The rise of China and the West’s dilemma

This piece was originally published on Changing Lanes Newsletter

Four years ago in Glasgow, the world’s governments and automakers committed to ending sales of gas-burning vehicles in leading markets by 2035. That deadline is now a decade away: let’s check in on how it’s going.¹

When the commitment was made, achieving it in just 14 years seemed ambitious, but possible, albeit with substantial effort: what crowdfunders call a ‘stretch goal’. Its possibility rested on the fact that market forces were expected to do most of the work. A future ban on internal-combustion engine (ICE) cars, combined with government subsidies to produce and purchase them in the present, would pose competitive pressure on automakers to make a fast transition away from ICE cars to zero-emission vehicles (ZEVs), to capture emergent markets. And that fast transition would, in turn, help automakers innovate, leading to cost reductions. Early adopters—both producers and consumers—would gain competitive advantage, while latecomers would benefit from economies of scale and proven technologies.

That was the vision. Increasingly, however, that’s not what’s happening. Chinese manufacturers, leveraging massive state support and supply chain advantages, have emerged as dominant players in the zero-emission vehicle transition. That means that in the coming years, other nations will face a difficult choice. They can meet the world’s climate goals, or retain their own industrial competitiveness, but not both.

The Glasgow Declaration

The Glasgow Declaration is my shorthand term for the Zero Emission Vehicles Declaration launched at COP26, the 2021 UN Climate Change Conference held in Glasgow. It is brief and simple:

Together, we will work towards all sales of new cars and vans being zero-emission globally by 2040, and by no later than 2035 in leading markets.

Specifically, governments committed to ban the sale of non-ZEVs, and automakers pledged to transform their product lines to produce only ZEVs.

For clarity: a ZEV is a car that emits no greenhouse gases as part of its operation (what some call ‘tailpipe emissions’).² Examples include battery-powered electric vehicles, for instance any Tesla or Rivian vehicle, a Ford Lightning F-150, or a Chevy Bolt. Hydrogen fuel-cell electric vehicles are much rarer, but also qualify: the Toyota Mirai or the Hyundai NEXO. 

It’s true that many leading-market nations chose not to sign, notably including the USA, Japan, and South Korea (not coincidentally, these are nations that export large numbers of traditional cars). But most leading-market nations did, including the UK, Canada, the EU as a whole, and—importantly—China. And notwithstanding American reluctance at the national level, many American states, like California and New York, and carmakers, like General Motors, also chose to sign.

Taken as a whole, the signatories represent a quarter of the global car market, and a fifth of global production. The combined purchasing power and regulatory influence of these markets, and the cooperation of these producers, means that Glasgow signatories have the power to shape global demand. By creating demand, and providing supply, for ZEVs on such a scale, producing mass-market consumer cars that aren’t zero-emission will simply become infeasible, permanently reducing global greenhouse-gas (GHG) emissions. At least, that’s the plan.

You may wonder about the Declaration’s staggered implementation: 2035 for ‘leading markets’, 2040 for others. This distinction reflects the uneven nature of global development. As used here, the ‘leading markets’ are characterized by high GDP per capita, extensive charging infrastructure, robust power grids, and sufficient market size to influence manufacturer planning. The idea is that by moving first, these players will create economies of scale that will make the transition feasible for emerging markets, who would be able to take advantage of falling costs in both vehicles and charging infrastructure, allowing the first movers to recoup their costs.

With Chinese manufacturers dominating the electric vehicle market, that assumption is now being severely tested. But before we explore that looming difficulty, let’s investigate the current situation.

The State of Play

The world’s major automotive markets are transitioning to ZEVs at different speeds.

Image courtesy of Our World in Data. Note that the graphs combine battery-electric vehicles with plug-in hybrids; the former are ZEVs but the latter are not.

The Nordics demonstrate what’s possible when policy and market forces align. Norway’s achievement of 83% electric vehicle market share in 2023 makes it the leader of the pack, but it is not alone: Iceland has 50% market share, Sweden 39% and Finland and Denmark roughly 35%. The Norwegian case is particularly noteworthy, given that the country is not only a major oil producer, but despite this has also become the world’s most successful electric vehicle market. (Notably Norway does not have a significant legacy automotive sector, which is a stumbling block elsewhere.)

This regional success is backed by some of the world’s most aggressive policy commitments. At the supra-national level, the EU has bound all of its member nations to the 2035 target, but Denmark, Greece, and Ireland have all committed to going even faster, ending ICE vehicle sales by 2030, five years ahead of the rest of the EU.

Other member-states are not so aggressive. France leads in absolute numbers, with 23% of vehicles sold in France as ZEVs; the United Kingdom follows closely at 21% market share. While the EU’s smaller markets might achieve high percentage shares, it’s larger markets like these that are moving the world to embrace ZEVs: Norway’s 79% market share in 2023 represents fewer total ZEVs sold than France’s 23%.

Notwithstanding these achievements, Europe’s commitment to the 2035 ICE phase-out faces challenges. It’s unpopular with citizens: a March 2024 survey across Germany, France, and Poland found ICE vehicle bans to be the least popular climate measure, even among respondents who support emissions reduction. This wariness is shared by politically-influential German carmakers, who are reluctant to give up their knowledge of and market share in ICE vehicles by going all-in with ZEVs. In 2023, Germany, acting on behalf of its carmakers, obtained an EU exemption from the ICE ban for cars that use ‘e-fuels’. E-fuels are synthetic fuels produced by sustainably-generated electricity; they are, or can be, carbon-neutral over their lifecycle, but nonetheless produce tailpipe emissions and so would be prohibited by the Declaration.

The immense difficulty associated with creating a supply chain for e-fuels, especially in competition with an already built and elaborated electrical grid, suggests to me that this path is a dead end, but leave that aside. The fact that this compromise had to be made illustrates that, in some quarters at least, Europe is unenthusiastic about the ban, and that other EU member-states might seek similar exemptions. Nor did the deal make the Glasgow commitment safe: notwithstanding the compromise, Germany’s Christian Democrats are pushing for repeal of the 2035 target.

North America is as fragmented as Europe but moving more slowly. The United States, polarized politically and unsure it could introduce the necessary charging infrastructure at scale, didn’t sign the Declaration, but some states have stepped into the policy gap. The west-coast states, notably California, and some northeastern states, notably New York, all require 100% zero-emission vehicle sales by 2035; these states collectively represent about 40% of the U.S. auto market. Nationwide, US ZEV sales represent 10% of the market, on par with Canada—which is a Glasgow signatory and has legislated the 2035 ICE ban—where the ZEV market share is 12%. Notably, jurisdictions in both countries are preparing to end ZEV subsidies for consumers, as buyer enthusiasm outstrips government budgets.

Many emerging markets show rapid growth in ZEV sales year-over-year, but only because they are starting from small bases. Ethiopia stands out, having banned non-ZEV imports outright in 2024, making it the first country in the world to do so. This boldness was possible due to its small automotive market and ample hydroelectric power. Most developing nations are not so fortunate, but Costa Rica (12% market share), for example, shows promising growth, suggesting that the thinking behind the Declaration—that emerging markets could slipstream behind the investment of more mature ones—remains sound.

What about Asia? It’s complicated, and complicates everything. It may surprise you to learn that Japan is not a leader in the ZEV transition, but a significant laggard. Carmakers there made a big bet that gas-electric hybrids and hydrogen fuel cells were the future, and doubled down on it long after it was clear that battery-electric technology was going to win. Take Toyota: it revolutionized the auto industry with the Prius hybrid in the early aughts. I myself drove a first-generation Prius, and enjoyed it so much that I expected to be a Toyota customer for life; but the firm’s refusal to support wholly-electric cars led me to buy a Tesla in 2022. Toyota finally accepted reality in 2023 and announced a shift toward ZEVs, but the years they wasted have left it and other Japanese firms trailing both Western and Chinese competitors in pure electric development.³ The news that Honda and Nissan and Mitsubishi may merge to stay competitive is the bitter fruit of their delay.

Speaking of Chinese competitors, China’s dominance in electric-vehicle production is poised to upset the Glasgow consensus.

The Chinese Challenge

While Europe has been the fastest mover with explicit bans, China appears poised to achieve similar results through stringent efficiency standards. In August 2024, China’s Ministry of Industry and Information Technology proposed new fuel consumption requirements that would take effect in January 2026. If implemented as drafted, these standards would require passenger vehicles to achieve efficiency levels that ICE vehicles cannot meet. Even conventional hybrids would fail: a Honda Civic hybrid, for instance, would need to double its efficiency to qualify. The proposal is currently open for public feedback but given China’s industrial advantages in ZEV production and its track record of rapid policy implementation, one should expect these standards to be adopted largely as proposed.

If China follows through, these requirements will essentially make ZEVs the only viable option in the world’s largest car market by 2026—nearly a decade ahead of the Glasgow Declaration’s timeline. Car manufacturers seeking to sell in China would face a stark choice: either achieve near-impossible efficiency standards with ICE vehicles or pivot to ZEVs, a space where Chinese manufacturers already excel.

The ascendance of Chinese carmaker BYD exemplifies China’s growing dominance in ZEVs. While traditional Western manufacturers like Ford and GM maintain single-digit ZEV market shares, Chinese firms are leveraging three key advantages: subsidies, supply chains, and scale. The Chinese government provides extensive support through direct payments, tax incentives, and cheap loans, spending over 1.7% of GDP on industrial policy, far exceeding other major economies. This enables aggressive pricing that gives Chinese ZEVs a significant cost advantage – for example, BYD’s Atto 3 sells for $39,000 to $48,000 USD in foreign markets compared to $62,000 to $72,000 USD for comparable Tesla models. As a result, BYD easily outsold Tesla worldwide in Q4 2024.

Gemini’s abstract interpretation of a ‘flood of ZEVs’

China’s control of the ZEV supply chain amplifies these advantages. Chinese firms process 60% to 80% of key battery minerals and produce nearly 70% of the world’s lithium-ion batteries. This vertical integration, from mineral processing to final assembly, gives Chinese manufacturers cost benefits and supply security that Western competitors can’t match. The biggest star of US-based ZEV production, Tesla, maintains a substantial manufacturing base in China; its Shanghai factory sources 95% of components locally. Even Tesla is reliant on Chinese suppliers.

China’s control extends beyond final assembly and batteries. While China doesn’t mine all the minerals needed for ZEVs, it processes nearly all of them: Chinese firms handle 60% to 80% of the processing of key battery materials. This processing dominance gives China enormous leverage over the entire ZEV industry. Non-Chinese manufacturers must either rely on Chinese processors or invest in building entirely new processing capabilities: a capital-intensive undertaking that requires both significant funding and environmental trade-offs that many Western nations are reluctant to make.

But perhaps most decisive is China’s sheer manufacturing scale. With vast industrial capacity and a deep pool of engineering talent, Chinese firms can rapidly iterate designs and scale production. This enables faster learning and cost reduction than competitors… who, by the way, have also chosen to maintain parallel ICE lines. While Western automakers hedge the transition, Chinese manufacturers have gone all in, focusing all resources on advancing the technology. These advantages compound each other. Scale leads to cost reduction, which enables more sales, which further increases scale.

The implications extend beyond market share. As matters stand, implementing the Declaration will lock in Chinese dominance in ZEVs.

The West’s Dilemma

The success of Chinese ZEV manufacturing presents the West with a difficult choice. The environmental imperative hasn’t changed: vehicle electrification is crucial for meeting Paris Agreement targets. Road transport accounts for nearly 24% of global CO2 emissions from energy, and a full transition to ZEVs could cut global emissions by approximately 1.5 gigatons of CO2 per year, according to the International Energy Agency; given that global emissions tend to rage between 33 and 36 gigatons, meeting the Declaration’s goal could permanently reduce emissions by 4%.

Yet the industrial reality is stark: Chinese ZEV production is so dominant that it can outcompete Western automakers still struggling with the transition. For a microcosm of the case, look at Thailand.

Thailand was not a signatory to the Declaration, as it wanted to protect its domestic carmaking industry. Nonetheless, it is following the playbook, subsidizing ZEV purchases by consumers while providing support to local producers. In practice, the former have proved far more important: its subsidy of ฿100,000 per vehicle has led to massive consumption of imported vehicles. At present as many as 10,000 Chinese-made ZEVs (from BYD) sit in Thai warehouses, waiting to be sold. Consequently, the domestic auto industry has collapsed. Suzuki and Subaru will cease production in Thailand this year, while Toyota has cut overtime and redeployed workers.

Such a backlog of unsold cars is not merely the result of Thai enthusiasm. Thanks to its intense subsidies to its producers, Chinese ZEV output now significantly exceeds domestic demand. In response, China has begun subsidizing consumer purchase of ZEVs, as well as moving to deter foreign ICE imports (with the new standards discussed earlier). But it’s also exporting ZEVs abroad well below cost, a practice known in international-trade circles as ‘dumping’. Dumping BYD ZEVs in Thailand helps BYD but is ruinous for its competitors in the Thai market. Other nations recognize that China, by dumping ZEVs it can’t sell at home, is engaged in trade war, and are responding in kind. The United States and Canada have each imposed 100% tariffs on Chinese-made ZEVs; and the EU has also imposed tariffs, albeit at much smaller rates.

The employment implications are serious: the automotive industry directly employs millions in Western nations, with millions more jobs in the supply chain. Subsidized Chinese imports threaten to crowd out other manufacturers, threatening jobs in assembly, parts, and service. Less obviously, traditional manufacturers need ZEV sales to get better at making ZEVs: absent such sales, learning curves won’t emerge, costs will remain high, and there won’t be money available to fund the massive investments necessary to build up ZEV manufacturing while maintaining (for now) their conventional vehicle lines.

And so, the horns of a dilemma. Meeting the Glasgow Declaration’s 2035 target requires rapid electric vehicle adoption, itself part of the larger, important work of averting the worst effects of climate change. Yet capitulating to Chinese dominance threatens other nations’ core industrial capacity, risks political backlash, and empowers a nation that is increasingly authoritarian, illiberal, and spoiling for a fight. And trying to strike a balance takes on all these risks while achieving no clear benefit.

An Electric Future, But Who Owns It?

Two things are clear. One is that ZEVs are the vehicles of the future. They are quiet, fast, more convenient, and require less maintenance. The faster the world adopts them, the better off the world will be, especially given the role they will play in decarbonizing transport.

The other is that rapid transition to ZEVs is feasible. Nordic success proves rapid transition is possible, major market progress shows it can scale, and Chinese manufacturing power demonstrates its industrial logic. But Chinese manufacturing power also threatens the economies of traditional automotive-manufacturing nations.

Threading this needle—fulfilling the Glasgow commitment while preserving Western industrial capacity, and the prosperity that rests upon it—will require more policy sophistication and industrial adaptation than we have demonstrated so far. I hope the leaders of the West are up to the task.

1 Technically it’s more than a decade; I’m writing this in January 2025 and there’s no date attached to the 2035 commitment, so December 2035 implementation would satisfy. So to be precise, there are 11 years less a week to go… but 2035 is ten years away, and that feels like a decade.

2 Emissions will certainly be created during the process of building the vehicle, so-called ‘embedded carbon’, but the Declaration is not concerned about these. It is narrowly focused on tailpipe emissions, which is a worthy and difficult-enough goal on its own. 

3 In my view, German carmakers agitating for permission to keep developing cars that run on e-fuels have not paid sufficient attention to Toyota’s surrender here.