60 Business The Economist April 9th 2022
Thecatfish effect
S
chumpeter is not a car owner. He bought his last one, a
dieselfuelled Volkswagen, in 2015, days before the emissions
cheating scandal erupted. He was so appalled that when the car’s
engine caught fire he vowed never to buy another and took to a
bike instead. He has lived in emissionsfree smugness ever since.
At least he did—until increasing numbers of electric vehicles (evs)
started to swish past, signalling even more virtue. Now his car
envy has returned—but with a dilemma. Some of the most appeal
ing evs in Europe are either made in China (Tesla) or by Chinese
owned firms (mg). Given concerns about the decoupling of trade
into ideological blocs, should that be a dieselgatesized worry?
To answer that question, first examine what is known in China
as “the catfish effect”, the idea that a predator makes weaker rivals
swim faster. For years China led the world in production and pur
chase of evs. However, the cars were heavily subsidised and shod
dy. They were a response to the government’s desire to scrub the
air and leapfrog the internalcombustion engine, a technology in
which China was a laggard. Delighting customers was an after
thought. No Chinese evmaker was as worldbeating as Huawei
became in smartphones—before America blackballed it in 2019.
That same year Tesla set up shop in Shanghai and began rolling
Model 3s off the production line. It became, says Gregor Sebastian
of the Mercator Institute for China Studies in Berlin, the epitome
of a catfish. The effect was similar to the benefit that production of
Apple’s iPhone in China brought to the country’s smartphone
market, where local suppliers had to raise their game to meet
international standards. Chinese carmakers’ ambitions likewise
rose. The result has been an accelerated shift towards electrifica
tion. byd, a battery manufacturer turned China’s biggest seller of
evs and hybrids, said on April 4th that it had ceased making full
combustionengine vehicles. As with Tesla, its sales are booming.
As yet, no Chinese evmaker is an export powerhouse. Stock
market analysts are playing up the potential, hoping this will
bring Teslalike valuations, says Tu Le of Sino Auto Insights, a con
sultancy. But most of China’s evexports are by wholly foreign
brands, such as Tesla, or those with Chinese partners, such as
bmw. Foreign marques account for most of the 296,000 Chinese
made evs and plugin hybrids sold abroad last year—more thanquadruple the number in 2020. Because of high American tariffs,
the favourite destinations are Europe and SouthEast Asia.
China’s biggest evfirms are adopting a variety of export strat
egies to catch up. saic, a stateowned car company, is making in
roads in Europe under the cover of mg, a classic British sportscar
brand that it bought in 2007. It keeps its Chinese identity hidden
behind the alluring octagonal nameplate, which may be why sales
hit more than 52,000 in Europe last year, double the year before,
many of which were evs. byd, as well as Nio, which hopes to take
on luxury marques like Mercedes, have made evfriendly Norway
the springboard for their forays into Europe. In SouthEast Asia
the strategy is to “attack the villages to surround the cities”, says
Scott Kennedy of the Centre for Strategic and International Stud
ies, a thinktank in Washington. That means selling lowcost evs
where Western companies do not venture, in order to strengthen
supply chains. Taxi fleets are a popular target for firms like byd.
Until recently it was considered a long shot that such lowcost
brands could penetrate developed markets as well as developing
ones. The evmarket in China includes scores of alsorans and it
begs for consolidation. The firms lack the overseas sales networks
of global rivals. Yet they have their own builtin advantages, in
cluding access to the best battery supply in the world and in some
cases more sophisticated software than European rivals. China is
also taking international safety standards more seriously.
If its evmakers thrive, it would be good for more than just the
car market. The more highquality Chinese products appeal to in
ternational consumers, the more of a stake China has in preserv
ing global trade. evs encompass many of the strategic tensions
that burden the trading system. They are heavily reliant on semi
conductors, which has become a sore point in China, and on bat
teries, Chinese dominance of which is a bugbear for the West.
They are hugely subsidised. The harvesting of personal informa
tion to improve traffic routes, charging and selfdriving tech
nology raises thorny questions about privacy, data storage and
cybersecurity. The evindustry is also exposed to trade wars: since
2018 America has levied 25% tariffs on Chinese battery cells, elec
tric motors and other evcomponents. The European Union, with
its green agenda, is less overtly protectionist for once.
Most Western carmakers have enough of a stake in keeping
supply chains open, and in maintaining access to China’s own
market, that they would prefer not to erect more trade barriers.
They know, however, that China is using them as catfish to im
prove its own industry. At any point it could decide that they have
done their job. That could throw the entire global market, includ
ing China’s, into turmoil. Completing the circuit
Yet the catfish effect can work in both directions. Last month
Bloomberg reported that catl, China’s battery behemoth, was
considering building a $5bn factory in North America. In response
Jim Greenberger of naatBatt International, a battery trade body,
said he would welcome this as long as catlbrought battery
manufacturing tech and knowhow in order to foster technology
transfer to American firms.
That, of course, is the magic of globalisation. Over time, com
petition and cooperation lead to the exchange of ideas, benefiting
all. It will not last if geopolitical tensions, heightened by Russia’s
pounding of Ukraine, splinter the world economy into competing
blocs. If buying a Chinese car feels unfamiliar, rememberthatyou
are supporting globalisation. Not bad as fringe benefits go.nSchumpeter
Save globalisation! Buy a Chinese ev