What does the 15th Century Chinese Armada vs. the 21st Century Auto Industry have in common?
I recently read an interesting story in the Australian edition of the Business Insider titled, “500 years ago, China destroyed its world-dominating navy because its political elite was afraid of free trade”. I knew of this story from Jared Diamond’s book “Guns, Germs, and Steel”, but this timely article reminded me just how different China has always been. The article sums it up very well:
“In the 1400s, China owned the greatest seagoing fleet in the world, up to 3,500 ships at its peak. (The U.S. Navy today has only 430). Some of them were five times the size of the ships being built in Europe at the time.
But by 1525, all of China’s “Treasure Fleet” ships had been destroyed — burned in their docks or left to rot by the government. China had been poised to circumnavigate the globe decades before the Europeans did, but instead the Ming Dynasty retracted into itself and entered a 200-year-long slump.
Few people in the West realize how economically and technologically advanced China was by the 1400s. The Treasure Fleet was vast — some vessels were up to 120 meters long. (Christopher Columbus’s Santa Maria was only 19 meters.) A Chinese ship might have several decks inside it, up to nine masts, twelve sails, and contain luxurious staterooms and balconies, with a crew of up to 1,500, according to one description. On one journey, 317 of these ships set sail at once.
Under the command of the eunuch admiral Zheng He, the Chinese were routinely sailing to Africa and back decades before Columbus was even born. Yet they did not go on to conquer the world. Instead, the Chinese decided to destroy their boats and stop sailing West. “
Why destroy such a magnificent fleet?
The article discusses many possible explanations offered by historians, but this one stuck in my mind:
Angus Deaton, the Nobel Prize-winning Princeton economist, prefers a different theory. In his book “The Great Escape: Health, Wealth, and the Origins of Inequality,” he argues that the Chinese burned their boats (almost literally) in an attempt to control foreign trade.
The Treasure Fleet was abandoned at the urging of the political elite inside the Emperor’s civil service who had become alarmed at the rise of a newly rich merchant class. “The emperors of China, worried about threats to their power from merchants, banned oceangoing voyages in 1430 (…)
What a poignant example of the enormous effect government policies and regulations can have on a country’s future. In an ironic turn of history, China is now actively encouraging free trade with the West, where some countries are instead increasing tariffs that limit this flow of goods.
OK, this is an interesting story, but how does it relate to the automotive industry?
China 2.0’s great armada are electric cars and they are dominating the automotive industry.
China is the future of electric cars
In 2018, more electric cars were sold in China than in the rest of the world combined. The Chinese government has spent nearly $60 billion in the last decade to create an industry that builds electric cars, while also reducing the number of licenses available for gasoline-powered cars to increase demand for electric cars. And Beijing plans to spend just as much over the next decade.
No other country in the world has made anywhere near as big an investment or instituted as significant regulations. But then again, no country has the same potential payoff as China. If its bet succeeds, China can look forward to cleaner air, lower reliance on imported oil, and being a technology leader in a new high-tech industry – by Quartz.com
The government’s investment is paying off exponentially: growth in electric vehicle sales in China is faster than Europe, the US, Japan, and the rest of the world combined! Chinese company BYD, which aptly stands for Build Your Dreams, is already the world’s largest maker of electric vehicles.
Global plug-in electric car sales, 2014-2018
A key element of an electric vehicle’s price is the cost of its batteries – and China already makes more than half of the world’s electric vehicle batteries. Battery prices continue to fall; industry analysts now suggest that within five years it will be cheaper to buy an electric car than a gas- or diesel-powered one. Forecasts predict the Chinese producing as much as 70% of the world’s electric vehicle batteries by 2021, even as the demand for electric car batteries grows. The electric vehicle revolution will come from China, not the US – by TheConversation.com
And it isn’t just the government providing investment capital. Many global automakers are investing heavily in China too, with the majority of the international investment coming from Germany. China’s $135 billion share is a staggering amount. by Denis Higgins, GE
So if China 2.0 has left the dust of history behind, has become an economic superpower, and has embraced trade and new technology, then what is the problem? China’s turn towards more open trade policies is still very opportunistic; it is very difficult for foreign companies to do business in China, and global companies rightfully worry about intellectual property protection, forced technology transfers, etc.
The automotive industry is globally dispersed. It has one of the most complex supply-chains of all industries. At least 30% of any car’s components are sourced around the world, with many parts made in China, so trade issues become supply chain issues. The trade war has started in earnest only two years ago but its impact has been already felt around the world. Just look at these recent headlines about Bosch and Magna – both major automotive suppliers.
Magna’s forecast dashed by trade wars
“Magna International, the Canadian automotive powerhouse, cut its sale forecast for the year as trade wars and currency volatility crimp global demand.”
Car market slowdown ‘threatens jobs’ at component supplier Bosch
“FRANKFURT: A global car market expected to slow this year against the backdrop of Brexit and a US-China trade war, and the continuing aftershocks of a sector-wide diesel cheating scandal, will hit jobs at the world’s biggest component supplier Bosch, its boss said on Tuesday.”
And there is more to come. China controls 85% of rare-earth metals reserves and refining capacity. Rare earth metals are needed to manufacture many EV components such as magnets, batteries, and electronics. China already manufactures 70% of global battery supply, and is now willing to use its virtual monopoly to apply pressure.
China’s rare earth producers say they are ready to weaponise their supply stranglehold, pass any tariff as cost to US customers
The Association of China Rare Earth Industry, which represents almost 300 miners, processors and manufacturers, issued a statement yesterday, citing an August 5 meeting: “US consumers must shoulder the cost from US-imposed tariffs,” the association said.
Let me end with a quote from writer and philosopher George Santayana (no, this one is not from Winston Churchill):
“Those who do not remember their past are condemned to repeat their mistakes. Those who do not read history are doomed to repeat it. Those who fail to learn from the mistakes of their predecessors are destined to repeat them.”
I submit that even now, in the 21st century, there are lessons to be learned from the demise of the 15th century Chinese armada. History tells us that we should not fear progress but instead choose cooperation over isolation. I hope that this sentiment will prevail and that the international superpowers will embrace the benefits of free trade and collaboration. Today’s flotilla of electric vehicles represents an enormous opportunity for progress, just as the 15th century armada did. EVs can even help us reduce the CO2 emissions and their disastrous impact on our planet, a goal with an impact on many generations to come.
About the Author:
Paul Rachniowski is based in Ottawa, Canada. Paul’s interest in Supply-Chain stems from having worked for almost 20 years at Kinaxis on advanced supply-chain planning solutions and the company’s flagship RapidResponse product.
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