Transcript: China’s race to tech supremacy — Driving into Europe

This is an audio transcript of the Tech Tonic podcast episode: ‘China’s race to tech supremacy — Driving into Europe’

James Kynge
Let me start this episode with a little history. One of the most fabled stories in China concerns Zhang He, a 15th century admiral who sailed to the oceans of the west. He commanded what was called a treasure fleet, with ships that were so large and so technologically advanced that they remained unsurpassed in the world for hundreds of years.

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Admiral Zhang sets off on his first of seven epic voyages. He heads west. His ships are mammoth wooden structures with enormous masts, balconies and opulent bedrooms. They’re packed with the finest goods, silk and porcelain and the most sophisticated weaponry of the time. Everywhere he docks, Admiral Zhang’s fleet inspires awe. It is said the admiral sailed to dozens of countries over nearly three decades, exacting tribute for the Ming emperor of the time and, crucially, extending China’s influence across the globe. Even today, his legendary fleet remains a symbol of the country’s great engineering history. Chances are, if you’re based in the west, you may not have heard of him. But Admiral Zhang’s story in some ways mirrors what’s happening with China today. Six hundred years on from Admiral Zhang, it was a chilly, grey April morning and I was standing on the dock in Bremen, Germany, on the North Sea. The Admiral never set foot here, at least not that we know of. But the ship that was about to dock in Bremen was another testament to China’s global technology and engineering ambitions.

I was there to watch the arrival of a Chinese cargo ship called BYD Explorer No 1 after its maiden voyage to the west. It was there to unload thousands of electric vehicles made by the Chinese car giant BYD. And its aim was simple: to dominate Europe’s EV market. There’s a big red BYD logo on the side of the ship. BYD stands for Build Your Dreams. And that’s what this Chinese car company is intending to do in Europe. This really does feel like a big moment.

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James Kynge
We are surrounded by German reporters, TV cameras. There’s a huddle of about 50 people, all with high-vis vests on. On the dockside here, BYD cars driving on and off as it unloads the thousands of electric vehicles that have been carried over from China.

Until relatively recently, BYD hardly exported any cars outside of China, but now it’s got its own fleet of cargo ships in the works. This is the first of many of these vessels that BYD is sending across to Europe, and it’s part of a broader strategy to control its supply chain.

It’s also really unusual for a car company to own, effectively, a shipping line. I mean, this is not the only one of these ships that’s going to be built. So having this car carrier owned by the BYD company gives BYD an advantage, both in terms of the reliability of their shipping schedules and also in terms of the fact that this is engineered to save costs. And cost is going to be the absolute key point, because the price war between BYD and the other European electric-vehicle makers has already begun. For Europe’s car industry then, the question is, can it survive this intensifying Chinese rivalry? And for BYD, can it survive the western pushback?

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This is Tech Tonic from the Financial Times. I’m James Kynge and I cover China for the FT. In this season, we’re going to the front lines of China’s rise as a technological superpower and ask whether it might leapfrog the west. Will Chinese technology be the technology of the future? In this episode, BYD and the success of Chinese electric vehicles. How did BYD become one of the world’s largest electric carmakers? And can established western car companies see off the competitive challenge that they pose?

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BYD is based in Shenzhen. We visited the city in our first episode of this series. It’s a brand that’s not particularly well known outside of east Asia. In fact, for many years their cars were seen as rather clunky. Elon Musk was known to crack jokes about them.

Unnamed reporter voice clip
There are competitors now ramping up, and as you’re familiar with BYD, which is also on the west Coast, I think they’re ramping up production of their electric vehicle. Why do you laugh? Trying to compete. Why do you laugh?

Elon Musk voice clip
Have you seen their car?

James Kynge
But over the last few years, BYD has seen accelerated growth, quickly catching up with Tesla in terms of electric vehicle production. BYD’s ambition is to have its cars as commonplace on western roads as Volkswagens, Fords or Toyotas.

Unnamed person voice clip
I need your driver’s license, please. Thank you.

James Kynge
One way to find out about BYD’s competitiveness in Europe: take a BYD electric car out for a test drive on the German autobahn, which is just what I did along with producer Josh. We’ve just arrived in Hamburg, and we’re at the Sixt car rental counter. We’re just about to rent a BYD car. The German car rental agency Sixt recently made a large purchase of BYD cars. It’s a good sign of BYD’s appeal in this market. We decided to rent one, the Atto 3 model, a small-size SUV. And to be totally honest, we got off to a rocky start.

There’s a lot of screens. This is the air conditioner. That’s obviously, like, plus.

A confession, I’m not used to driving a high tech electric vehicle, and my knowledge of the German language controls was scratchy, to say the least.

OK. You reckon that’s P? P on the bottom there. Right. Cool.

And the confusion continued when we got on to the German roads.

OK, let’s work it out. That’s parking. This is synching your mobile phone. This, I don’t know what that is. Hey. Could that be air conditioning?

Not that any of this was a reflection of BYD itself.

Oh, here we go, here we go. Here’s a fan and it says, on and off. Oh!

James Kynge
Top Gear, it was not, but eventually I got the hang of it. This is the BYD Atta 3. The controls are a little bit bewildering, certainly to start with. I was trying to work out what the air conditioner was for about half an hour before we managed to find out how to turn it on, but it is a very smooth vehicle, it has to be said. Here’s its appeal. This EV is cheap. It retails at about €38,000. Compare that to a similar Tesla model that comes in at €50,000. The particular Atto 3 I drove is also cheaper than German EVs from Mercedes or Volkswagen, which begs the question: how does BYD manage to make its cars so cheaply? Well, for that, we need to dive into a little bit of BYD history.

June Yoon
BYD’s growth story has been pretty amazing.

James Kynge
June Yoon is Asia editor for the FT’s Lex column. She’s written extensively about BYD. The company was founded in Shenzhen about 30 years ago by a man named Wang Chuanfu.

June Yoon
Long before BYD became famous for its electric cars, Wang Chuanfu was already the richest person in China. He was a battery researcher, and in his 20s he built a factory to make mobile phone batteries. So that was kind of how this whole project got started.

James Kynge
And then, rather wisely, Wang decided to buy a small Chinese carmaker and bring it under the BYD name.

June Yoon
I think it’s a combination of good timing and good luck in that it also came during a time where Beijing was really pushing to get ahead in green cars.

James Kynge
The Chinese government was driving electric vehicle growth with hefty state subsidies. That led to a whole new crop of Chinese EV makers. But BYD had a head start in battery development, an absolutely key component for all EVs, and one got to work making sure the production cycle was as efficient as possible. Unlike most carmakers, which tend to buy parts from different sources and then assemble the cars, BYD controlled its supply chain from top to bottom.

June Yoon
BYD has a vertically integrated network of factories that not only builds their batteries but other car parts, so they have cost advantages everywhere.

James Kynge
Those cost advantages? They were possible because BYD had better control over its supply of lithium for batteries and had an in-house semiconductor division, and they were possible because BYD developed its own cutting-edge suspension system, its own engine, and of course, the cargo ship we saw docked in Bremen. All this means that BYD can design its cars very quickly and reliably, churning out new models without supply chain bottlenecks. And it also means BYD can make cars very cheaply.

June Yoon
What makes them cheap is also the reason that makes them so innovative. You know, batteries in electric cars accounts for about a third of the cars’ total cost of production. To be able to make your own battery, that cuts a lot of production costs.

James Kynge
This is what we heard again and again from people we spoke to for this story. BYD’s battery system is truly cutting-edge, and their low price point has allowed the company to surge ahead in some crucial foreign markets.

June Yoon
South-east Asia has for decades been completely dominated by Toyota, and less than two years since BYD entered south-east Asia, especially Thailand, which is the region’s second-biggest car market, BYD has now taken the position of the biggest electric-car maker in the country, and also the third biggest automaker for the entire market. And, you know, I don’t think anyone really expected that to happen so fast.

James Kynge
Nobody expected BYD to take on Tesla either. But earlier this year, BYD overtook Elon Musk’s carmaker to become the world’s largest EV producer. The two companies are now neck and neck. BYD is expanding its manufacturing with new factories in Brazil, Uzbekistan, Indonesia and, crucially for the European market, a plant in Hungary. Yoon says they have a shot at making big inroads in Europe.

June Yoon
Their technology, their smart features, their 5G connectivity continue to improve, right? And the battery becomes, you know, smaller or they get even cheaper. I think longer term they would find quite a following in Europe as well.

James Kynge
Competitors are watching with anxiety as cheap Chinese electric vehicles flood the market. It could even turn existential for some carmakers. But Europe? Well, it isn’t sitting back and letting it happen. BYD’s expansion on the continent has contributed to a growing price war in the car industry. And not everyone thinks BYD has played by the rules.

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James Kynge
BYD has been able to accelerate its growth in foreign markets thanks to its cutting-edge batteries, control of its supply chain, and its super fast production. One of the big western backers of BYD has been Berkshire Hathaway, the legendary American investment group. Charlie Munger, the group’s co-founder, is known for his colourful quotes. Years ago, he described BYD’s chief executive as a combination of Thomas Edison and Jack Welch. Jack Welch is the former head of GE, who is known for his hyper-efficient management and his ruthless cost-cutting. It’s that cost-cutting that has western companies very worried. So, says Stefan Bratzel. He’s a car analyst with the centre for Automotive Management in Germany.

Stefan Bratzel
It won’t be very easy for companies like Volkswagen to reduce the cost in a short time span, and that makes BYD very dangerous. And to this price advantage, we think that there’s a price advantage of 25 per cent against the competitors, which is enormous.

James Kynge
But there is another side to this story. The European Union suspects that BYD has been given an illegal leg up.

Olof Gill
In October last year. The commission decided to launch an anti-subsidy investigation.

James Kynge
Olof Gill is the EU Commission spokesman for trade. And the investigation he mentions is looking at Chinese electric vehicles, including BYD. The EU says it looks an awful lot like Chinese state subsidies exceed the legal limits set by the World Trade Organization. That might mean Chinese government subsidies for groundbreaking research, state support for cheaper batteries, or the sizeable tax breaks given to Chinese consumers when they drive these cars off the lot.

Olof Gill
We saw a large increase in Chinese battery electric vehicles on the European market within a short period of time. Short enough that it set alarm bells ringing.

James Kynge
The speedy rise of Chinese EVs also comes at a super sensitive time for the European car market.

Olof Gill
Here in the EU, we are committed to only selling zero-emission new vehicles by 2035. This is leading to a profound structural change in the car industry, as a result of which European automakers are investing heavily in their operations, in R&D and innovation, in producing the value chains that can deliver high quality electric vehicles for European consumers.

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James Kynge
What Gill is saying here is that the EU wants its carmakers to go green, and in order to do that, those European companies need to be making a decent profit so they can invest in electric cars. That’s hard to do if BYD and China are undercutting their prices. The investigation is ongoing. So what would the EU do if it finds that those Chinese subsidies are, in fact, illegal?

Olof Gill
We would apply tariffs to the degree required that, in our view, would re-level the playing field.

James Kynge
Tariffs could be a real challenge for BYD. Earlier this month, the United States announced a 100 per cent tariff on any imported Chinese electric vehicle, essentially doubling the cost of import. That’s devastating for Chinese companies. BYD for its part hasn’t moved into the US market. They don’t sell cars there, but tariffs in the Eurozone could really hurt BYD’s expansion efforts. Now, you’d think that European carmakers would be pleased to see the EU Commission ride to their defence. But, well, it’s complicated.

Manuel Kallweit
An anti-subsidy investigation against competitors is, in our view, not the right thing. It’s not the answer for the challenges.

James Kynge
This is Manuel Kallweit.

Manuel Kallweit
Chief economist at the VDA Association of the German Automotive Industry.

James Kynge
VDA is a lobby group that represents companies like Volkswagen, Mercedes-Benz and BMW. And Kallweit says that the carmakers he represents are competing with China, but they’re also dependent on China.

Manuel Kallweit
For us in the European Union, especially in the automotive industry, we have totally globalised value chains, and we need things from other parts of the world. We need raw materials. We need semiconductors.

James Kynge
The fact is, European carmakers need China to supply parts. And perhaps more importantly, they, themselves, need access to Chinese consumers. German car companies are heavily invested in the Chinese market. I watched this story unfold in the 1990s when German car companies flocked to China for joint ventures. They wanted to tap into the world’s most promising consumer market, something that they’ve been very successful at.

Manuel Kallweit
Our market share in China is something like more than 20 per cent.

James Kynge
German car companies make a lot of money in China, and the risk is an EU investigation into Chinese electric vehicles could lead to retaliation or even a trade war.

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James Kynge
China has already hit back against the anti-subsidy investigation. Kallweit seemed genuinely uncomfortable when he described to us how the EU action has made things tricky.

Manuel Kallweit
For sure, it makes the situation more complicated, and I think the situation in the world in the moment is complicated enough. I do not know. Maybe trade war is a big word. But yeah, things are getting more complicated.

James Kynge
All of which leaves the German car industry in a bind. They’re lagging behind Chinese EVs, but they can’t support a protectionist policy against Chinese competitors either. So while German carmakers are in an EV price war, they can’t risk looking like they’re siding with the EU in its investigation. In recent months, the EU has also launched other investigations into Chinese manufacturers. There’s one looking into security equipment, another into medical devices, and even steel and trains. Not to mention clean tech sectors such as wind turbines and solar panels. In other words, the problems besetting BYD in Europe are indicative of a much bigger battle over trade. Perhaps one side will eventually run out of steam, or, in the case of our BYD car, run out of battery power.

We’ve just arrived at a charging station. We’re on our way to the airport. I must say, the big problem is that we’ve spent almost our entire journey worrying about whether or not the electric charge in the vehicle is going to last long enough to get us to our destination. And here we are. The charge in the vehicle now is right down to almost nothing. We really don’t know at this point whether or not we’re going to make it to the airport on time. After charging the car at an autobahn rest stop, our BYD did, thankfully, get us to the airport on time, but there’s another caveat to the BYD story. FT Lex editor June Yoon, whom you heard from earlier, is sceptical about the EU’s claims that the company has been supercharged by Chinese state subsidies.

June Yoon
This type of support has been given to many sectors, so it’s difficult to say that state support alone is a reason their cars are so cheap. Because, you know, just five years ago, there were more than 500 electric carmakers in China. Since then, around 400 of them have gone out of business. If state support was such a big reason for BYD’s success, we should have many, many more Chinese EV brands on the streets around the world. But that’s not the case.

James Kynge
All this brings us back to Admiral Zhang. His 15th-century treasure fleet never made it to Europe. But perhaps BYD is taking up the challenge, bringing cutting-edge technology to the continent. The cars that were unloaded in Bremen off the BYD super ship are the engineering fineries of a new green era. The west may just have to get used to BYD’s westward voyages. Until then, Chinese technology will continue to cause some serious trade frictions.

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Next time on Tech Tonic, we travel to Nigeria to hear about China’s influence in the country’s tech scene and the rise of online lending apps.

Adedeji Olowe
Regulatory barriers are low. The safeguards are non-existent. There are zero consequences for bad behaviour. So this is like the wild, wild west.

James Kynge
You’ve been listening to Tech Tonic from the Financial Times with me, James Kynge. Our senior producer is Edwin Lane, the producer is Josh Gabert-Doyon, and the executive producer is Manuela Saragosa. Sound design by Breen Turner and Samantha Giovinco. Original music by Metaphor Music. The FT’s head of audio is Cheryl Brumley.