China has overtaken Japan as the world's largest overseas shipper of cars, sending more than 5 million vehicles overseas last year, the China Passenger Vehicle Association said on Tuesday. Companies known for their fuel consumption are the big winners, but electric car makers such as BYD (HKEx: 1211) and (002594.SZ) are gaining market share and will drive the trend.

Both supply and demand are driving overseas sales. On the supply side, automakers have the equivalent of about 10 million vehicles a year of excess capacity at their factories in China, giving them enough money to boost export output, according to consultancy Automobility. Meanwhile, Russia's war with Ukraine has prevented many international brands from selling to Russia, helping Chinese companies such as Great Wall Motors (601633.SS) grab market share, with Chinese brands accounting for more than half of sales by August 2023, compared with less than 10 percent before the invasion, according to Autostat and PPK.

These catalysts may not last. Russian sales appear to have peaked as domestic production recovers, while other competitors may pick up. Domestically, Beijing is addressing overcapacity by restricting production licenses. Geopolitical friction is another potential obstacle: Geely has warned of potential delivery delays as attacks on Red Sea vessels force shippers to take longer, more costly routes, while the European Union is investigating the success of Chinese firms in the region.

But the Chinese automakers' overseas journey could still continue, with Canalys analyst Alvin Lau saying the car companies' latest sales targets clearly mean they are looking to expand their overseas presence, with their strategy shifting as Chinese brands try to go global.

Their growing dominance in friendly regions such as Latin America and "Belt and Road" allies is likely to be sticky, as exports are booming. Electric cars could account for more than 50 percent of overseas sales by 2025, according to Canalys. While Tesla (TSLA.O) played a big role, accounting for 5 percent of light-vehicle exports in the first half of last year, local brands such as BYD, Geely Geometry and SAIC MG also benefited.

BYD and its compatriots have kept costs relatively low thanks to the country's highly developed electric car supply chain: automotive supplier Forvia calculates that it costs them about 10,000 euros less to build a car than their European rivals. They have also developed a keen technological edge, particularly in software and the ability to develop new models quickly. Increasing domestic competition, especially for mid-market electric models in the 200,000 to 300,000 yuan (about $28,000 to $42,000) range, is forcing them to continually hone this advantage.

Chinese automakers will be hard to outperform.

China is expected to overtake Japan as the world's largest auto exporter by 2023, the China Passenger Car Association said on January 9th.

Last year, China's total auto exports, including passenger cars and commercial vehicles, were estimated at 5.26 million units valued at about $102 billion; Japan's exports for the year are expected to be about 4.3 million units, according to the association.