Getting to $30,000: The Cost of EV Industrial Policy vs. Adoption

When we first launched “Supply Chain Jigsaw” in 2019 that identified the lithium-ion battery as one of three crucial products for the global economy, few knew what NCM or LFP meant. Today, the battery has indeed become synonymous with the future of transport.

For all the attention lavished on the battery and China’s dominant role in it, the electric vehicle (EV) industry requires an extensive supply chain that goes beyond China. Auto incumbents, hampered by spectacular success in the traditional auto industry, have found pivoting to electrification more challenging. Repurposing assets tied up in a legacy industry while also building a new, parallel EV supply chain is proving an arduous ordeal.

In contrast, China’s struggles in its traditional auto industry ironically freed it to be more agile and invest in EVs ~15 years ago. One of the most important Chinese officials was arguably Wan Gang, former minister of science and technology and an engineer who championed EVs during his tenure in the late 2000s.

Now, while advanced economies like the United States are preoccupied with EV industry building, China boasts an increasingly integrated supply chain and scale efficiencies that can drive down the cost of EVs. And bending that cost curve rapidly matters a lot for EV adoption, because industry consensus suggests that mass adoption requires EVs to reach a sweet spot of $30,000 and 300 miles of range.

That’s why we created the Vantage, an “everyman EV,” to make the EV supply chain tangible and to understand how cost might inform consumer decisions on going electric. The bottom line is that, at the moment, China appears to be the only major EV manufacturer that can produce EVs around $30,000, about the same price as an entry level Honda Accord.

Price Matters

One key factor in the final EV price is the overall manufacturing cost. That is, ceteris paribus, China’s EV manufacturing costs are around 40% lower than those of the United States. This owes less to labor costs, since EV factories are largely automated, than to cheaper inputs like steel and rubber.

For example, the cheapest configuration of the Vantage, which consists of sourcing entirely Chinese components with comparable specs, comes in at ~$24,000. Even if that Vantage doesn’t get you the $7,500 tax credit from the Inflation Reduction Act, it’s still considerably cheaper than the $30,000 Honda Accord. Currently only the Tesla Model 3 could reach that price point with a patchwork of federal and selective state-level credits like in Colorado or California, while EVs on average cost Americans ~14% more than gasoline vehicles.

Whether US industrial policy is raising the cost of EV adoption and limiting consumer choices is therefore a worthwhile debate. Some observers contend that once EV adoption passes a “5% of new car sales” threshold, adoption will magically accelerate. But it seems the availability of cost competitive EVs is an important variable in the adoption equation.

Take Sweden, a relatively small European market but with a very high EV adoption rate—already over 50% of new car sales are fully electric. At least 35% of those EVs sold in Sweden are Chinese brands, with BYD’s $40,000 Atto 3 SUV fast becoming the country’s best-selling model. In contrast, the United States, a very large market that just barely passed the 5% EV sales mark last year, has limited access to affordable Chinese EVs. Yet the US government currently has a goal of reaching 50% EV sales in the next seven years.

It isn’t just Scandinavia, Europe writ large is now the destination for 60% of Chinese EV brands, while Asian markets account for 35% (see Figure 1). It would appear that US consumers, at a minimum, are not getting the cost-effective EV choices available in other markets. Only Geely’s expensive premium brands Polestar and Zeekr have modest traction in the US market.

Figure 1. Chinese EV Exports Rise in Diverse Markets, Jan-July 2023

Note: Data show export distribution of 17 Chinese EV brands.
Source: General Administration of Customs China.

Holistic Supply Chains

China’s EV cost advantage is largely a result of having a robust supply chain beyond batteries, including minerals processing, intermediate components, and final assembly. While the country doesn’t dominate all key components, it has sufficient domestic suppliers in midstream components for import substitution.

Firms like Horizon Robotics in autonomous driving chips or Hesai Technology in lidar can offer similar product performance as market leaders at lower prices, potentially saving thousands of dollars per EV. Moreover, many key components in an EV aren’t necessarily frontier technology but rather the application of existing technology, enabling China to indigenize the supply chain more easily. In areas where China is relatively weak, such as next-generation silicon carbide power chips, it is actively trying to become a leading supplier by 2030.

Further fortifying China’s EV ecosystem is its grip on upstream metals. While many focus on the massive investments China has poured into developing countries—having topped $10 billion in the first half of 2023 alone—to secure critical metals like lithium and copper, its real strength lies in processing metals at home.

All metals require processing to become viable battery inputs, so what’s in the ground matters less than where they’re processed (see Figure 2). For example, the Democratic Republic of Congo sits on 75% of global cobalt resources and Australia produces more than half of the world’s lithium, but in both cases, the majority is exported to China for processing.

Figure 2. China’s Strength Lies in Metals Processing for EVs

Source: MacroPolo.

For all the froth and irrational exuberance that accompanied China’s EV boom, the industry has emerged as a formidable global competitor that can churn out high quality and affordable “everyman EVs” at scale. This emergence has come at a time when advanced economies are turning to industrial policy to support their auto industries during this dramatic transition, which could come at the expense of consumers’ access to lowest-cost choices. How these tensions evolve over the next few years will be a crucial determinant of the pace of EV adoption in key markets.

AJ Cortese is a senior research associate at MacroPolo. You can find his work on industrial technology, semiconductors, the digital economy, and other topics here.