Policymakers and automotive industry leaders in the United States and Europe have long asserted that subsidies granted to Chinese electric vehicle manufacturers provide them with a competitive edge. However, a new report from the research institution Rhodium Group challenges this perspective. The report indicates that structural advantages, rather than subsidies, constitute the key factor behind Chinese EV makers' superiority over their Western counterparts.
According to Rhodium, these structural efficiencies encompass vertical integration, larger production scale, and lower indirect costs, which collectively exert a far greater impact on the profit margins of Chinese EV firms than subsidies do.
While Rhodium does not deny the benefits derived from Chinese government subsidies, the firm states that the cost advantages from such subsidies—which also benefit Western automakers operating in China—"remain negligible when compared to structural cost advantages."
The report highlights that a higher degree of vertical integration, where a company controls multiple stages of the production process, is the "most significant factor" enabling Chinese automakers to reduce EV costs without substantially sacrificing profitability.
For instance, Byd Company Limited produces nearly 80% of its core components in-house, more than double the proportion for Tesla. Rhodium estimates that this allows the Chinese automaker to achieve substantial savings by avoiding supplier markups on various parts. Compared to the Tesla Model 3, the Byd Company Limited Seal sedan saves approximately $2,369 per vehicle in supplier markups.
As a result, Rhodium projects that Byd Company Limited will maintain a gross profit margin of 20% in 2025, surpassing Tesla's 18%. This is despite the Tesla Model 3 being priced at around 235,000 yuan (approximately $33,943) in China—nearly three times the advertised starting price of Byd Company Limited's entry-level Seal model, which is 79,800 yuan.
Rhodium's report notes that over recent decades, many Western automakers have "reduced their level of vertical integration by outsourcing key components to specialized suppliers."
Although this outsourcing trend has been driven by cost pressures and a "belief that suppliers could enhance efficiency and innovation at scale," the report finds that concerns about vertical integration leading to higher unit costs "have not been borne out in practice."
Rhodium points out that the conventional Western belief in the cost-effectiveness of outsourcing is challenged by China's significantly lower construction and manufacturing expenses compared to Western nations. This enables companies like Byd Company Limited to concentrate production domestically, maintaining a notable cost advantage.
However, for Western automakers, reverting to a vertically integrated model would be difficult without incurring substantial costs.
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