. The auto sector is a key US driver of innovation, jobs, industrial base capacity, and prosperity. Right now, it is under threat, with severe implications for US national and economic security. The US must compete, immediately. It must do so in a fashion that accounts for the positions of global dependence China has already secured, as well as the subsidization, regulatory arbitrage, and mercantilism that feed China’s model. The US must also learn from the 2008-2009 playbook that Beijing has now reactivated. Otherwise, the CCP is poised to pass its global competitors at an industrial inflection point.

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