Should phonemakers build electric cars?

Three years ago, Chinese tech giant Xiaomi announced that it was getting into the electric vehicle (EV) business, following in the footsteps of US rival Apple, which spent the better part of a decade researching and developing its own EV.

Fast forward to 2024 and, while Apple has given up on its plans to build a self-driving car, Xiaomi is just days away from the launch of its SU7, a four-door sedan produced by the state-owned car manufacturer BAIC at a factory in Beijing.

Xiaomi is not alone. Rival Chinese smartphone maker Huawei is also developing technologies for the auto industry, from smart driving systems to cockpit systems and communications platforms. Huawei's Stelato brand of vehicles is also a partnership with BAIC.

Xiaomi's Speed Ultra 7 (SU7), which will be available in 29 Chinese cities from March 28, has a driving range of up to 800 kilometers (500 miles) and is equipped with Xiaomi software and electronic features.

It also has technology capable of delivering faster acceleration speeds than Tesla and Porsche's EVs. It can reportedly go from zero to 100 kilometers per hour (62 miles per hour) in 2.8 seconds.

Chinese consumers line up to try Xiaomi's new car

The company says it has already booked 100,000 appointments to view the car, which is priced at between $35,200 (€32,200) and $55,000.

Shares in China's largest smartphone maker soared nearly 12% in Hong Kong in a day earlier this month on the news of the first deliveries, as part of what CEO and founder Lei Jun previously said was a goal to become one of the world's top five automotive manufacturers.

But how feasible are Xiaomi and Huawei's ambitions, given the already ultra-competitive landscape of the automotive sector?

"It looks like we are witnessing the biggest transformation in the [auto] industry," German auto analyst Ferdinand Dudenhöffer said in January.

Could tech firms gain the upper hand?

Dudenhöffer said he expects car manufacturers to become mere suppliers for the likes of Xiaomi in the future, noting how "bending sheet metal is getting boring," compared to the creation of the dashboard intelligence provided by the smartphone makers.

"The future of the car can be seen less in the mechanics ... [it] depends on software, autonomous driving, and smart cockpits. That is exactly the competence of these tech companies," he added.

Xiaomi and Huawei will certainly benefit from their home market being the world's largest automobile market in terms of demand and supply. Last year,  total output in China reached 30 million vehicles, including 9 million EVs.

China's potential is enormous as there is currently less than one car for every five individuals, versus 800 vehicles per 1,000 inhabitants in the United States.

Price war as competition intensifies

But despite record vehicle deliveries, China's automakers are currently engaged in a massive price war that threatens their profitability.

Tesla was the first to make several rounds of price cuts worth thousands of dollars as Elon Musk's firm fell into second place to Chinese rival BYD in the last quarter of 2023, in terms of the number of EVs sold.

Tesla's rivals have quickly dropped their prices too, so vehicle prices fell more than 8% last year, according to data from the Shanghai Automotive Industry Corp.

Adding insult to injury for the auto sector, Chinese government subsidies to encourage the transition to electric vehicles, worth nearly $1,800 per car purchased, ran out at the end of 2022.

Some analysts predict that consolidation is on the cards over the next two years and that some vehicle manufacturers could even go bust.

Many foreign auto brands, meanwhile, are at a further disadvantage, having already struggled to get a foothold in China. That's despite the easing five years ago of joint venture requirements so the likes of Volkswagen and BMW no longer needed a Chinese partner.

Europe, North America could be tricky

While tech giants like Xiaomi and Huawei may have a home advantage, they could face an uphill battle in the race for global EV supremacy.

Xiaomi is Europe's third most popular smartphone brand but is only ranked fifth in the United States. Huawei's reputation was severely damaged by sanctions imposed by Washington under the Trump administration.

"With zero brand equity in Europe or North America it will be a tough ask to penetrate those markets," auto analyst Matthias Schmidt told DW. "Especially with the European Union likely to raise import tariffs this summer and the US with a nearly 30% import tariff in place for Chinese manufacturers."

Brussels is concerned that cheap Chinese EV imports could stymie the growth of European automakers who have invested heavily in electric car production but are currently facing slower growth in EV sales largely due to the cost-of-living crisis.

EU, US consider new curbs on Chinese EVs

The European Commission, the bloc's European arm is looking into whether Chinese subsidies on EVs amount to unfair competition and is considering introducing higher import duties. The arrival of Chinese smartphone brands' cars could make Brussels act.

Similar tariffs imposed under the Trump administration effectively keep Chinese EVs out of the US market for now. But BYD has already started exporting EVs to neighboring Mexico and is searching for possible locations for a Mexican production line.

"Europe and North America are likely to be markets where we see incumbent manufacturers double down on the heritage and brand equity stories. Tesla has been perhaps an exception to the rule, but now that small gap to enter the market is closing, making it tougher for new entrants," Schmidt told DW.

Dudenhöffer forecasts that BYD will replace Toyota as the world's largest car producer within a decade. The challenge for the Chinese smartphone makers will be to partner with the likes of BYD and others to ensure their technology reaches as many drivers as possible.

Disclaimer: This opinion first appeared on DW, and is published by special syndication arrangement.