It’s been a big week in China, with the annual government meetings (aka the Two Sessions) kicking off to lay out key policy priorities for the year – and to drop a draft version of the 15th Five Year Plan (FYP).
There’s a ton of policy to wade through in both the annual government work reports and the FYP – from macro, to tech, to healthcare, to bio-manufacturing, and more.
On this week’s Trivium China Podcast, host Andrew Polk is joined by six different Trivium policy specialists to walk through their initial takes on what matters most in latest releases.
Then on the second half of the pod, Andrew is joined by Ilaria Mazzocco, Deputy Director and Senior Fellow with the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies, to discuss all the latest in the China electric vehicle (EV) space. Ilaria gets into:
Successes and failures of Chinese industrial policy in supporting EVs
The role of the private sector in realizing China’s EV dominance
How countries throughout the world are responding to the Chinese EV juggernaut — from the US, to the EU, to a range of emerging markets – as they seek to protect or grow their own advanced manufacturing capabilities
How it all plays into various national conceptions of economic security — in both China and the West
The conversation is a must listen for anyone who cares about the future of global electrification, as well as issues of economic security.
Transcript
Andrew Polk: Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder — Andrew Polk. And today we’ve got a special treat. We’ve got a little bit of a different approach today because I’m sure, as listeners will know, this week is the Two Sessions, which is the big annual government meetings that happen every year to sort of set economic policy, tech policy, governance policy for the year ahead.
And this Two Sessions is especially important because they also have released at least the initial version, I think they’ll release a final version later, but a draft version of the 15th five-year plan. So, a lot of information to go through. There’s the annual government work report. There’s a work report from the NDRC, China’s Macro Planner. There’s the Ministry of Finance work report. There will be, I believe, some personnel moves later in the two sessions.
There is the 15-5-year plan. So, lots to go through. We are going to get into all of it with several different Trivium analysts. So, we’re going to just do a quick around the horn — we couldn’t get everybody on one call — so I’m going to start right now with two of our U.S.-based folks, and that is our Head of Markets Research, Dinny McMahon, and our Head of Tech Policy Research, Kendra Schaefer. Kendra, how are you doing?
Kendra Schaefer: I’m good. I’m good. We’re drinking out of a firehose over here.
Andrew: Yeah. Dinny, how are you, man?
Dinny McMahon: Oh, great, mate. Pleasure to see you, as always.
Andrew: We’re going to go quickly around the horn with Dinny and Kendra and talk about kind of their high-level takeaways. And then we’ll have a few other Trivium folks on from Asia, all on this pod, to talk about high-level takeaways. Then next week, we’ll do a deeper dive with the whole Trivium gang once we’ve had some real time, a week to really chew through this stuff. But that’s what we’re going to do in the first part of the pod today, and actually for the full pod next week.
But then on the second half of today’s pod, listeners should stick around because I have an interview with Ilaria Mazzocco, who is the deputy director and senior fellow with the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies. She is an expert in industrial policy, Chinese climate policy, and the intersection between the energy transition and economic and national security. So, it’s a perfect time to have a conversation with her.
We talk about EVs and industrial policy around EVs and the global geopolitical dynamics behind that, all very much driven by the context that’s happening this week in the policy space. So, stick around for that conversation on the second half of the pod. We’ve got a lot going on, but all of it’s well worth your while. Of course, before we get into any of the content, we have to quickly go through our customary vibe check. Dinny, how’s your vibe today?
Dinny: Mate, I am basking in the superiority of the socialist governance system. Seriously, five of your plans, mate. Imagine that. They have a plan, Five years of the future. God, this stuff’s gold.
Andrew: All right. You heard it here first, folks. Dinny’s a convert. All right. Kendra, how about yourself? How’s your vibe?
Kendra: Oh, I’m totally drowning. I mean, it’s a fun kind of drowning. You know, usually when I was based in Beijing, we would get up super early. We’d all crack a soda and watch, or get a coffee and kind of dive right into the two sessions, grab all the papers when they came out. But for me now, it happens in the middle of the night. So, I was up super late last night kind of reading all the documents as they came out. It’s fun. It’s fun. Everybody sort of hangs out together and trades notes, but it’s also a lot. And then we wake up today and sort of churn stuff out. So, that’s the story.
Andrew: Yeah. It’s a different vibe. I was at a dinner last night with a bunch of China folks in D.C., China analysts, China policy people, and then everyone started getting pings on their phone that the government work report was out. And one of them was like, “Oh, the government work report’s coming out tonight?” They had totally forgot. And it basically, it dawned on them that they had another two, three hours of work to do before they went to bed. So, I felt sorry. That’s great. Well, we’ve got Dinny converted to socialism. That’s great. And Kendra, you know, overwhelmed with all these policies…
Kendra: Oh, ages ago.
Andrew: Yeah, you’ve been converted for a long time. So, that’s awesome. It’s going to be a good pod. We’re going to go through a lot of different stuff. Quickly, though, I also have to do the housekeeping. Quick reminder, we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes domestic policy, which we’re going to go through a lot today, and then also includes policy towards China out of D.C., London, Brussels, and other Western capitals. So, if you need any help on any of that stuff, please reach out to us at hq@triviumchina.com.
We’d love to have a conversation about how we can support your business or your fund. Otherwise, if you’re interested in receiving more Trivium content, check out our website, triviumchina.com, again, where we have a bunch of different China policy intel options, both free and paid. We’ve got market stuff, tech stuff, on down the list, check it out. You’ll find what you need on the site. And finally, tell your friends and colleagues about Trivium, both about the business the podcast. Helps us grow our listenership so we can get the word out both about what we’re doing here in general and kind of educate the public about China policy and also to make money to drive customers to our business.
So, we appreciate those word of mouth recommendations. All right, let’s get into it, guys. Dinny, we’re going to start with you. One of the big things, of course, that everybody looks for from the Two Sessions each year is the GDP growth target and what that says about what they’re trying to do in terms of the pace of economic growth and also kind of the structure of economic growth. So, tell us your high level takeaway when it comes to GDP growth target, what you saw and what you think.
Dinny: Yeah, well, when is a target not a target? It’s when you get this, right? So, usually, we get a target, it’s an actual number, a specific number. Sometimes they give themselves a bit of wriggle room. So, for the last three years, it’s been around 5%. This year, we got a range. So, the range, the target range is 4.5% to 5%. But there’s a rider on that, which is they’re going to strive for better in practice. So, the range is 4.5% to 5%, but they actually want more than 5%. So, the range isn’t a range, it’s something outside of the range is what they’re going for. So, before the actual work report came out and we were kind of trying to work out what the target might be and what it would mean, we thought, look, if they go with 4.5%, that’s a pretty clear signal that it’s like, okay, it could mean two things.
One is that the days of 5% growth are over. That’s just a natural progression. Things are slowing down. Or it could also be a signal that, look, there’s a bunch of structural adjustment that needs to go on in the economy. Specifically, we’re dealing with a lot of industrial overcapacity. If they set it at 4.5%, that potentially signals that the authorities are willing to tolerate slower growth so that local government officials have a bit of wriggle room to deal with the problems.
It effectively opens up some space for reform, right? We thought, look, if they set it at 5% again this year, then it’s kind of saying the opposite, right? We kind of think it’s going to be a tough year for growth anyway. I mean, investments, look, was slowing the second half of last year. It’s unlikely to come roaring back anytime soon. Domestic demand, household consumption is still really weak. The economy is still very much relying on exports. So, it’s going to be a tough year for growth. So, setting it at 5% kind of says, okay, we’re still prioritizing growth. So, reform isn’t a priority. This is about holding the line.
What we did not expect is this kind of like, well, we’d like 4.5% or 5% and fire if you can manage it. It’s like one of those all bets are off things, go for broke. So, this target is not a target because the 4.5% says deal with your problems and we’ll tolerate slower growth. The 5% says we want things to be going exactly how they’ve been going for the last three years. And doing a little bit better than 5% is saying all bets are off, let’s just go. So, this is a target without a target. And if anything, it doesn’t tell us what Beijing wants. It tells us that there is clearly a complex shmuzzle at the top level of Chinese government at the moment. They cannot decide what they want.
They can’t decide what’s feasible. They can’t agree on what they actually want. They don’t know what they can deliver. And instead, we got this. And I think the government work report is great because when they give that target, the entire system knows what they’re aiming for. Local governments, state firms, they know what is expected of them over the next 12 months. This time around, no one has any idea.
Andrew: Yeah, and that’s a terrible way to make policy because when you have multiple targets or multiple goals, when everything’s a priority, nothing’s a priority, right?
That’s true for any government, being a person who’s spent my career doing China policy analysis. It’s definitely true of China. When policy is the best is when there’s one to two very clear high-priority goals, and everyone kind of sticks behind it. I was thinking, actually, as you were saying that, It drives me crazy — this is like when somebody gives you a deadline but says we’d love it earlier if you can. So, like I’m a very deadline-driven person. So, if somebody’s like, I need this on March 6th, you get it on March 6th.
Do not tell me it’s March 6th and then say, “Yeah, but I’ll take it before.” And then email me on March 4th and say, is it ready? No, it comes on the deadline. So, if the target’s four and a half, I’ll hit four and a half. If the target’s five, I’ll hit five. But if you say four or five, or better if you can… it’s a total nightmare. All right. Well, where they might have been slightly more clear, Kendra, is in your domain.
Dinny: It feels like you’re taking this very personally, Andrew.
Andrew: I know, I know.
Kendra: Well, I’m an overachiever, and if somebody told me, Andrew’s going to do right up to the line, only what is expected of him, and then he’s taking a frigging break, I’m like, if you tell me over 5%, I’m going to be like, “That’s it, we’re getting 6%. Go, go, go.”
Andrew: Yeah. Well, the point is the Chinese government is made up of individuals like everyone, and everyone’s going to interpret that differently, hence you’re going to have a total mess.
Kendra: Exactly. Exactly. Exactly.
Andrew: What about in your space, Kendra, SciTech? Were they a little clearer on the high-level stuff? What was your big takeaway from yesterday?
Kendra: Yeah, I’d say a lot clearer. If I had one high-level takeaway, it’s that the 15 Five-Year Plan and the government work report kind of taken together, all the signals kind of taken together, indicate the state is focusing on increasing the agility, speed, the flexibility, and the intensity of the policy tools and funding mechanisms they’re already using to pursue self-reliance and frontier technology. And you can see that in one respect, or one metric that kind of makes that very clear is the increased science and technology budget that sort of came out in the Ministry of finance’s national budget.
SciTech spending at a national level is going up 10% again, went up 10% last year. But the most notable part wasn’t actually that number. It’s the Ministry of Finance explicitly said, “Hey, look, other areas are going to be squeezed, but this is a priority, and we don’t touch SciTech funding. So that will continue to be fully funded. We’ll continue to pump money and support into that area. But it’s not just the budgets going up that are indicative of this sort of intensifying push towards self-reliance. I think we’ve kind of talked about it before. The last three to four years, China’s sort of been engaged in this big effort to rethink the role the state plays in innovation, right? The idea was to sort of reform the way the state thinks about supporting companies and researchers as they develop emerging technologies.
And the state has known for the past four or five years where its major problems blockages were in terms of supporting innovation. They generally knew how we wanted to solve them. And we’ve watched for the last three or four years as policy levers to do that have been tweaked and explored, right? The state knew that it wanted to sort of centralize control over strategic decision-making at the national level a little bit more.
It knew it wanted to get more financing to tech companies. It knew it wanted to commercialize technology faster. It’s something we’ve talked about on this pod quite a lot. But now it’s clear that the policy buckets that it has to do that, that the policy levers it has to do that, it likes them. It likes them a lot. And now it’s doubling down on what it has been playing with for the last couple of years. Very specifically, we see that in the fact that the 15th Five-Year plan calls on China to, or says that China will establish a critical and emerging technologies’ list at the national level, which is probably going to be similar to the U.S. critical and emerging technologies list, right?
We’ve got one. Technologies on that list in the U.S. are those which are considered significant to national security, significant to long-term competitiveness. And having that list helps coordinate the government support for those technologies at the state level, at the national level, all the different agencies, etc. So, that’ll be a key coordination tool that the sort of national government can use to, you know, get everybody on the same page and drive everyone in the same direction. But we also see a really interesting raft of policy measures in terms of speeding up drastically and rapidly speeding up commercialization pipelines. So, how breakthroughs get from a laboratory to a company and then out onto the market as soon as possible.
And that is going to be things like encouraging officials to be extremely flexible in the way that they design regulatory approval processes for things like autonomous vehicles, like full self-driving, which is coming out probably in the next couple of years, and flying cars in the low altitude economy and artificial intelligence-based services, stuff like that. It means asking universities and research institutions to license patents to small and medium tech firms on a buy now, pay later basis. In other words, try to make a technology with this. We know that you, as a small tech company, don’t have a ton of money.
So, try to make a technology with this. And if you succeed, you can pay for this patent from the proceeds, like those kind of arrangements, which lower the friction to SMEs taking something out of the lab and making a thing with it and trying to get that thing to market. So, there’s just a bunch of interesting levers like that that have been in, you know, that we’ve seen emerge over the last few years that now are being doubled down on.
Andrew: Very interesting. All right. We want to keep it tight. We will do a longer exposition of all this stuff next week. So, I’m going to give you each a chance to do sort of a quick hit on a little bit of a deeper issue in your space. So Dinny, we’ll start with you. You look at kind of what the Government Work Report, what the Two Sessions said about investment this year and about sort of consumption/investing in people. What’d you see?
Dinny: Okay, let’s talk about investment in infrastructure because I mean, I’m clearly waiting in a very different pool from Kendra. I’m just getting bog and mud in the infrastructure side of things because look, you know, we’ve talked about it, we’ve written about it. Second half of last year, investment was incredibly weak. Property investment dropped off a cliff, which is amazing to think that was even possible, five years into a property crisis. Anti-involution measures took a hit on manufacturing investments and infrastructure investment was contracted for the year.
And so, it’s really important that infrastructure investment sort of takes a step up this year. And certainly, all the signals we’ve been getting from the government is, yes, we’re going to commit more to investment in infrastructure. It’s just from the amount of money that’s been put aside, it’s difficult to actually tell whether they have committed to it or they haven’t. Because you look at the way the numbers line up and they’re not materially different from last year. I mean, they put a marginally bit more out of the ordinary budget. The general budget is going towards infrastructure. 800 billion RMBs worth of special treasury bonds. Same amount of last year is going towards major national strategic projects, which is a big chunk of that is infrastructure. Some of it’s for industrial upgrading and whatnot. And then 4.4 trillion RMB’s worth of special purpose bonds, which is what local governments use for infrastructure.
And that’s the same as last year’s quota, although by the end of last year in October, the local government’s got an extra 200 billion. So, the numbers, as they line up, they’re more or less the same. And so, in the past, we’ve kind of looked at the special treasury bonds, we’ve looked at the special purpose bonds, and they have been the signal. You look at those numbers and it’s like the government is committing more debt to investment. And that is the stimulatory impulse that the government is directing into the economy. And this year, we just can’t tell. And partly that is because what special purpose bonds in particular are used for, they’ve changed radically over the last decade. I mean, once upon a time, they were for infrastructure, right?
This was the thing that was supposed to wean local governments off their local government financing vehicles. Beijing was like we can’t have local governments funding infrastructure off balance sheet. We’ve got to give them the resources to do it themselves. And so, that’s what these things were for. Over the last few years, though, special-purpose bonds have kind of become a bit of a Swiss army knife. Every time Beijing has a problem that it wants to fix at a local level, which requires additional funding, they go, “We’ll use special-purpose bonds.”
And so these days they are used for paying down arrears that are owed by local governments to contractors and suppliers. They’re used to recapitalize local banks. They are used to buy back land from developers that don’t actually need it anymore. They’re used for other property support measures. So, there’s kind of been this sort of ever-expanding list of things that special purpose bonds are used for. So, last year, total amounts of special-purpose bonds that local governments got to issue, 4.6 trillion. Only about 3.2 trillion of that went towards infrastructure. And so, the question then becomes, this year, how much of the quota will go to the infrastructure? Will it be 3.2? Will it be 3.5? Will it be 3.6? And the thing is, we have no way of knowing at the moment.
So, whereas a few years back, we could look at those numbers for special purpose bonds and have a fairly good indication of the additional stimulatory impulse that is going into investment, these days it’s a bit of a black box. And so, this kind of goes back to the same point I was making before. Usually, the Government Work Reports send very clear signals about what we can expect from the government’s priorities for the year. And those signals then get translated by various state actors into economic activity. This year, the signals just don’t pay.
Andrew: Big stuff. All right. Well, we’ll see how all that plays out over the coming months. Thanks for that, Dinny. Kendra, what’s up? What are you watching?
Kendra: I got signals out the wazoo. That’s what I got. I got all the signals you need right here.
Andrew: That’s what the content people come to this pod for.
Kendra: Well, I mean, I don’t think it’s going to surprise anybody, honestly, if I say that I want to talk about what’s in there in terms of semiconductors briefly. I think most of our clients on the tech side and a broad swath of people not necessarily in the tech industry are heavily focused on what China is going to do on semiconductor manufacturing over the next few years. And the 15th FYP was really actually pretty interesting on that point. The message in the FYP was very clear — Domestic semiconductor self-sufficiency is now a generational project. It’s not a short-term response to U.S. export controls, right?
The state is digging in for a very, very long haul. And one indicator of that is that the Government Work Report identified semiconductors as a pillar industry alongside aerospace and biotechnology. Pillar industries are sort of defined elsewhere in these documents as industries that have large growth potential, high sort of concentration of technology, and broad market penetration. In other words, they touch a myriad of sectors. And so they’re going to serve as a sort of long-term ballast for large swaths of economic activity and for development of other sectors.
So, that’s obviously not going anywhere. Biotechnology and aerospace aren’t going anywhere, neither is chip development. But the other indicator was maybe even more interesting to me, which is that, no surprise here, the state targets support at China’s present-day chip bottlenecks. Those parts of the semiconductor supply chain that we all talk about ad nauseam, right? Equipment, materials, components, high-performance processors like GPUs, and high-density memory. Those are all the present-day constraints that China is operating under.
But the plan also looks further out. It backs next-generation wide bandgap semiconductors like SiC and GaN semiconductors, which are proven technologies. They’re still working towards affordability and scale. So, that’s cool. But it also additionally supports the generation past that. It explicitly names ultra-wide bandgap semiconductors such as gallium oxide and diamond. Those are early stage technologies with major unsolved commercialization challenges, and there’s no large-scale supply chain for that. So, that’s a long-termist strategy if you’re looking generations and generations of breakthroughs down the road into what you’re going to be prioritizing or where you’re going to be funneling your research.
And then finally, I’ll say the Five-Year plan also sort of signals a potential hedging strategy by supporting three approaches to chip development that do not follow current conventional chip development methodologies. And so, they’re essentially looking into alternative methods for developing semiconductors that don’t fit, right? If we can’t build chips the way that chips are currently built, can we get around that by building totally different types of chips? Even if we can’t do it now, can we do it 10 or 15 years from now? So, really a long-term view on semiconductor manufacturing.
Andrew: And you also had some thoughts quickly on AI, and then we’ll wrap up.
Kendra: Sure. I’ve got lots of thoughts on AI. I mean, I think that nobody who’s listening to this pod will be particularly surprised that there was extensive focus on AI+, the AI+ Initiative in several of these documents. Just quickly for anybody who’s listening for the first time, the AI+ Initiative is a strategic initiative, China’s sort of top-line AI policy, which governs how the state wants to see AI adopted in various parts of the economy. But the cool part is that the FYP also recognizes that AI development has advanced very rapidly, even from just 12 months ago, and that a whole bunch of new development frontiers have opened.
And so, it calls to, and I’m going to read a little quote here, “Encourage technological innovation in multimodal intelligence, agent-based intelligence, embodied intelligence, and swarm intelligence, and explore development paths for general artificial intelligence, or AGI.” So, the fact that agentic tools came out really in the last just couple of months, sort of exploded into popular consciousness, and now they’ve been wrapped into the FYP. I’m pretty sure that was a last-minute get-out-the-whiteout edit. You know, we better stick this in here. But probably most notably to AI policy watchers is the mention of AGI in this policy document.
Well, it is and it isn’t, right? Because it’s the first time that the term has appeared explicitly in a big, consequential, national-level policy document. And the reason that matters is because it lands at a moment where there’s all these questions about whether or not Beijing is sort of quietly pursuing AGI on a parallel track to U.S. frontier labs. The framing here suggests that the answer to that is like, no, not exactly right. Not really, not yet. Rather than urging tech firms to pursue AGI or indicating that the state will support basic research in AGI and really sort of funnel a bunch of state resources into that particular technology or that development direction, it uses very cautious language, only calling to explore pathways towards, you know, yeah, maybe kind of sort of this amorphous thing.
And the hedging is really telling because it suggests Beijing is not really fully convinced that current scaling approaches represent the only or even most viable route to AGI capabilities. And it could also just reflect genuine ambiguity within Chinese policy circles about what AGI actually means, right? The international AI community hasn’t really settled on a definition. It doesn’t really make sense for the state to set that as a target or a goal or to push funding towards something where the outcome is unclear or it’s not clear what everybody’s chasing. So, the state acknowledged that the term exists, but I wouldn’t say that they’ve named it as an explicit pursuit.
Andrew: Yeah, well, it is an interesting development. We, like I said, are going to dig a lot more into all this stuff in a more structured pod next week once we give the team a little bit of time to really further digest. But both of you, thanks so much. Those are really excellent insights on a quick turnaround for a bunch of documents that dropped less than 24 hours ago. So, really appreciate the time and the insights.
Listeners, stick around. We’ll have a few more of our Chinese analysts or our analysts based in China, some of them are Chinese, some of them are not, going through various aspects. And then we’ll have our interview with Ilaria. Lots of good stuff on this pod. So, stick around.
All right. Well, now I am joined by a bevy of Trivium Insiders, Trivium Analysts, to go through some more details and various aspects of the Two Sessions, which, as I mentioned before, included both the government work report and other annual work reports, as well as the publication of the 15th Five-Year plan. We won’t rehash all that. But we’ve got a lot to get through, so we’ll keep it quick. I’m going to start with Ether Yin, based in Shanghai. Ether is our overall policy guru.
And so, Ether, why don’t you talk to me just about your overall sort of impression from the Government Work Reports or the work reports for 2026? What was the overarching sort of feeling you got, sort of vibes-based read on what policymakers are thinking right now?
Ether Yin: Yeah, of course, Andrew. I would say my kind of feeling kind of reading through all reports yesterday, overall feeling is kind of disappointed or I kind of feel a bit kind of bored by it. I think the reason being, you know, nothing really kind of surprised us because we already know, kind of know what’s going to coming out because what’s in the Five-Year Plan, the kind of outline, the kind of key things, you know, last year in the Forth Plenum, you know, what’s going to come out of the government work report more as a kind of annual economic playbook is already kind of outlined in the Central Economic Work Conference last year. So, when we kind of come into this, we’re really looking for concrete measures, you know, would make how they’re going to tackle those economic policy issues kind of more concrete. But the overall impression is that we actually didn’t get much new things out of that.
And, on the contrary, one thing I feel like is everyone talks about the economy is not right. The policymakers need to do something about, in particular, the consumption, how they boost that. But after reading all the reports, that include the Government Work Report and the NDRC report, it feels like only one thing the policymakers are concerned about, that’s tech. because that’s the one area you feel like they are working towards a timeline. That’s one area they show the sense of urgency. That’s one area when policy talks about, they talk about there’s a kind of timeline, you know, within five years, five to 10 years, China basically must kind of control certain supply chains that include semiconductors.
Other than that, when you’re kind of reading through their plans for the economy, yes, there are some kind of direction, kind of shift. Yeah, we’ll do more to boost consumption. We’ll do more to kind of boost welfare because that’s also related to consumption. So, people can more confidently kind of spend. But the direction is kind of clear. There are some shift, but the plan is not concrete in the plan. That’s kind of my overall thinking, overall impression. And then the second one is like Chinese, you know, over 70s, senior policymakers sitting in the Zhongnanhai are as concerned about AI as, you know, Western investors or any company executives.
Premier Li Qiang mentioned AI seven times in his work report, and that’s just direct mentions. There are also a lot of kind of mention about computing powers, you know, how we build kind of, you know, ensuring data center has powers, you know, all that kind of things, all about kind of AI. That’s just to show you how they are seeing AI as both opportunities and also has an opportunity to transform the economy and opportunity that China had, first time had, can lead a kind of industrial kind of evolution for the first time. But also, there’s, again, a sense of urgency that if China missed it, then they can say goodbye to the goal to take a lead, even potentially overtake the U.S.
Andrew: Before you get into the third thing, I just have to quickly jump in because part of what you just said very much aligns with the conversation I had with Kendra and Dinny, which we were laughing because Kendra was like, there’s a clear plan on tech. They’re all in. They’re clearly ramping up the intensity. They see this as a specific window. And Dinny’s comment was like, well, the growth target was either 4.5% or 5%, or if you can, even more. Like, you know, what is it? Is it four and a half? Is it five? Is it extra?
So, your comments very much align with, I think, the conversation I had with them, which is good to know that we’re both reading this on different sides of the world, both groups of us, and kind of coming to the same conclusions, like a little bit of listlessness, lack of direction on the econ side, but plenty of firepower behind the tech developments. And then I was also just going to say, you know, I mean, everyone knows the U.S. is a gerontocracy, or at least it’s led by a geriatric, largely political class, right?
And so, it’s sort of good to know that sort of China is in the same boat. It’s all these old guys. Literally, they’re all guys, like, trying to figure out what AI is. I think a lot of listeners probably, like, are trying to figure out AI and feel like they’re behind. So, I guess we can all take some comfort in the fact that the Chinese government also hasn’t cracked the nut. So, anyway, just a couple of quick observations. What was your third point on what you were looking at?
Ether: Yeah, third point is kind of very kind of minor and specific is that, you know, of the kind of questions we go into the Two Sessions, kind of asking ourselves, because of clients, is asking ourselves, what’s the plan to tackle overcapacity? You know, there are some kind of bits here and there in the plan.
But what kind of made me laugh yesterday is that the NDRC report, it talks about we’ll do some kind of capacity monitoring, even, you know, plan to cut some overcapacity in key sectors. And I was like, good, they finally will do something to cut capacity. But then the second line reads, they use the word “encourage.” We’ll encourage appropriate overcapacity in emerging sectors. And they even give a reason because that’s good for competition.
Andrew: So, they literally said encourage overcapacity?
Ether: They literally said encourage and they give a rationale because it’s good for competition.
Andrew: Oh my gosh. Well, this is one of those where… I mean, that’s hilarious and we have to laugh, find moments of humor in our very serious job of trying or tedious, maybe it’s the right word, to read through Chinese policy documents.
Ether: Yeah.
Andrew: But, you know, it just speaks to everyone looks and says, “Well, overcapacity is a feature of this Chinese system. They can’t do anything about it.” And, you know, it’s destructive. But it’s interesting to understand that at some level, they’re encouraging and even going for overcapacity. I mean, obviously, Western economists would not prescribe that. But I’m sure that’s one of the targets they will definitely achieve is putting in some more overcapacity.
Ether: Yeah.
Andrew: Awesome. Well, thanks for that, Ether. Now we’ll go to an equally hilarious topic, which is geopolitics. Joe Mazur, our Head of Geopolitical Research, why don’t you give us some giggles on what you found on the geopolitical side in these documents?
Joe Mazur: Yeah, it was a real laugh-a-minute, I got to say, from the Government Work Report. No, but I think, honestly, I’m kind of in the same boat with Ether in that it was nothing particularly groundbreaking, nothing especially interesting. I mean, there’s a couple of bits that I think are maybe worth highlighting. So, you know, a slight change in the way they talk about opening up to the external environment. And, you know, you got to remember during last year’s two sessions, right, Trump was newly back in the White House. We were kind of at the height of the U.S.-China escalating tariffs. And I think China was a little bit in panic mode, right?
This is sort of before they’d hit upon their strategy of rare earth export controls, rather before it had been kind of fully developed to the extent that it would be later. And at the time, last year, they said something like, regardless of change in the external environment, we’ll always adhere to the principle of opening up to the outside world. Depending on where you want to put the emphasis in that sentence, that sort of reads like, “Oh, we’re going to do it no matter what. Nothing can stop us.”
And this year seemed kind of a lot more like normal Chinese policy documents, upholding win-win cooperation, steadily expanding institutional opening up. Like you couldn’t get a more boilerplate sort of statement on the external environment than that. I think that reflects probably the fact that China feels generally in a lot more secure position than it did last year. It’s got a fairly adroit method for dealing with the U.S. at this point. Certainly, it looks like the adult in the room compared with the U.S. in a lot of respects. And so, I think there’s maybe a little bit more confidence there than there used to be.
You know, another small thing is they added the mention of the Global Governance Initiative to go along with the previously announced Global Security Initiative, Global Development Initiative, and Civilization Initiative. That’s a pretty small thing. A lot of these initiatives start out aspirational and kind of gain steam over time. That sort of was the case with Belt and Road. As it is right now, these are more talking points than they are major, meaty frameworks for China’s vision of the world, at least in the sense that, you know, the extent to which they’re followed by other countries.
But, you know, it’s worth noting that global governance is now kind of officially in the mix in the canon of Chinese wisdom to the rest of the world on state craft. The language on trade, I think, was probably as expected, which is to say there’s no indication that China is really going to do anything about the trade surplus. And I think it was Trey who wrote up this piece yesterday for our newsletter, and the Government Work Report called for a basic equilibrium in the balance of payments, which sounds great, except when you read the part where they reviewed what they were doing in 2025, they said, oh, a basic equilibrium was maintained in the balance of payments.
Which, if you ask basically anybody else in the world, certainly in the U.S., Europe, other countries, they’re going to say, I’m not sure that’s how I would characterize it. That certainly doesn’t seem like a basic equilibrium. In fact, Xi Jinping has had European leaders hammering down his door, begging him to address the imbalance of payments. So, that seems like a little bit of an indication that China is okay with being criticized about the trade surplus they run with the rest of the world, and probably an indication they’re not going to do much to counter it.
Andrew: I think policy stances by the Chinese government are often much more sustainable than people think they are. I remember at the beginning of the Russian invasion of Ukraine, the talking point out of Washington was that, well, China can’t sit fence forever because that’s an awkward position to take. And I was like, they don’t care it’s awkward. They can maintain a fence-sitting position, which they now have for four years. So, I’m sure they can do that on the trade situation as well.
Okay. Let’s also talk, we can’t label this foreign policy, right? But another issue of geopolitics, shall we say, Taiwan, what did do you get on that front?
Joe: Yeah, in the absolutely not foreign policy category, I am a little bit torn on this because it is such an important piece and people do kind of dissect it incredibly closely, which they should. But I think it does sort of lend itself to every little movement in syntax, kind of makes people freak out. So, here’s my assessment is that we’ve seen a very slight hardening of language on Taiwan, and I want to emphasize very slight. And so what that is specifically is that in the 2025 work report, the headline goal was peaceful development. And that’s still a headline goal in 2026.
But in addition, we now have a second headline goal, which is advance the cause of national reunification. That language was also in the 2025 work report, but it was in the second sentence, a little bit lower down. It wasn’t in the headline. So, again, a very, very minor change. But given the attention that people pay to this, I think it’s probably worth noting. There’s also language about implementing policies for Taiwan compatriots to enjoy equal treatment, which as far as I can tell is a new statement. I think that’s sort of broadly in line with other integration efforts involving people from Taiwan working and studying and living in the mainland. I don’t know what the specific formulation of equal treatment necessarily entails, but worth noting that that’s new.
So, altogether, the Government Work Report gives us a very, very slightly more assertive tone on Taiwan. I do not think it represents a major departure from China’s longstanding overall goal of peaceful reunification and a focus on integration rather than… well, I say integration, carrots as well as sticks, right? The stated goal is integration through the simple draw of brotherly unity and economic opportunities. But certainly, there’s a lot of kind of coercion that happens as well. But anyway, so much to say. There’s no indication here that China’s radically changing its tack when it comes to cross-straits affairs in 2026.
Andrew: Excellent. Great stuff. That’s something, of course, that is of high interest in capitals throughout the Western world. So, something that we keep a close eye on. There’s no real eloquent way to pivot here, but we are trying to get kind of a smorgasbord of different views within Trivium on why all of these documents matter. So, we’re going to get a little bit more granular. I’m going to throw it to Even Pay, who’s a director at Trivium, who covers a range of things. She’s a specialist in ag, but also does trade in minerals and increasingly covers health for us and also is our biotech expert. So, a jack of all trades.
Even, talk to us about what you saw on the health side and the biotech side in terms of things that you thought were interesting.
Even Pay: Yeah, awesome. I like to think of my portfolio as whatever is so technically frustrating that nobody else wants to deal with it. Increasingly, that’s how I sum up my area of responsibility. So, let’s get into it.
So, Ether mentioned that one of the only places that we saw real ambition and sort of evolution and shift in the 15th Five-Year plan draft text that we just got is on the tech front. And, as far as I would say, that was true in my areas of interest as well. The place where I saw real movement in the plan is in what Beijing refers to as the bioeconomy. And as we all know, China’s had a lot of success basically implementing what’s essentially a leapfrog approach. So, purchasing Western 4G systems while laying the groundwork to lead on 5G or importing and licensing combustion engine IP while laying the groundwork to lead the world on batteries and EVs.
And what jumps out to me from this plan is that there’s a clear intent, at least, to do something like that again in the biotech space in a few different ways. So, first of all, we saw biomedicine identified as an emerging pillar industry. And these emerging pillars, that’s a new category that we’re only just beginning to get a clear definition of. We saw it for the first time, I believe, at least in a high-level document, in the party’s 15th Five-Year Plan proposals last October. And then in December at the Central Economic Work Conference, we’ve recently learned that Xi Jinping explicitly listed a few examples of what he thinks of as emerging pillars — semiconductors, aerospace, and biomedicine.
And then now that’s explicitly in the text of the 15th Five-Year Plan, which tells us that there’s going to be a great deal of structured kind of policy support. And, you know, it basically gives localities sort of a big indicator that this is an area that Beijing believes will be a pillar of the economy. You know, it’s already emerging as a pillar, and it will be a future pillar. We also saw biomanufacturing flagged on the list of future industries. It was also flagged in that proposals document back in October. But what we did see that was new here is that we got a much shorter list of much win sectors where Beijing is going to make a “extraordinary measures” to achieve decisive breakthroughs. And biomanufacturing was also on that list.
So, China is already home to about 70% of the world’s biofermentation capacity. And what the plan tells us is that Beijing is going to keep throwing resources into winning the innovation race at the high end of that sector. So, similar to semiconductors, broad manufacturing dominance doesn’t necessarily translate into winning the high end in biomanufacturing. But the difference here is that Beijing has caught that issue very early, right? And so now there’s going to be a concerted effort, extraordinary measures to make sure that Chinese IP owners are really successful at the high end and not just across the manufacturing base.
And this also showed up in the agriculture sector, where we saw the sort of 10-year-old broad push to revitalize the domestic seed and breeding sector, starting to get some really sharp, innovative teeth. Efforts to stockpile germplasm domestically showing up in the plan. Those efforts are extending to microorganisms, which this is really wonky, but it becomes a great, huge, essentially free or very low-cost public resource and enables bio-innovators to have a huge genetic library that they get to work with, using AI tools in crop breeding and livestock research, all kinds of crazy stuff there as well. So, it’s showing up all across the plan.
Andrew: That’s great. Well, it aligns with what Kendra said in our conversation earlier in the pod, and earlier today when she was talking about not just investing in semiconductor technology, but sort of looking down the track, like what is the future of semiconductor technologies that aren’t even really at scale yet or commercialized, and how can we compete at the very cutting edge? So, that seems to be a theme and we’ll get into a bunch more of your portfolio next week when we do the deeper dive on the Five-Year Plan on our next pod, but let’s round it out.
Speaking of AI and compute, Linghao, Bao Linghao, one of our tech analysts based in Shanghai, talk to us about what you saw in terms of China’s plans for compute for addressing the compute issues that it’s facing.
Bao Linghao: Yeah. So, like Ether said, AI is huge in this year’s Two Session. And the biggest missing piece to China’s AI development is compute, right? They have massive shortage of computing resources. We know the bottleneck is advanced chip manufacturing capacity, right? But in reality, there’s not much Beijing can do on the chip side, right? So, really, at this point, it’s just an engineering challenge among the ecosystem of chip companies. But what Beijing can do is to make better use of existing computing resources they have, right?
And there are several things that are mentioned in the FYP I thought was interesting, but I will talk about one thing today. One policy directive they’re going to do is to push companies or particularly SOEs and state agencies to use public cloud as their IT infrastructure. And just by the background, the cloud adoption in China is way lower than that in the United States. And the reason why that matters is because if you want to reach maximum of compute utilization, the best way to do it is to have everyone to be on the cloud.
Because you’re essentially like pooling resources together and you have a platform to orchestrate demand, right? So, that way you can get more out of the compute. And that’s a critical issue right now because the compute gap between China and U.S. is widening, right? So, China must like squeeze every bit out of all the chips they have today. Otherwise, I think it’s going to be really tough for them. Not even developing the models, even servicing the models is going to be a huge problem.
Andrew: Yeah. Well, I think it’s, I guess, promising from China’s standpoint that they’re zeroing in on that as a key issue, right? Like, I think they’re sort of diagnosing the key challenges they’re going to have properly. Would you agree with that?
Linghao: Yeah. I would actually see more of that in the plans. So, I’m not sure where they’re at right now. What I would like to see is that in the next few months, I would like to see a policy plan in terms of how to encourage people to use more public cloud.
And also, like face some other areas of this, you know, compute fragmentation problem that China has right now. Because I think this issue needs to be solved quickly and they need to be on it like right now.
Andrew: Right, right. Well, that’s exactly the kind of thing we’ll be looking at over the next few months as these policy documents inevitably cascade into a bunch more granular policy documents. Thanks, everybody, for weighing in just your quick bites, your quick sort of takeaways on the initial reactions to both Five-Year Plan and Government Work Report. I will say one last time, we are going to dive into all of this more deeply next week. And also, I just want listeners to know this is sort of what we do at Trivium. We talk about tech. We talk about econ. We talk about the overall policy space, geopolitics, semiconductors, compute, biotech. We cover it all. Tried to give you guys a little bit of an inside look at how Trivium approaches this stuff.
So, I hope it was useful for listeners in terms of dissecting what’s been happening this week in the policy level in China. And I really have to encourage everybody to stick around because I have a great conversation with Ilaria Mazzocco around China’s stance on, not just stance, but China’s presence in the global EV market and how it’s impacting not just China’s economy and manufacturing, but the global EV market and global economy and manufacturing. So, stick around for that. Otherwise, thanks, everybody, for your thoughts today.
I’m joined now by our latest very special guest on the Trivium China Podcast, and that is the Deputy Director and Senior Fellow with the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies, Ilaria Mazzocco. Ilaria, how are you doing?
Ilaria Mazzocco: Good. Thank you for having me on your podcast. I’m such a big fan.
Andrew: Well, that’s very kind of you to say. Thank you so much for taking the time. As we started thinking about having more external guests, you were top of the list to have on. So, I’m excited to discuss.
Ilaria: I’m really honored. That’s wonderful. Thank you.
Andrew: Well, for those listeners who may not know, Ilaria’s expertise is in Chinese industrial policy and climate policy, and specifically the intersection between the energy transition and economic and national security. So, things that are very much top of mind. We are recording today, which is March 5th. So, we’re recording just after the 2026 government work report came out and the 15th Five-Year plan, which is going to have a lot to do with industrial policy. But we’re not going to get into that stuff today. All to say our conversation is very timely, even though we’re not going to necessarily touch on the latest documents. There’ll be plenty of time for that.
I really just want to dig into kind of your area of expertise. And to start, Trivium does sort of macroeconomic coverage as a lot of the think tanks do, of course. But I’ve just noticed that over the past few years, our quote-unquote macro coverage has really trended towards more deep dives on specific industries and specific technologies. And it’s still macro coverage, but we’re honing in or homing in on those industries and technologies that sort of have an outsized impact on the economy more broadly.
And one of those that we cover a lot is the EV sector, electric vehicle sector, which you do a ton of work on. So, I just wanted to start with your initial thoughts on laying out why you think the EV sector is sort of so central and so critical to China’s economy generally and its economic growth strategy, geo-economic strategy, all those things going forward.
Ilaria: Yeah, thank you for the question, Andrew. Actually, if I can say something before I answer the question specifically, I would say it actually makes a ton of sense that even though you’re looking at macro, you end up looking at these sectors because industrial policy plays such a big role in China. And industrial policy, by definition, focuses on sectors and companies, right? And so you end up having a situation where even though you may be looking at the economy as a whole, you end up looking at specific sectors because that’s actually how the government is also looking at it.
And so some sectors are given priority over others and also just seeing really impressive performance of some sectors in China, such as the EV sector. I would just say that, you know, one thing that to note is that outside of China, I would say, especially maybe in the United States, often when we talk about electric vehicles, it feels like a niche topic, right? It feels like a thing of its own. But actually, if you zoom out and look at it globally, and also if you’re actually, frankly, speaking to people that follow the automotive sector day to day, it actually has a lot more to do with the broader automotive sector and sort of technological shifts within it.
And just more broadly, just the big technological shifts that are happening across the board, where things are just getting more connected, smarter, and more based on electricity rather than fuels. And so, I think that shift is happening in a lot of our sort of energy systems. And most of us don’t get to see the grid or grid-related technology on a day-to-day basis. But cars, we do, right? A lot of people spend every day on their car, right? And so you actually are seeing, if you are in countries where this shift is happening more rapidly, you’re actually seeing that on a very personal level.
You’re sort of seeing that technological shift. And this is something that a lot of companies internationally are recognizing is, I think even in the United States, there’s a recognition that eventually this is going to become a pretty important dominant technology, even though maybe we are, like in the U.S., a market with still fairly niche at this point. So, it’s much more of a debate of like just how long it will take and what percentage of the market it will take rather than, you know, does this matter or not? And the reason why I bring this up is because the automotive sector in general is like a big deal, right?
Most countries that have a manufacturing industry have an automotive sector of some kind, right? They have an automotive manufacturing sector of some kind. And so, China is part of that, but also basically Europe, the United States, Japan, but also a lot of emerging markets. I know perhaps we’ll get into that, but a lot of emerging markets also have manufacturing sectors that are part of the automotive value chain. So, this transformation has big implications for trade, but also for just actually geopolitics, right?
The actual sort of like who is providing technology, where is it shifting toward, what are the global value chains, matters in those value chains. And this is getting, I think, to your question, where China is now in a position where it matters in these value chains a lot more than before, right? It used to be the case that Chinese consumers were buying Western cars, which were made in China, or assembled in China, but a lot of the high-value-added parts of that car were still being generated in Germany, Japan, the States, etc. Now, when you look at the market in China, 50% of new cars sold last year were electric vehicles.
Most of those electric vehicles were Chinese brands, right? So yes, and we can talk about this, there’s still like a global value chain. Those Chinese brands are still very globalized, and they still rely on a lot of components and know-how that comes from abroad. And yet, you know, a lot of it is Chinese. And that’s just like a completely different paradigm.
There’s a big paradigm shift there, which I think is completely in line with what the Chinese government would like to see, which is more Chinese companies generating high, advanced technology and then maybe exporting it as well. And also, I think, provide the model, right? I think this is in some ways one of the more successful cases of this new techno-industrial policy that China’s been focusing on. So, it actually provides sort of this model and this idea that like, yeah, we can do it and it can be successful, look at the EV sector.
And I know we’ll probably get into of the challenges in the EV sector as well. But on the whole, yeah, it is a pretty impressive sort of feat that they pulled off in that sector. That’s, I think, generally speaking, how I think about it and why it matters.
Andrew: Yeah, that’s super helpful. And I think it really lays the groundwork well. And my colleague, Dinny McMahon, and I released a paper through CSIS, of course, where we work, talking about kind of the future of China’s industrial policy. And one of Dinny’s big takeaways from that research was sort of this idea that as China moves up the value chain, the stakes are higher because China is now competing with other countries that have advanced manufacturing.
The countries that don’t have advanced manufacturing are somewhat less worried about China’s move up the value chain. But that’s why the United States is so worried about the EV revolution in China, Germany, Japan, obviously.
I don’t know if you have any thoughts on that, but I guess I think about it as, for years, economists said to China, “Move up the value chain, the value chain.” Now it’s moved up the value chain, and suddenly everyone’s like, “Whoa, whoa, whoa. Actually, we don’t want to be competing with you here.” I don’t know if that resonates with kind of how you think about it.
Ilaria: No, I think that’s right. I think that’s exactly right. And this is not an industry like solar panels where countries may be willing to say, “Well, you know, whatever, like we’ll just import them.” This is like a pretty core industry, right? Everybody’s willing to fight for it. If you have an automotive manufacturing industry, you’re going to fight for it, right? That’s, I think, generally the case. And so, I think it sets up for a lot of trade tensions globally. I think it’s true. And I think a lot of maybe more developing countries, especially ones that don’t, even develop countries that don’t have manufacturing, automotive manufacturing sector. So, say like Australia or Norway, right? These are countries that are more comfortable with importing from China and don’t have direct sort of conflict.
But I think, you know, there are some emerging markets where there’s concern that China is, yes, transitioning domestically, but it still has a huge industry that’s producing all those other cars, some of them quite cheap, right? Internal combustion engine vehicles. And I should say, there’s Western car makers that are also using their old internal combustion engine vehicle factories in China to export more than they used to because they’re no longer able to access that Chinese market.
But we’re just seeing that there’s just been since 2020, this huge surge in exports of cars. And it’s not just EVs. It’s also a long-term combustion engine vehicles. And those are, I mean, aside from like the negative implications for climate, I mean, from a purely economic standpoint, that’s a direct threat with a lot of those emerging markets industries. So, if you look at Mexico, Mexico is now importing a lot of cars from China. And those cars are cars that Mexico is no longer making.
So, I mean, Mexico is doing fine because it’s exporting to the United States. But, in terms of its domestic industry, that’s like a pretty big shock. And that’s happening in a lot of other markets as well. So, there’s like multi-layered, I think, potential trade tensions that different countries are worried about. The political economy is complex.
Andrew: 100%. And I actually want to circle back to the emerging markets piece of it in a second because I know you’ve done a ton of great work on that and specifically published a big report on that back, I think, in October. But before we circle back to that, I kind of want to touch on a couple of other sort of macro things. We talked about sort of the idea of industrial policy. I mean, everyone knows that part of the reason that China has been able to develop a world-leading electric vehicle sector is because of government support in many ways.
But also, something that we often talk to clients and companies about and also sort of debate internally is sort of the role of the private sector. These companies are really good companies, right? BYD, you know, Chery, Geely. They’re producing excellent cars. They are absolutely cutthroat. They are, you know, not just doing what the government told them. They’re trying to be really great global companies. And in many cases, they are. So, I just want to get your thoughts on sort of the breakdown between how much, you don’t have to put a percentage on it, but how do you think about the role of the private sector in China in the development of EVs vis-à-vis industrial policy and state support?
Ilaria: Yeah, I think that’s spot on, right? You could have, you know, a lot of money being dumped in the wrong hands, investments in the wrong companies, which could lead to not very successful outcomes. And I think, you know, if you look at the Chinese aircraft industry, right, with Comac, you could see, you know, examples of, you know, state-owned enterprises that have really struggled to be super innovative. Instead, you had in China, I think, the preconditions, which were, yes, entrepreneurial companies, also sort of like an industrial ecosystem that was very complementary with this type of technology, right?
So, you had companies that were already producing batteries. You had companies that were very active in the electronics industry. And it turns out all those are actually very complementary with the EV sector, right? So, even if you look at a company like BYD, it’s a company that emerges from the ‘90s making batteries for electronics and then sort of decided to invest in, to bet, I would say, on electric vehicles. And then, you know, there was actually sort of, I would say, actually a lot of like interaction with the government where there was also BYD saying, “Hey, you know, we could make this happen if you only like give us sort of the right sort of policy framework for it.”
I generally think about it as sort of like multiple elements that led to success, right? So, one is industrial policy, but it’s not just industrial policy. I think it’s consistent policy over time that was supporting both the supply side and the demand side at the same moment. And, if you actually look more broadly at all those clean tech industries that China is doing really well in, right? So, just, you know, batteries, of course, but also solar, wind, I think you see that, that like generally speaking, the government sort of, yes, there were ups and downs and there were shifts in policy that sometimes were a little bit disrupted, but like overall, there was the sense that like, you know, the government is supportive of this sort of industry as a whole.
And there may be changes to the subsidies, but we’re not going away. And that was, I think, helpful because it also signaled to local governments that this was an industry that they could support. And local governments, of course, tend to provide lots of white-side incentives. But then local governments and the central government also worked really hard to create a market, which I think, you know, I recently got a question like, well, why did the U.S. not succeed at this?
And it’s true because those policies started around right after the financial crisis, both in China, and if you look at the U.S., that’s when Tesla got its loan from DOE. But you never had that sort of like comprehensive policy to really push the market in the United States. California did a bit of that, but at the national level, that didn’t happen. Well, in China, that was pretty consistent. It really ramped up. And it came also with restrictions on internal combustion engine vehicles. So, really, the government actually tipped the scales towards the technology. So, I think, you know, yes, there were a lot of subsidies, you know, absolutely.
And like a lot of cheap credit and a lot of all the things that we think about when we think of industrial policy in China. But there was also sort of this like broader policy support of just like ensuring that consumers would actually be there to buy these cars. And initially with public procurement and shifted to private consumers, etc. And then, yes, there were like really entrepreneurial companies, as we said. And these companies had sort of that they could supply from the broader ecosystem of companies that were just making already things that were relatively complementary with the supply chain that was necessary for these types of cars.
And then finally, I would say the timing was really good. They did an investment in China’s support for R&D for batteries for a long time. But I would say since 2010, that’s when you really start seeing ramping up of like actually like policies to try and promote the commercialization of EVs. Around the world, there was a lot of interest in this, as I said, in the U.S., but Europe, a lot of different governments were exploring these types of options. And that’s actually a signal of the fact that the technology was mature enough that governments were starting to take it seriously and consumers were starting to take it seriously as well.
Again, this is the moment when Tesla is starting to come out with its first models, etc. So, this was a good time because the technology was there, but there wasn’t enough competition to make it really hard to then actually get a foothold and become a leader. So, countries like India, for example, today, which is trying to replicate what China did, have a much harder time because they’re competing against China, which is like a really established juggernaut at this point. And it’s just really hard. But China at the time wasn’t competing against anything quite as dominant. And so, I think those different factors together played into each other in a really interesting way.
Andrew: Yeah, you make a great point about the demand side sort of policies. I think those are underappreciated. It’s something we’re thinking about internally, just how strong of an industrial policy support that element is. If you’ve got folks who are going to buy it, whether it’s companies or individuals, then you can really build an industry. You can sort of force the commercialization. And people often focus on the supply side subsidies when actually it’s the demand drivers that can really move the needle.
You also make a great point about kind of the timing. I hadn’t even really thought about it. I mean, it’s almost 20 years ago now when they’re doing this stuff. And it seems quite prescient, right? You say the technology was there and governments were getting interested, but certainly in the United States, while Tesla was sort of off to the races at that point, I think that Tesla was still seen as kind of a bit of a going off on a lark, right? By most U.S. consumers.
So anyway, the fact that they kind of went all in, or not all in, but really put some resources behind this 20 years ago, and now we’re seeing the fruits of it, I think is interesting. And to sort of dial forward to today, we now have a ton of Chinese companies, Chinese EV companies that are very competitive and sort of layering on the back of that idea about state versus private companies. Now, the big issue is that a lot of these companies are not very profitable because there’s such intense competition.
And a lot of the criticism of sort of Western investors towards these Chinese companies is, well, you know, they’re dominant, but they’re not making any money. I often point out, you know, that’s kind of the Silicon Valley way, right? Burn a bunch of cash, get a bunch of market share, worry about profitability after the IPO. So, maybe that’s too simple of an idea. But how do you think about profitability when it comes to the EV sector in China? Is that a fair criticism that these companies are on an unsustainable path because many of them are not profitable? Or I don’t know, what is your thought on that aspect of it?
Ilaria: I mean, it’s a really fascinating question, right? Because on the one hand, I think I completely agree with you with a lot of these companies, not all, but a lot of these are really impressive companies that have really impressive technology. And yet I do think profitability is an issue because otherwise we wouldn’t see this being one of the main targets of the anti-involution campaign in China, right? So, clearly, some people in Zhongnanhai think this is an issue and are trying to come up with solutions that are not too disruptive to try and address that.
I think there is this like complex dilemma where, yeah, on the one hand, they are doing really well and they are doing really well because they have really good technology. But on the other hand, it does feel like there’s a bit of a bubble situation, right? Where some companies may be overdoing it and the government is trying to rein them in a little bit. And I think, going back to the issue of like how this creates sort of a tinderbox globally, that’s been one of the big drivers of all the exports from China, which have been like a really interesting dynamic where these companies are sort of forced to look for new markets where they might have higher margins.
And so they’re literally going anywhere they can, which has big implications for the rest of the world. But in some cases, it’s also like creates tension, I would say European Union, first among many.
Andrew: Can you elaborate a little bit on kind of how you view the anti-involutional campaign in China? I mean, we’ve talked about it a lot on the pod. Broadly speaking, it’s partially about addressing this issue of weak profitability and deflation and overcapacity, but it’s sort of more than that in a lot of industries. It’s about moving companies further up the value chain. But I guess, do you have additional thoughts on China’s approach to anti-involution in the EV sector specifically? And have you seen anything that you think is going to be particularly impactful or successful to try to get some of these companies to stop the race to the bottom in terms of cutting prices?
Ilaria: Yeah, I think you’re probably more of an expert on anti-involution campaign than me. But I mean, what I’ve been seeing is, you know, there’s some measures, right? Like paying your suppliers in a timely manner, things that I think that the government has identified that are sort of like allowing companies to operate with very thin margins or at a loss. So, they’re trying to sort of crack down on those, but they feel fairly marginal. I think there’s also sort of just political guidance where it’s like, don’t overdo it, right? So, you’ve seen BYD maybe rethink just what their targets should be.
I mean, I think the interesting thing is that it’s still a fairly crowded market, but it is also a market where companies like BYD just take up a massive amount of the market, right? So, it’s like in some ways, there’s like three companies that are really the leaders there. And those are the ones that are probably setting a lot of the prices for everybody else. And so I think that’s quite mean. I don’t know how that’s actually going to be resolved at the end of the day because companies like BYD definitely, I think, have a sort of world domination strategy in mind. And they may or may not want to share with other companies. Right? So they see it in their best interest to like squeeze everybody out. Right?
Andrew: Yeah, that’s a good point. I guess maybe it sounds like you’re sort of making the argument that the industry is already more consolidated than maybe we think, right? We look and we say there’s 80 EV companies or whatever the number is, something around there. But you’re saying there’s really only three, four, five that matter.
Ilaria: No, there’s definitely more than that. There’s more than those. But like I’m saying, if you’re looking at who’s selling 50% of the cars, yeah, that’s just a handful of car companies. But you still see, I think, to your point earlier, you have really interesting, impressive private companies like BYD or Geely has done really well. But then you also have all the SOEs that they’re never going to go away, right? And so there’s a really impression of, even though they may not be making the top line products, they’re going to keep hanging on. And then you also have all those really impressive tech companies, which they’re always going to sell smaller numbers of vehicles.
But there, and I think normally what you would expect is some consolidation. And we’ll see how it works out. But that would probably help. But also, you know, there’s real questions of, do you want a monopoly where BYD is the only company that’s selling EVs? I don’t know. That’s getting a little beyond the sort of anti-evolution issue there. But I think there’s like some interesting questions there of what the end goal is.
Andrew: For sure. And I mean, our experts inside Trivium who follow this stuff think that there’s got to be a shakeout at some point. It’s kind of their view that eventually there will be some more aggressive consolidation. But to your point about the tech companies and some things BYD is doing, can you speak to sort of what you’re seeing on the technological front that these Chinese companies are doing that’s so impressive? Like, where are they pushing the boundaries? I think in the States, you know, I know we have listeners all over the place, but in particular, because there’s not that much EV take up in the States, we’re not thinking about the newest, best, brightest EV technologies.
But Chinese companies are pushing the edge. What can you point to a couple of things that you’ve seen that are particularly impressive on that front when you think about what Chinese companies are doing?
Ilaria: Well, BYD can make a car that goes underwater.
Andrew: That’s amazing.
Ilaria: You can find it on YouTube. There’s these videos of these young people saying, hey, and then going out… No, that’s not what I would put in the like. But it’s pretty wild. No, it’s across different segments or rather in different spheres. So, there’s really impressive stuff that’s being done on the battery front, right? And I think that’s actually been like a key advantage for the Chinese company, right? Is that they’ve had access to these lower cost, high performance batteries, which have allowed them to lower prices overall.
And that’s actually why BYD is able to squeeze a lot of other companies, because even though their margins too have been quite low, is because they’re entirely vertically integrated, right? So, they can really sort of take advantage of their own R&D in batteries, which has been, just the number of engineers working at R&D and BYD is like incredible, right? And it’s quite concerning, I think, if you work in any other automotive company. So, I think there’s really impressive things happening on the hardware side of things.
But then also, I think, on the sort of software side of things and the platforms, sorry, software platforms, there’s really interesting stuff that Chinese companies are doing as well.
And there, I think, you see an interesting dynamic where some of these companies, Chinese companies that do come from more of the startup techie kind of world, right? Like Xpeng, Leapmotor, they’re actually starting to partner with Western companies to provide them with some technology in exchange for, say, probably liquidity. And so you see that Volkswagen has a partnership with Axe Xpeng, and Stellantis has a partnership with Leapmotor.
And initially, this was supposed to be things that were only going to be really relevant for the Chinese market. Well, it turns out now Stellantis is going to be using some of that in Europe as well. And so, I think if the big OEM, international OEMs are looking out for this technology, then I think it tells you that it’s valuable technology, right? They’re quite aware, I think, that this is also a threat, right, to them. So, if they’re embracing it, it means that they’re evaluating that it’s quite attractive. If you want to see where the really impressive stuff is, I think look at what the international OEMs are trying to acquire.
And if you look in the U.S., Ford has a partnership with CATL, the battery maker, to make LFP batteries, right? Again, tells you sort of like things where Chinese are doing really impressive stuff. The foreign OEMs are not stupid, right? They know what’s the Chinese advantage.
Andrew: Totally.
Well, I was going to ask a question about other emerging markets, but on the back of that, I wanted to follow up with the idea of more Chinese investment in specifically the EV sector and the battery sector and clean tech has been floated as sort of part of a potential ongoing deal or negotiation between the U.S. and China. And I think a lot about this, you know, China has the best EV technology. Ideally, the U.S. would buy more EVs. Why don’t we have them come invest in the U.S., force them to license us their technology, create JVs, all that stuff, sort of the reverse playbook that they have done to U.S. and Western OEMs in China all these years.
What is your thought on whether or not that’s a good move for the U.S. and other Western countries to really try to attract more Chinese investment? And you also worked on U.S.-China stuff. Do you see that as part of a potential, you know, we got the Trump trip coming up to China, is that going to be part of those negotiations, do you think?
Ilaria: So, I would say, first of all, basically everybody else is trying to do it except for the United States. I think that puts us in a pretty awkward position if we’re not at least considering what we may want to do. Secondly, as I said, there are some examples of existing partnerships, right? The CATL-Ford licensing agreement, for example. And so I think those are worth sort of exploring and thinking through more carefully, right? There’s been a little politicization, but I think that actually taking a very close look of like, you know, maybe there are things that didn’t work or are not working and some things are.
And sort of trying to think like what the right model is. I think in terms of whether it’s politically feasible is a really good question. I find it very hard to envision a scenario where a company like, you know, say BYD is invited to open a factory in the United States that’s directly competing with Detroit. I just don’t know what scenario that would be. Now, it’s possible you could get some sort of like a joint venture scenario. That might be a little more realistic. That would actually probably be more attractive to the Chinese companies as well because they’d be a little more shielded from political blowback in the United States. So, potentially that’s one scenario. Another scenario is maybe licensing of some kind.
Ultimately, again, what you want, like a deal scenario is something where the U.S. company learns from the Chinese company and is not just like fully dependent on the Chinese company forever. It’s dependent in the short term, but the other companies sort of continue to do R&D and like acquire some skills. And then you sort of have, maybe the partnership continues forever, but you still have like actual innovation happening in the United States. I think that’s ultimately the best scenario.
And that’s complicated, right? Because even in China, we know that when they tried to mandate doing ventures in the internal combustion engine vehicle industry, it didn’t really work. I said this on a panel, and somebody was like, well, there’s a paper to prove that like there was some skills, blah, blah, blah, blah. But, ultimately, it didn’t really work. And that’s why they invested in electric vehicles. And so I think that’s just like things to think about. But as I said, it’s happening around the world, right? And so there’s actually good examples that the United States can draw on if it wants to do so, of both failures and potential successes.
The one problem is that it’s been so quick that we don’t have very established long-term models. But can also gives you a little bit more time. Like, you’re not actually entirely behind everybody else as well. I think those are just worth considering. But I mean, I don’t know if you wanted to get to this, but I mean, I think the interesting question is, up until this year, I would say, or maybe some time, even this year, the U.S. has been pressuring Mexico a lot to not accept Chinese investment in cars, in the automotive sector.
And actually, Mexico has introduced now higher tariffs on EVs. And then Canada went and made a deal with China that would allow some EVs from China to be exported to Canada. And they’ve been talking about investment. And, you know, of course, there’s the USMCA review that is ongoing. And now, you know, now the U.S. is talking about like maybe we would want investments. So, It’s just like a really weird dynamic, I would say, within North America where there’s some resistance and there’s talk about putting quotas on Chinese content that, you know, is coming across the border.
And yet at the same time, there’s discussion of like, well, but maybe we also want some of that technology. Like, if it seems to reflect how undecided the U.S. is or how unexplored this debate has really been and maybe how maybe rapid the shifts have been over time. The U.S. went from like a decade ago like full engagement to you know trade wars to decoupling to know we’re doing de-risking but also, investment is still happening but we just don’t talk about it, to now we’re thinking it again. I think it’s making for not entirely very clear policy.
Andrew: Totally. Well, and then you’ve got a bunch of cross-cutting sort of rationales, right? So, there’s the national security rationale of we don’t want any Chinese cars on our roads because they’re going to suck up everyone’s data and maybe like Beijing will have a back door into them and can crash them all under bridges, which is, I think, kind of silly. But there’s that argument, which is just no Chinese cars on the road for national security interests at all. And then there’s the idea, well, wait a second. These cars are really good. And we do want investment. And Mexico is getting investment. And Canada is getting investment. So maybe, you know, we would like the money. But then we also want to protect our companies. And there’s the aspect of the sort of whole NIMBY thing. And yeah, you know, some localities just don’t want Chinese companies investing in their space.
So, I agree with you. It seems a little bit all over the place. I will say, I don’t know if you have thoughts on this, I was quite skeptical, even pessimistic on whether, I’ve said this on the pod before, the world would move forward with really good electric technology and vehicles, mostly driven by the Chinese. And the U.S. would just get left behind, right? And we’d just have these old ICE vehicles, years old technology because of largely the national security arguments against having Chinese cars on the road. But then in early February, there was the reporting that Ford was holding talks with Xiaomi.
And it reminds me of the point you made where the OEMs, these companies, they know what’s good and they’re going to go try to get the best tech. So, maybe actually Ford and GM and others will take the politics out of it and say, actually, we need to partner with these Chinese companies because they’re going to actually help us on the next leg of innovation. I don’t know. I guess I’m as confused as you are. I don’t know if you have any thoughts on that Ford Xiaomi thing or if you think we’ll see any kind of breakthrough in the confusion.
Ilaria: Well, they both denied it.
Andrew: Yes, of course.
Ilaria: But then, there is, I think, also a deal in Europe where Ford is going to be collaborating, I think, with Geely for production. I don’t know the details of that, but that was an interesting report as well. But Ford is clearly very active, at least talking to Chinese companies. I think there’s also like an interesting Geely, which owns Volvo, which has a factory in the United States. So, that’s like an interesting other dynamic. And I think Geely has made statements that it’s coming to the U.S. in the next few years. I don’t know what that means, right? I don’t know if that’s real.
I don’t know exactly how they’re going to navigate the connected vehicle rule, which is what you’re pointing at, right? That we have rules in place in the United States which restrict the use of software and hardware that are, you know, trade conflicts, but essentially made in China or by Chinese companies. And I think that’s been a real constraint. But I think there’s two points just to respond to your point. One is, you know, a lot of these technologies, not just cars, but more broadly, even technologies that plug into the grid, right? Like solar power inverters, etc., there’s just like a higher risk of cybersecurity in general. Even the connected vehicle rule, when you read the actual sort of the arguments that Commerce Department made when it was valuating the risk, they made the example of like hacking of a car remotely.
But this was like something done in like a lab. So, it wasn’t necessarily a Chinese, right? You know, obviously they’re saying like if it was Chinese software and it was like Chinese government intervention, this would be a higher risk. But to me, when I read it, I was like, oh my goodness, I hope they’re making these cars secure because dudes in labs everywhere around the world could hack into our cars, right? So, I think there’s just a broader cybersecurity problem, which is not a China problem. There’s just an issue, and that’s just going to become more and more of an issue for everything, right?
From our fridge to our cars to, obviously, our phones to everything else. And then there’s sort of the China-specific issue. And there, too, I think, obviously, there’s real risk. And I think, though, we need to have honest conversations of like, what is the risk where we actually want to sort of put a red line and say, “That’s stuff that’s core infrastructure. We don’t want any Chinese DNA. Nobody should touch it. But only American companies can touch it,” that sort of thing. And then where can we say, “Well, this is something where we can maybe like use Chinese hardware, but we put American software on,” right?
Which actually would be like a really sweet deal for some American companies, right? And I think there was, again, reporting that Waymo was importing cars from China. And Waymo’s argument was, well, this is not really a risk because we’re stripping it. We’re like buying it without any software and then we put Waymo software on it. And so actually, yeah, the data, the spying is not being done by Chinese companies. It’s data that Waymo is collecting.
Andrew: It’s being done by Silicon Valley companies.
Ilaria: It’s done by Silicon Valley, right. I don’t want to say that they’re spying, but that’s really the argument. So, I think there’s sort of interesting dynamics there. And ultimately, look, if there’s a deal on TikTok, right? Wasn’t the concern that TikTok was going to be collecting data on American citizens? I mean, if there’s deals there, that perhaps could even be sort of like give us a template. So, I mean, I think national security risk can be taken very seriously, but I think we should also be very clear about what are national security risks because otherwise it just becomes like a complete confusion. Everything becomes a national security risk, and that means that we’re not actually focused, like actively laser focus on what is real, and we’re just spreading our resources to thin and like realistically we’re not actually addressing what really matters.
Andrew: Yeah, I totally agree with that. The bright shiny object syndrome has a way of really impacting China policy, just like chasing whatever is kind of in the news instead of focusing on what matters. That’s something that I decry all the time, but I think that’s a great point. I do want to quickly pivot sort of back to the emerging markets piece, because again, I know that you have done a lot of work on this. We spoke about kind of how the U.S. is thinking about this from a regulatory and political standpoint. But how are various, you did a lot of research looking at how emerging markets fit in, are thinking individually sort of about where they fit into the Chinese EV supply chain, how they can kind of ride the wave or fight against the wave if they need to.
What were kind of some of the big themes that you took away from that research effort over the past, I guess, year or so that you were undertaking?
Ilaria: Yeah, and we’re hoping to actually continue to research this coming year as well. So, we’re looking forward to doing more of that, hopefully. But the really interesting part to me was that, again, you know, we talk sometimes of EVs as sort of a niche thing. But when we started looking at these countries, a lot of them are taking this as a really significant technological shift that the governments are taking quite seriously. We actually found it was difficult to find a country that didn’t have some sort of like, you know, at least a white paper where the government sort of had a strategy that they were outlining for EV.
Now, that doesn’t mean that everybody is being successful at this, but I think it just points to the fact that it’s something that a lot of countries are watching. And a lot of countries also have their own industrial policy because, as I noted, a lot of the bigger emerging markets actually have significant automotive manufacturing costs. So, they may not be significant when you’re looking at like who’s in the top five for producing cars. But when you’re looking at that country’s economy and that country’s employment, it’s quite significant, right? And often there are exporters as well, etc.
So, shifts in the industry matter quite a bit to them as well. And so we found there’s like significant variation. A lot of these countries are recipients of FDI. So, you know, if you look at countries like Brazil or Indonesia or South Africa, a lot of the manufacturing is happening, foreign OEMs that are producing in the country. And so, what they are thinking is, well, if there’s a technological shift, it’s not these companies that are producing in our country that are going to be sort of benefiting from that shift. We need to hedge and start getting more of that investment from the companies that are going to be more significant in this sort of more electrified future.
And so you’re starting to get sort of interest in like attracting more investment in EV manufacturing as well in part because the Chinese companies are the ones that have the low cost EVs that they could sell in the market. They’re not necessarily the dirt cheap cars, the dirt cheap EVs but it’s definitely like the EVs that are going for less than $45,000, right? Those are the ones that are most popular in these markets. And so, I think that there’s this interesting dynamic there. And then there’s other countries where there’s real concern about India, right? India has domestic manufacturers that are trying to make EVs.
So, they have been extremely concerned about Chinese investment or Chinese competition. They’ve been very careful there, even though ultimately, a lot of these Indian car makers are still using Chinese batteries, right? Because if you want to… Mahindra has these new models. They’re really cool. They’re around $20,000. Well, they use the BYD Blade Battery, right? Because ultimately, if you want to make a $20,000 car and you need an LFP battery, and who makes the best LFP battery? It’s the Chinese companies, right? So, that creates a lot of difficult choices and tough admissions on the part of the Indian. The Indian strategy is made more complicated by this.
So, I think that’s all worth noting. And I think, on the whole, there’s been this really keen interest on just attracting more investment from Chinese companies rather than just being benefiting from exports. On the part of the bigger, again, emerging markets. If you’re a small developing country that doesn’t produce parts, there’s a lot of openness to these Chinese EV exports. Because in many cases, these countries are highly dependent on oil exports. I mean, I think even this week has become apparent oil is a commodity.
Andrew: Well, I’m not sure what you’re talking about.
Ilaria: There can be a lot of disruption and volatility. And also it can really be really expensive to import that oil. And a country like Ethiopia essentially banned internal combustion engine vehicle imports because, reportedly, the main reason for this was they were really concerned about their exchange rate. And they were really concerned about reserves and that they were too dependent on or the oil made them like too exposed. And so, the EVs have played into their financial security, not just their energy security.
So, again, this is a country that, you know, they’re not producing a ton of cars. They’re just like swapping one type of import from another type of import. But this matters for whoever is exporting those cars, you know. And that, again, gets to that question of like, this is why this is such a big trade fight with developed countries.
Andrew: That’s really interesting, the Ethiopia example, I hadn’t even considered that. And it makes a lot of sense, right, that this can play into sort of the whole economic and financial security thing. Were there any other specific countries that jumped out? And no problem if you don’t have this off the top of your head, but as having kind of unique or creative approaches to trying to fit in or figure this thing out?
Ilaria: Yeah, Ethiopia, I should say, it was actually not one of our case studies because in part there’s like very little data. Costa Rica is a good example of that type of approach. I would say actually some of the more creative policies come from Southeast Asia. So, Indonesia, which was one of our case studies, has adopted a similar policy to Thailand, where they basically temporarily reduced tariffs to allow imports on car companies that then are committed to building factories. So, that’s been pretty successful. Now, Indonesia has this complex strategy because they produce nickel.
So, they have this whole vision that they could develop the entire value chain. As it turns out, Nikol is not used in LFP batteries. And so, the cars that are made for the Indonesian market largely use LFP batteries. So, it’s kind of a bit of a mismatch. But, you know, they have now received a lot of investment. There’s a lot of factories, a lot of Chinese companies. But not only, right? VinFast, there’s a Vietnamese company, it’s also building a factory. I don’t actually know the status of it now, but they’ve committed at least to build a factory in Indonesia. Hyundai already had a factory in Indonesia for EVs.
And they’re hoping to become more bigger exporters as well. I don’t know how that’s going to work out because if you’re trying to be an exporter, again, you’re competing with China, and China has some huge advantages, as we know, and etc. But this has really actually boosted domestic sales in Indonesia because they opened up the market, they got this big inflow of sort of attractive, lower cost vehicles, consumers actually liked them. And so, Indonesia skyrocketed in terms of its electric vehicle sales share above the United States, for example. And I can’t highlight how surprising this is because up until like just two or three years ago, there was this very established understanding that EVs were like a rich person’s developed country technology.
And now, it’s turning out they’re actually wildly popular in a lot of emerging markets as well. I will take a little caveat. When we talk about EV shares, keep in mind these are much slower markets, So it’s much easier to shift the market, right? Yeah, we’re talking for less than a million passenger vehicles sold in Indonesia every year, right? But still pretty impressive. Again, nobody expected this, right? And when you look at Thailand, it’s over or at least around 20% at this point.
Andrew: Oh, wow.
Ilaria: Which is, it’s close to the European Union’s share.
Andrew: Wow. Well, I mean, it’s going to be fascinating to see how all these global supply chains and global demand shifts around what is clearly such a key part of the global economy and each individual country’s economy. But you just mentioned the EU. We haven’t touched on Europe a bunch, and you’ve been generous with your time, so I don’t want to take up too much more. But we talked about the U.S. We talked about some various emerging markets. Can you give us the 101 on where, obviously, there’s no Europe-wide view on this? But what’s the 101 on how Europe as a whole and some of the key European states are thinking about the China challenge on the EV front?
Ilaria: Yeah, I think Europe has been a really interesting example because, as we know, that that’s where a lot of the OEMs that used to, well, if you look at Volkswagen, for example, this was like a leading brand in China up until recently, and now they’ve been really struggling. And now what used to be an export surplus in the automotive sector from Europe to China is now split, right? So, now there’s now deficit for Europe and surplus for China. And some of that is actually Western European brands that are making cars in China. I think there’s actually a bit of a misconception, right? So, the European Commission introduced tariffs on Chinese-made battery electric vehicles a couple of years ago.
Those don’t just apply to Chinese brands. They apply to anybody who’s making cars in China, And so actually Volkswagen has a higher tariff than BYD based on how it’s calculated. Tesla is also subject, although they got a small share and it’s like a different share by brand. But yes, it affects also Western brands because there’s this weird or complex situation at the moment where you’re having some European brands that are saying, “Well, you know, if we made the car in China, we could be competitive because we could take advantage of these like brand new facilities in China, the really integrated value or very integrated industrial ecosystems and the high levels of automation, all the other things that gives advantages to manufacturing in China, we can make them there and then sell them into Europe and they’d be very competitive.”
And at the same time, Chinese brands are saying, “Well, but don’t worry, we can make the cars that we make in China, we can make them in Europe and hire European workers and we can contribute to your European supplier ecosystem and all the things that you’re concerned about in terms of competitiveness and innovation in Europe, we can help you with that.” And so you are getting this very awkward situation where European officials off the record might say, “Well, yeah, I mean, ultimately, the Chinese companies might be giving us in some cases a better deal than some of the Western or European companies that are trying to flee Europe because of all the problems that exist in Europe with manufacturing at the moment,” right? A high prices and some challenges to competitiveness.
So, I think that’s the awkward situation for Europe. And so, I think that creates a situation where different groups have very different views on it. You have those who are very concerned about national security, and you’ve been seeing now more policies coming out, especially the commission, that are really sort of emphasizing localization and local content. I think that’s also a reaction to this. So, it’s not just national security, it’s also economic security. I think that’s actually the priority the main concern in Europe. It’s really sort of, you know, is Europe being de-industrialized as a result of competition with China. But then you also have, especially national governments, they’re saying, “Well, maybe one solution is we get more Chinese investment.”
And as a result, you actually have a fairly uncoordinated approach to this where still there’s like debates of like well if we allowed investment in, what would be the best structure, and how could we get more companies? But that investment has largely been committed at this point because there was sort of like this race to getting it. And a lot of the investment is in Hungary which is frankly probably the least or a country that’s not particularly in line with either the commission or coordinate very closely with other European partners. So, I think you get this sort of like an awkward situation where there’s a lot of thinking and really original thinking, I think, and really good thinking on the issue in Europe. But then when you look at implementation, it’s like all over.
And I think it’s very hard to get everybody to have sort of like a constructive, or rather not constructive, but more unified view that would make it a little easier to deal with China and give Europeans a little more leverage. So, it’s a difficult complex multi-level, multiplayer game that I think is playing out in Europe at the moment.
Andrew: Yeah well I mean it’s just fascinating to me because, I mean, obviously pretty much every country in the world is thinking about how are you going to react here? I mean, the U.S. is kind of all over the map. There’s a bunch of creative solutions and emerging markets — Europe, as you said, it’s very complex. And there’s creative thinking but sort of lackluster implementation. I mean it’s just strikes me as this is going to be an ongoing challenge for a really long time that countries have to think about from a geoeconomic point of view and economic security point of view, geopolitics. So, it’s not going anywhere. And I hope that we can have you back on at some point soon to kind of let us know the latest as things continue to unfold and talk us through more of your research on an ongoing basis.
Ilaria: Yeah, absolutely. That would be fantastic.
Andrew: Awesome. Well, thanks so much. We covered a lot of ground. I really appreciate all your insights, Ilaria, and great to have you on. Appreciate it.
Ilaria: Thank you.
Andrew: And we’ll see you again soon. And thanks, everybody, for listening. Bye, everybody.
