Shifts in the car industry, which relies on extensive and complex supply chains, highlight the global economy’s evolution, where cost efficiencies and regional demand are reshaping traditional manufacturing hubs.
In 2023, China manufactured 58% of the world’s electric vehicles (EVs), cementing its position as a dominant player in an industry that’s crucial for both the future of transportation and climate action.
China’s rise as the global leader in EV manufacturing is a powerful illustration of how the geography of car production – and, by extension, global trade and investment – is shifting.
The global car industry, often a microcosm of the international division of labour, is one of the most emblematic markers of trade integration.
Car production requires extensive, complex supply chains linking various regions, and where cars are made often depends on the size of local markets, production costs and economies of scale.
Originally rooted in places like Detroit in the United States, Stuttgart in Germany and Nagoya in Japan, car manufacturing has gradually migrated to lower-cost regions with advantageous trade positions.
This shift, captured in the Trade and Development Report 2024, highlights the global economy’s evolution, where cost efficiencies and regional demand are reshaping traditional manufacturing hubs.
Scaling up: Why car production is out of reach for many developing countries
One of the main challenges for car manufacturers has been achieving the economies of scale necessary for profitability. Building cars on a single platform – the base structure of a car – reduces costs. To maximize profits, companies need to produce up to 250,000 vehicles per year on the same platform.
By 2023, profitable economies of scale in the car industry had grown even larger, with annual production requiring roughly one million vehicles on a single platform. This level of production is far out of reach for many developing countries and even for some wealthier nations.
Countries like Cyprus, with just 12,500 cars sold in 2023, rely heavily on imports. Even Austria, with around 300,000 light vehicles sold annually, primarily produces cars for export rather than for its own market.
Thailand, however, is a unique case. Consuming about 776,000 vehicles each year – mostly light commercial vehicles – it has emerged as a major vehicle exporter because Japanese manufacturers have set up production there. The strategy reflects the increasing shift toward producing cars in regions where it makes sense to produce cars not just for the local market but for export to bigger regions.
Moving manufacturing: From components to complete cars
Over the years, carmakers have transitioned component production to countries with lower labour costs.
Initially, countries like Mexico and Taiwan were popular choices, followed by Eastern Europe and China. Alongside this, the assembly of lower-cost vehicles has increasingly shifted to developing economies with favourable regional export conditions, such as Mexico, Korea and Spain in the 1980s; Czechia, Slovakia and Thailand in the 1990s; and Brazil, Indonesia and Morocco in the 2000s.
However, these production sites often focus on lower-value models of more expensive cars, designed to meet local and regional market demands. Romania’s Dacia Logan, which shares its platform with the Renault Clio V and Nissan Juke and Czechia’s Škoda Octavia, which shares its platform with the Volkswagen Golf and Audi A3, are examples of this strategy.
Electric vehicles: A shift but not a revolution
The industry’s transition to EVs might seem like a dramatic shake-up, but the production logic remains remarkably consistent.
Electric vehicles still require high production volumes to be cost-effective, and economies of scale for EV battery production hover around 400,000 to 500,000 units per factory.
Despite the shift from internal combustion engines to batteries, the strategy of locating production near high-demand markets remains essential. The heavy weight of EV batteries drives up transport costs, reinforcing the “produce where you sell” principle and encouraging manufacturers to keep production close to major consumer regions.
China’s dominance in EV manufacturing underscores this trend. Bolstered by government support, China’s EV industry has become a major force in the global market. In 2024, the country’s total EV sales could reach 12 million units, a number that mirrors its role as both a massive production hub and a growing consumer market for electric vehicles.
Challenges and opportunities facing developing countries in the new economic landscape
The rise of China in EV production is part of a larger narrative explored in the Trade and Development Report 2024.
The traditional model of manufacturing-led export growth is losing effectiveness, especially as global economies shift toward services and digital and capital-intensive industries. For developing countries, these changes present a pressing need to rethink economic strategies.