How the West lost the future of the automobile
The bad news is that America and Europe have mostly lost the global future of the automobile to China. The good news is that you can now experience why in our latest Riskgaming scenario, Powering Up: China’s Global Quest for Electric Vehicle Dominance, which we released this morning with all of the materials you need to play. This is our third Riskgaming scenario after Hampton at the Cross-Roads and DeepFaked and DeepSixed, and it skews much more heavily toward economics and business strategy.
The game, designed by Ian Curtiss, simulates in less than two hours the history of an American and an European automaker (represented by “US General” and “Autobauer”) as they navigate China’s political economy in the 2000s and 2010s alongside the rise of electric vehicles from domestic upstarts (represented by the “Shanghai Car Company”). Powering Up explores the risks and opportunities of joint ventures, the challenge of using intellectual property in the most profitable way and how China’s political system (represented by the vice mayors of Chengdu and Shanghai) constantly sand off the proprietary edge of foreign companies to benefit domestic industry. A trusty “foreign consultant” rounds out the party of six, who is incentivized to make investment deals happen.
Unsurprisingly given that I work at Lux, most of our Riskgaming scenarios are forward-looking, exploring the future often through the lens of technical innovation. Yet, when it comes to understanding how Ford, GM, Volkswagen and other automakers fell so far behind their Chinese upstarts, I have been frankly shocked at how few people understand what just happened, or why Ford’s CEO Jim Farley called China’s automotive industry an “existential” threat to the company in September.
One of the primary objectives of Powering Up is to help policymakers and business leaders identify the factors that led to such a catastrophic reversal, and make sure they never happen again.
The story is in both short and long. In short, as can be seen in these graphs, electric vehicle production in China started skyrocketing in early 2021 and has grown exponentially since then.
Why? Take the BYD Seagull, a quite-compact urban sedan with seating for four that is priced under $10,000 in China’s domestic market and reaches $12,000 with more features. It’s China’s best-selling model, and what makes it so attractive is what made the Ford Focus so successful upon its debut back in the 2000 model year: the quality-to-price ratio. It looks good, it’s sporty, it’s functional and it’s got some cool technology that’s attractive to middle-class consumers and particularly younger ones who otherwise can’t afford larger and more expensive wheels. As Michelle Krebs reviewed in The New York Times back in October 1999 about the ‘econobox’:
Among the most impressive small cars of recent years, however, is a new entry, the Ford Focus, which melds edgy styling with a spacious interior and superb handling.
After a month with four versions of the Focus -- the base and midlevel sedans, the station wagon and the sporty, top-line sedan -- I concluded that the car is well suited to buyers who want more than basic transportation, but still want an entry-level price. It is a subcompact I could happily live with.
And
With its edgy styling, ample space for people and cargo, great handling and numerous features, the Focus makes a big impression. It is a lot of small car for the money.
That’s what Chinese automakers increasingly provide and Western automakers are no longer able to produce given their margin structures.
GM once produced about $2 billion in profit annually from its China operations, about 10-15% of its total global haul. It also sold more vehicles in China than the United States for more than a decade. All of that has been reversed, and the denouement happened last week when GM announced a $5 billion write-down of its China operations.
GM’s cars no longer compete in the Chinese marketplace, where consumers are gravitating toward domestic brands, as this chart shows:
While many of these companies are unknown in the United States, they are widely popular brands locally.
The West’s reversal here is a rather perfect tale of Clayton Christensen’s The Innovator’s Dilemma. Gas vehicles from the West have dominated China’s domestic auto market for the past two decades. China has therefore focused on leapfrogging into electric vehicles, but early models were poorly received and the lack of comprehensive charging infrastructure prevented widespread consumer adoption.
As the nascent technology matured though, electric vehicles have now overtaken gas cars in desirability. Without an internal combustion engine, they require far fewer parts and have lower maintenance costs, making them particularly attractive for buyers seeking affordability. The limited range of early cars has been solved through better hybrid technologies, with BYD selling a $14,000 car that can drive 1,300 miles, or roughly the distance from New York to Miami. Meanwhile, GM killed off the Volt — it’s only competitor in the affordable electric vehicle market — and just this week killed off Cruise and its fleet of robotaxis. This is a company ensconced in the amber of the 1950s past, not one that is poised to seize the future of the global auto market.
So, the short story is that domestic Chinese manufacturers have been on a tear over the past three years, and that is radically different from the previous two decades where Western brands had quite a lot of profitable dominance.
The longer story is that this didn’t happen by chance. Scott Kennedy of CSIS estimated earlier this year that China’s central and local governments subsidized the development of the country’s electric vehicle industry by about $231 billion. That’s a massive number, and one that makes the $53 billion of subsidies for semiconductors in the CHIPS Act look like a pittance.
Yet, how much would you pay to essentially buy a large stake in the global auto industry? After all, it’s one of the few industries that’s measured in trillions of dollars of annual sales (about $3 trillion depending on how you count). Car factories also act as the bedrock of a country’s manufacturing industry, maintaining the resilience and vibrancy of vast supply chains of materials and parts that help cross-subsidize many other products as well. In that context, $231 billion feels almost a pittance given the scale and importance of cars.
The “sudden” victory of Chinese automakers was more than a decade in the making, dating back to the late 2000s with a push through strategic industrial policy. That policy is now reaping massive dividends for China, a pattern that will likely accelerate alongside the emerging global middle classes in countries like India, Indonesia, Brazil, Nigeria and elsewhere.
Ian Curtiss wrote an op-ed last week in Foreign Policy on the collapse of Northvolt, the European battery manufacturer that declared bankruptcy in its competition with China’s BYD. Ian points out that the writing has been on the wall for years:
Beijing literally announced it for everyone to see, attracted immense investment in these areas, and then facilitated and coerced technology transfers to progress their capabilities. Now Western automakers are seemingly surprised.
Instead of understanding how the winds were changing, policymakers and auto executives failed to see a future where technological and consumer trends from a foreign market could overtake U.S. and European momentum. Foreign investment flowed into these fields in China, technologies were co-developed, scientists were trained, and subsidies were leveraged for short-term gains.
How did governments and top executives miss this?
The answer is that they didn’t pay attention to the power of exponential growth, nor did they take the lessons of Christensen’s disruption theory and realize that the infant electric vehicle technology of yesterday would one day evolve into the market-leading models of today.
In short — and we see this often in Riskgaming — our strategies toward uncertainty and risk remained static in an otherwise dynamic world. We hosted launch runthroughs for Powering Up in New York, Washington and San Francisco, bringing together a few dozen people across EV technology, policy, journalism and government. While there are differences in the cultures of all three cities that played (as well as at our smaller launch events in London, Tokyo and Romania), the one consistency is that players tend to choose a strategy early and then see it through to the end of the game.
That’s unfortunately a direct mirror of reality. An executive takes a new role and develops a strategy, and then executes that strategy ad infinitum. Yet, what companies and governments need to do is assiduously update their strategies to match new information and changes in the market and the world at large. Autopilot may work for Waymo (and I finally got my first ride this week in SF), but cruise control is no way to approach industrial competition. Lack of attention and lack of responsiveness is how the West lost the future of the global auto industry. We can’t allow that to ever happen again.
Sign Up for Riskgaming events
We’ve now published three Riskgaming scenarios, and we are always inviting folks to both beta test new scenarios and join us at launch events in the United States and across the world. Want to join us and prove you have the strategic acumen to improve the universe? Click the link and we will add you to a future game.
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Podcast: “Introducing our new scenario, ‘Powering Up’”
So yes, our episode this week is on the same subject, but it covers a totally different angle. Now that Ian, Laurence Pevsner and I have hosted Powering Up across the United States (and Ian has hosted for policymakers and tech folks in Europe and Asia), we figured it’d be fun to just talk about all the observations we’ve been noticing, from differences in cultures of cooperation and competition to the important strategic implications of how players have been playing the game.
We got to record a live and in-person episode from our Menlo Park studio, and so tune in to hear us chat and then sign up for a future Riskgaming runthrough so you can join us at our next events.
🔊 Listen to “Introducing our new scenario, ‘Powering Up’”
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- Laurence Pevsner enjoyed Samuel Firman’s essay in Noema on “Trespassing For The Common Good,” on how some English citizens are violating the notions of enclosure to reconnect humanity to nature. "Right to Roam has generated widespread debate about land access and justice in England and beyond — in large part thanks to its use of trespass as direct action. Making the case for a right to roam, and proactively modeling what it could look like, hundreds have mobilized to walk, swim, play and protest in off-limits locations around England: Kinder reservoir, Cirencester Park, Englefield Estate, Dartmoor National Park, Berry Pomeroy and Scots Dyke (an earthwork built in 1552 in the so-called Debatable Lands to mark the border between the kingdoms of Scotland and England).”
- If you want to read just an astonishing, trollish, and erudite interview, you shouldn’t miss Santi Ruiz’s interview with Edward Luttwak on his newsletter Statecraft in “How to Stage a Coup.” A big pull quote: “Now, you have to know what you're doing. What people running CIA personnel want to do is to obviate the need for intelligence officials to be intelligence officials, to be able to assess recruits, to understand them, to know what they are dealing with. They want to do this by getting only people who have never had contact with any foreigner (which, by the way, doesn't assure anything). In other words, if you want to improve the CIA, you have to empty out the building. You have to fumigate the building — exclude any technical people who really should belong to one of the 17 intelligence organizations that cover electronics, photography, and everything else. Nevertheless, CIA has some of those people — Those people should be transferred. Having transferred them, you restaff with young Americans interested in foreign parts who have traveled around and picked up a language or two. We start with that. And if you're worried about counterintelligence? Your professionals should have the feeling in their fingers. And if they don't have it, they should sell insurance.”
- Finally, and I honestly haven’t had time to process it, but Google announced a major quantum “breakthrough” with its Willow chip this week. Meanwhile, noted quantum computer scientist Scott Aaronson discussed the details and critic Gil Kalai wrote about it as well. Is quantum the next frontier or just another slow walk of innovation? I guess that depends what parallel universe you are living in, and in this universe, I didn’t have time to do the research.
That’s it, folks. Have questions, comments, or ideas? This newsletter is sent from my email, so you can just click reply.
