Das Auto and the Second China Shock: Industrial Policy and the Disruption of Technological Incumbency

Why has the EU, despite strong climate regulation, advanced manufacturers, and deep industrial finance, fallen behind China in the electric vehicle (EV) transition? This article challenges explanations that attribute Europe’s predicament primarily to Chinese “unfair competition” or to an inevitable curse of incumbency. We propose instead a co-evolutionary yet ultimately state-anchored framework that integrates neo-Schumpeterian insights with developmentalist state theory to explain divergent outcomes in the EV transition. In technologically complex and capital-intensive sectors such as automotive manufacturing, technological change depends on the interaction between firm-level capabilities and institutional environments. Neo-Schumpeterian analysis explains why incumbent firms often delay radical transitions: Asset specificity, sunk costs, and entrenched organisational routines bias firms toward incremental innovation within existing technological regimes. Developmentalist perspectives, however, highlight the capacity of states to reshape these conditions. Comparing trajectories of Volkswagen and Geely, two companies significantly invested in the combustion engine technologies at the start of the 2010s, the article argues that the choices of these incumbents have been significantly mediated by policy regimes that either permitted delay or compelled strategic recombination. China’s dirigiste state coordinated the EV transition across critical minerals, batteries, electronics, demand management, finance, and infrastructure, creating incentives for rapid firm-level EV adaptation while destroying demand for internal combustion cars. Industrial policies in Germany and the EU lacked comparable coordination and credible long-term commitments, allowing incumbents to hedge and delay.