China is on course to overtake Japan as the world’s top auto exporter by the end of 2023, according to Moody’s Analytics.

“China made heads turn through the pandemic as it strutted past South Korea in 2021 and Germany in 2022, making it the second-largest car exporter,” the credit ratings agency said in a report last week.

China is now closing in on Japan, the report said, adding that the shortfall averaged at around 70,000 cars per month in the June quarter, compared to almost 171,000 in the same period last year.

“At this pace, China is on track to overtake Japan by the end of the year,” Moody’s economists wrote, a global ranking which Japan has claimed since 2019. 

A surging demand for electric vehicles sent overall auto exports from China beyond the levels seen before the pandemic.

In the first half of 2023, China’s EV export receipts doubled from the same period last year. In comparison, overall auto exports from Japan and Thailand — which include both traditional vehicles and EVs — have yet to see a return to pre-pandemic levels.

China boasts a competitive advantage in lithium-ion battery cell production, which Moody’s cited as a factor giving its carmakers an edge when it comes to EV production costs. 

According to Moody’s projections, China produces more than half the world’s lithium supply, thanks to its low labor costs compared to rivals Japan and South Korea. China also boasts more than half of the world’s refining capacity for the metal. 

As a result, some of the world’s largest auto companies have set up production facilities in China, including Tesla and BMW. However, Moody’s noted that the foreign brands did not eclipse local ones like Chery and SAIC. 

“Indeed, the speed at which China has embraced new technologies in the automobile industry is unparalleled,” the economists said.

The Asia-Pacific region, which is home to some of the world’s largest auto exporting powerhouses such as South Korea, China and Japan, has seen a mixed recovery in auto exports, Moody’s highlighted.

Still, EVs made up nearly 30% of all passenger cars sold worldwide last year, compared to less than 5% pre-pandemic.

According to the International Energy Agency in April, EV car sales jumped to more than 10 million in 2022, with China leading the charge and accounting for about 60% of the market.

Moody’s attributed the uptick in EV demand in part to “large price cuts by Chinese manufacturers and generous government supports.” For example, a 10% purchase tax on the new cars has been exempt for EVs since 2014.