Do you want to hear something crazy? There are 169 electric vehicle manufacturer in China right now. The question is, how can they survive? The answer is, they can’t.
The Chinese communist party sees its industrial base, not as a source of income, but as a source of jobs. When people work, and earn a living, they don’t rebel, they don’t demonstrate, they don’t question the reality of the CCP. For the past decade, the Chinese government decided that it would become a leader in the electric vehicle business. It would be polite, to state, that it has achieve beyond its wildest expectation. The reality, is out of the 169 companies, less than a dozen account for 80% of total market. The other 160 company, share. The balance.
this hyper competitive market situation has led BYD the world‘s largest electric vehicle manufacturer, to sell one of its newest, and smallest EV for just about $7000. There is simply no way, that BYD makes money on that vehicle. In addition, that vehicle used to be just over $10,000. BYD reduce its price across-the-board by 30%. I want to be clear here BYD it’s probably one of the best electric vehicle manufacturer in the world. Its cars are great quality, and well built. But . BYD reduce its price across-the-board by 30%. I want to be clear here BYD it’s probably one of the best electric vehicle manufacturer in the world. It’s cars are great quality, and well built. But when profit is irrelevant. These things happen.
I dealt with a small company in Norwich last year. I needed some brass rivets that had to be designed to my specification. I didn’t need millions of rivets I needed a few hundred. I met with the company owner, a very pleasant fellow, who operated out of very modern operations in Norwich. he was telling me, that ordinary brass rivets that he purchase in the hundreds, for his customers, he purchased at a price point lower than the stock brass wouldcost. In other words, the rivet he purchases from China are less expensive than him buying brass rods to make his own rivets.
When profits is not an objective, markets get distorted. There’s a reason why China built 2500 miles of high-speed train. When you don’t care about the cost, when you don’t care to make any profits, these kind of situation happen.
now I want to be clear, the Chinese do not have Monopoly. I’m stupid Projects and unprofitable, government-subsidized production of widgets. My all-time favourite vanity project, is the building of a train line in Yucatán. Total cost of building the rail line was around $20 billion the trains now more or less function. But it’s important to note, that the Mexican government could have bought a fleet of 10,000 buses run them for free for 50 years. It would cost less than the $20 billion passenger train project.
What’s my point? It’s easy an industrial policy that relies on subsidy is bound to fail. Because the objective rarely coincide with a real demand. And the subsidies remain much longer than they are warranted.
no one should be surprised by the Chinese action. It is their DNA, if you understand their objective which is to create and promote employment, then their subsidy strategy is reasonable. It’s also unsustainable, even for China. But it can take an awfully long time before trouble arises. 15 years ago everyone knew the real estate market in China was unsustainable. It’s only five years ago that the Chinese government took action when they oversupply was so over the top, that even for them it would become ridiculous.
I say these things about the Chinese or the Mexicans not because I care of either country. I care about my country, I care about the idea that industrial policy, and subsidies, are the solution to our countries economics slow down. That’s simply not true. The truth is that investors invest when they are confident they will make an economic profit. When they understand the market in which they operate and where the demand lies.
The tories had this idea that Brexit would change nothing. And evident, and patented lie. Of course things would change, and they will continue to change. The one good aspect of the current labour party administration is that they know that Europe is off the map. For investors, it means that the market is here. there will be some exports, but even those will be restricted. Donald Trump did not invent tariffs he made them fashionable. The world order is changing the signing of a trade agreement between London and Washington. Last week is an excellent development. Everybody knows here that the negotiation proceeded the arrival of the orange one in office.
I have no idea what my fellow entrepreneurs will do, nor do I care. What I do care, is that we have a playing field, in which the rules have been determined for the next few months or years. This certainty is critical to their investment strategy. It gives me tremendous amount of hope.
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