How will China's anti-involution campaign impact its EV industry? Strategist explains

0:00 So there's a lot of focus now on how China is going to tackle the issue of involution which it has signaled it has strong intent to. So are you expecting some sort of strong strategy wide sweeping strategy or very targeted measures when it comes to involution and particularly for for EVs. >> Yeah. The the the tricky thing is what does involution mean? To be honest, I think it's been a little bit tricky because this word almost seems like it came out of nowhere. We've done a lot of work looking at the official texts um and when it really came out. And it's interesting because the social meaning of evolution came out probably in the mid 2020s, but it was very much a social term. It was about working very hard or university exams being very difficult and people competing against each other.

0:47 But over the last couple years, the government, especially from last year, started to co-opt this term and they've, in my opinion, changed the meaning a bit. It's not really the social competition. They've brought it to this different level where we would define involution as excess competition to a certain degree excess supply, but also to a certain degree price deflation. And that wasn't the original meaning, right? The government sort of changed the meaning to this sense. So now when they're talking about anti-involution and specifically for EVs, a lot of it is about managing that price competition, getting out of the deflationary spiral.

1:19 Now in terms of the actual concrete actions right now, we haven't seen a major concrete policy out that's quotequote cut a bunch of capacity in EV or something like that. I don't I haven't seen that happen. There's reasons for that mainly because the previous supply side reform in China was mostly about SOEs. This time around it's mostly about private enterprises. So it's a different ballgame this time around >> and because now most of that uh excess capacity or a lot of that is in the private sector. So do you think that that will be a challenge for policy makers too and and do you think consolidation is necessary to deal with excess or outdated capacity?

1:55 >> Uh in the medium-term consolidation is necessary. I I do think that the Chinese auto market and a lot of the CEOs in the major companies be it Xpang or Leato have mentioned this that long term there will be consolidation in the industry. you need to have probably at least 2 million units of sales per year to survive. A lot of these companies are not there. Um, so you would imagine there is consolidation in the medium term, but whether or not the government will push it is is still unseen. We we haven't seen that clear push from the government to say we want consolidation.

2:24 >> Yeah. But you're talking about the Chinese market, EV market. But if you're looking at some of the moves that they're doing in Japan and South Korea and of course obviously Europe, they're taking things overseas and sort of setting the EV standard and the pricing is very very attractive. So maybe it's a long longer term kind of a play here for China. >> Yeah, I definitely agree with that point. I think that for China there is the domestic market which we all know is extremely competitive and if we were looking at any auto company in China the real ability to grow is going to come from the overseas market and I think that's the most important thing because as you mentioned correctly the the cost advantage in China is huge supply chains are very efficient and a lot of the global OEMs have figured this out you know I think Ford CEO has come out they've looked at the Chinese cars and they realized wow their components are so much cheaper >> we need to sort of copy the China model it's not that we should be like avoiding China, we should be actually looking at China to try to make our cars better.

3:22 And I think that's something which everyone's figuring out um over the last couple years. >> And do you think they are sticking to the strategy where they sort of tap into the commercial vehicle uh segment of an overseas market first and let that foreign market sort of exper have that experience. This is not too bad and it's cheaper. So I will go for it for my passenger vehicle down the road like eventually open up that segment as well.

3:46 >> That's right. I I think I think it was maybe two weeks ago that the EU came out with regulation where uh rental car fleets actually have to go pure EV uh in the next couple years, right? I actually see that as positive for the Chinese auto industry. Um and exactly to that point because if you could you're renting a car, generally speaking, you don't have that much choice over what kind of car you get. Uh but you end up with a Chinese EV, you enjoy that experience, that could be sort of the hook that gets people actually this car, despite the origin, is not that bad. And that would help consumers, allow Chinese companies to grow overseas.