Why this analyst says the future of cars is electric—and Chinese

The coronavirus pandemic has upended the global car industry—but China remains a bright spot amid the disruption.

After shutting down from late January until early March during the early stages of the country’s battle with COVID-19, Chinese car manufacturing is now fully operational and there are signs that car buyers are returning to pre-pandemic purchasing levels.

China’s ability to reopen its economy quickly doesn’t just provide global automakers a chance to salvage profits in China; it may let Chinese automakers accelerate long-held ambitions to expand globally and become an electric vehicle manufacturing hub by 2025, says Michael Dunne, the chief executive officer at ZoZo Go, a San Diego-based consultancy that advises automakers, suppliers, and investors on strategy and operations in Asia.

Currently, China is the largest automobile manufacturer in the world, and in 2019 made 28% of all vehicles produced globally, according to the International Organization of Motor Vehicle Manufacturers. That output, however, serves China’s domestic market almost exclusively. China exported roughly 3% of the vehicles it produced in 2019. It lags behind Japan, Germany, and the U.S. in selling its cars globally. Last year, for example, China exported roughly one million cars abroad whereas Germany sold roughly 3.5 million overseas.

This week, Dunne told Fortune’s Clay Chandler why China’s global footprint in the automotive space is likely to expand as the world battles the pandemic in the coming years. He also discussed the challenges and opportunities Chinese manufacturers will face in expanding abroad amid heightened U.S.-China tensions, how China’s own auto market has rebounded during the country’s economic reopening, and why the future of Chinese vehicles is electric. The conversation below has been edited for length and clarity.

Fortune: Passenger car sales in China have increased for the past two months. Has China shaken off the shock of the coronavirus?

Michael Dunne: The comeback has been remarkable. If we go back to February, the entire industry and the market came to an absolute standstill. Factories weren’t building cars and no consumer was going to a dealership. Sales tanked 80%—80% in the world’s largest market. But you’ve really had a tremendous recovery after that standstill. In May, sales are up again, not by a lot.

What is the mindset of Chinese consumers right now?

Cautious, careful, circumspect. There’s a cloud of uncertainty that’s hanging over the Chinese economy. U.S.-China trade tensions, job losses in the economy, people are unsure, and they’re being quite careful about the way they spend.

How much is the pandemic disrupting auto production lines in China?

Production is not a problem in China. Workers are back, supply chains are more or less in order. China’s supply chains are largely here inside China; it’s not an issue of relying on a lot of parts coming from overseas.

The question mark remains where demand is going to be in these coming months. [China has] the capacity to make up to 40 million vehicles a year with demand at home at about 20 million. So, do the math, and there’s just enormous pressure for them to push out [to foreign markets]. And they will push out.

But [China] really has its eyes on Southeast Asia, Africa, and South America; those are markets where the consumer is more price sensitive. In terms of the United States and Europe, it’ll be another five years before we really see Chinese cars on American roads. It’s going to be a while.

The Chinese automaker Geely announced intentions to merge with Volvo in February. Can we expect to see more of that kind of cross-border investment in the auto industry from China?

That deal represents a strategic direction for Chinese automakers as they go overseas. It will be difficult for Chinese to build their own ‘transplants’ [or foreign-owned manufacturing facilities] in other markets, but the approach that Geely took with Volvo has been phenomenally successful.

Volvo has had record sales, record profits. They’re firing on all cylinders and the key there is that rather than [Geely] trying to build [its] own brand, which in many consumers’ minds might be tarnished to begin with, [Geely] instead just acquired another brand.

Acquisition is going to be a key tool for Chinese as they go abroad.

Do you expect political backlash against and restrictions placed on that Chinese investment?

No question about that, and especially here in the United States. In 2017, we [at ZoZo Go] were stunned to discover that over a hundred Chinese owned [auto] firms were operating in the United States. Most of them are parts makers, and came in through acquisition. But, wow, who would have guessed there are so many Chinese companies operating in the U.S.?

Since 2017, that needle has not moved. [Chinese auto companies] are holding their ground here, but fresh investment has gone to almost zero. That’s largely due to perceptions that the U.S. is no longer an easy and friendly place to step into.

What is China’s vision for electric vehicles?

China is saying [to global automakers], ‘If you want to play here, you must build electric vehicles.’ For global automakers this time, there’s really no workaround, there’s nowhere to run, they really have to comply.

China also has invested heavily in charging stations nationwide. So China has by far the largest network of electric car chargers of any country and Tesla, for example, has a huge network not only between cities but inside cities.

Look for China, come hell or high water, to be No. 1 in electric vehicles, remain No. 1 and be the export hub globally for electric vehicles. That’s a vision from Beijing.

This story is part of Eastworld Spotlight, a series of conversations on matters of business, tech, and finance with executives, experts, entrepreneurs, and investors in Asia. Subscribe to Fortune’s Eastworld newsletter to get them in your inbox.

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