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Jun 22 17 tweets 6 min read Read on X
The EV sector industrial subsidy figures released last week by @CSIS are inflated by at least ~$80B, mainly from poor assumptions made to calculate the NEV Sales Tax Exemption that (i) don't pass the sanity check and (ii) are out-of-whack with disclosed actuals amounts.

🧵 https://www.csis.org/blogs/trustee-china-hand/chinese-ev-dilemma-subsidized-yet-striking
As disclosed in the CSIS analysis, the Sales Tax Exemption assumption is based on a very simple premise:

To incent purchases of NEVs (new energy vehicles i.e. BEVs+PHEVs) over ICE vehicles, most NEVs are exempt from the sales tax exemption, which is assumed to be 10%. Image
$39.5B of Sales Tax Exemption in '23 thus implies that there were at least $395B worth of NEVs sold in China based on CSIS assumptions.

Since we know how many NEVs were sold (~7.9M passenger and ~0.3M commercial), we can back out the implied average selling price (ASP).Image
CSIS discloses ASP assumption of ¥1.2M for large commercial vehicles. This would imply ~$54B in commercial vehicle NEV sales in '23, leaving $341B for light passenger vehicles.

Based on ~7.9M passenger NEVs sold in '23, this implies an ASP of $43k (¥310k). Image
This does not pass the sanity check, nor is it consistent with CSIS' own assumptions (passenger NEV ASP is ¥250k).

e.g. the best-selling models in China are compact and mid-size NEVs with ASPs in the ¥120-250k range.
In any case, we can also cross-check this assumption with actual disclosed figures.

The Ministry of Finance disclosed last year cumulative NEV Sales Tax Exemptions through 2022 of ~¥200 billion (~$29B) + another ~¥115 billion (~$16B) in 2023.

This suggests the CSIS estimate for Salex Tax Exemptions is overstated by 2.5-2.6xhttps://www.gov.cn/zhengce/202306/content_6888094.htm
Factoring in more accurate assumptions that are more in line with these actuals, I have done my own analysis on Chinese EV sector assumptions and arrived at ~$147B, ~$83B lower than the CSIS estimate. Note: the difference in Sales Tax Assumption estimate accounts for ~$64B of the difference. The remaining difference comes from the Buyer's Rebate which is also overestimated, although much more in the ballpark. I have copied assumptions for infrastructure subsidies, R&D and government procurement.
Based on this, more interesting is what happens going forward IMO.

Per below, the NEV Sales Tax Exemption has been extended for 4 more years, but like the Buyer's Rebate before gradually eases out.

For example, the maximum exemption halves in 2026 to ¥15k per NEV.
https://www.gov.cn/zhengce/202306/content_6888094.htm
https://www.adamasintel.com/china-ev-buyers-get-four-more-years-tax-breaks-as-us-incentives-fall-flat/
I've taken the EV sector subsidies analysis out through 2030 assuming the Sales Tax Exemption is retired after this current program ends.

As you can see avg. subsidies per vehicle continue to fall gradually, from $2,700 in '23 to <$200 by '30. Image
If we take the model even further out to 2040, China will have spent ~$330B in total subsidies on the EV sector.

Paired against ~704M cumulative NEV sales through 2040, this would average out cumulatively to a subsidy of ~$468 per vehicle.
I think the lesson here is pretty clear and does not need overstated subsidy estimates to make the point.

The key to any successful industrial policy subsidy program is providing support to a domestic industry to achieve scale and profitability so subsidies can be gradually withdrawn over time.

The last point is key. If industrial policy and subsidies cannot achieve industry scale and self-sustaining profitability, you end up with a non-competitive sector that continues to suck up fiscal resources indefinitely.
The development of the Chinese EV sector has followed this principle.

Subsidies per car have fallen from >$20k per vehicle to ~$2k per vehicle over the last decade and will be effectively completed by 2027. Image
The question for Western policymakers is not about the need to develop and retain an EV industry using industrial policy and subsidies, like China has done. That should be pretty clear, the answer is yes.

It is about execution of said industrial policy. Specifically, are we seeing aggregate subsidies per NEV go down over time at a satisfactory pace?
Remember there are other new industries beyond EVs.

That China is a few years away from withdrawing subsidies from EVs just means that those fiscal resources will soon be available to support development of other future industries.

If one is stuck subsidizing old industries indefinitely this just means less fiscal resources available to spur development of new ones.
This is not the first time I’ve seen highly questionable assumptions in CSIS analysis on China.

Its analysis of COMAC development costs was even more egregious and off by 6-14x.

These numbers influence policy and decision-making. Isn’t it important that we get them right?
Bad analysis does enormous disservice to our policymaking.

13 years ago, Chinese NEV industry subsidies were scoffed at as “wasted investment”.

Instead of breeding complacency, maybe we should have taken them seriously. Catching up will be that much harder as a result.
Another interesting datapoint from this analysis:

~2/3rds of NEV sector subsidies were focused aimed at stimulating the consumer demand side with <1/3rd focused on production.

Nascent industries require coordinated stimulation of both supply and demand.

This also contradicts prevailing narratives about how China "focuses disproportionately on the supply-side at the expense of households/consumers".Image

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More from @GlennLuk

Jun 3
21st Century Fordism, indeed.

Over the 16-year period since 2008, the number of years it takes for an average Chinese manufacturing worker to afford a basic plug-in EV has fallen from ~9 years to <1.

This is while the technical/performance specs have increased dramatically.Image
This is quite comparable to increasing relative affordability of the Ford Model T over a 16-year period from 1909 to 1925 when the number of weeks it took for an average worker fell from 76 to 11.

Sorry I posted an old version of this table.

I was wrong. It has actually fallen from ~10 years to <1.Image
Read 6 tweets
Jun 1
Everyone knows about the scale of clean energy growth in China by now.

What was more surprising / meaningful about this chart to me was how the RoW is also growing faster than the G7.
This should be concerning.

Forget about China. The rich world is lagging the *entire rest of the globe* in clean energy deployment.

The transition to clean energy is potentially as impactful as the shift to petroleum/combustion in the 20th century or the shift to coal/steam in the 18th and 19th.

If things don’t change, we may be witnessing the disruptive effects of technological change discussed in Clay Cristensen “Innovator’s Dilemma” but on a planetary scale in the 21st.
I wrote this back in 2007 about how the opportunity cost of fighting in the Middle East (in part to secure oil supply) was not building out a nationwide high-speed rail network.

Turns out the real opportunity cost was ceding clean energy to RoW.

readwriteinvest.com/p/the-opportun…
Read 4 tweets
May 28
Yes, country-level trade surpluses are not caused by comparative advantage.

But @SteveRattner op-ed never even mentioned surpluses! The title/meme is a strawman.

Stepping farther out, this was a confusing piece that deserves clarification.

🧵

ft.com/content/8e24a1…
1⃣ Things we can probably agree on:

▪️ Comparative advantage is driven by production efficiencies (incl. natural endowments)
▪️ Comparative advantage is a relative concept and "nets out" at the country level (that's why it cannot cause trade surpluses or deficits)
▪️ Relative production/natural efficiencies in one segment enable comparative advantage for that segment
▪️ If there is no trade, any trade benefits are merely theoretical, obviously. Hence the need to be "expressed through exchange"

No disagreements on any of this; it's classical Ricardian theory.Image
2⃣ Where we start to disagree:

It's only when Michael tries to sneak in this modifier: that "only a balanced exchange of goods will express it" that the alarms started sounding.

The benefits of comparative advantage can certainly be gained through trade between surplus & deficit countries.

That there may be hidden costs in the deficit countries is a separate topic (that I'll address below) but it is irrelevant to the basic theory of comparative advantage itself.Image
Read 20 tweets
May 23
Some are pointing to this article and saying, "hey even Chinese solar insiders think there is overcapacity!".

This is a misinterpretation. Let's dive into solar, its similarities with commodity chips, & "overcapacity" in growing vs. mature sectors.

bloomberg.com/news/articles/…
1⃣ Solar cells are similar to commodity chips

At a very high level, production of solar cells and chips is an exercise drawing patterns on silicon through a variety of steps. And then packaging it up.

A key difference ofc is that the patterns are physically many orders-of-magnitude larger in solar than chips.
More specifically, solar cells are similar to commodity chips.

Commodity chips are ICs with simple designs (repetitive patterns) like memory (DRAM) and storage (NAND).

This contrasts with logic chips which are basically diverse and complex algorithms (more analogous to software) that are "hardcoded" onto silicon.
Read 27 tweets
May 18
I argue here that the irony of Trade Wars are Class Wars is that it is Beijing's proactive policy support of the lower class often at the expense of the mass affluent in the post-GFC era is what is causing global spillovers and financial markets and trade.
1⃣ Absolute income growth

Broad consensus that China's HH income and wage growth have outpaced every major economy in the post-GFC era.

Absolute HH income growth drives HH demand (expenditures and investments like housing) which drives quality of life and welfare improvements.Image
Image
2⃣ Relative income growth/balance

Of course, as TWCW insists, it is the relative balance that matters.

On that front as well, both narrow (e.g. disposable income 👆) and broad measures (e.g. adjusted HH income 👇) have increased as a proportion of the economy since the GFC.Image
Read 34 tweets
May 16
Highlighting an example of this problematic framing: how China's structural disadvantages in natural endowments like land & oil are effectively weaponized in criticisms of its economic & trade policies.

This matters to developing nations that have similar disadvantages.
One reason why China was historically poor was not being blessed with enough land compared to a huge population.

e.g. per capita arable land is ~6x higher in the U.S. than China 👇.

This a structural economic disadvantage. As a result, in China land is much more expensive than U.S. land relative to income levels.

To combat this, China is forced to make more efficient use of its scarce land e.g. allocating a higher share of economic resources to build vertically.

This comes at a cost, like four decades of back-breaking construction labor undertaken by a largely blue-collar migrant labor force.
Read 19 tweets

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