BYDの急成長と中国自動車産業の未来

In 2023, BYD produced more than 3 million new energy
vehicles. Byd has grown into this powerhouse. You look at the monthly rankings, they're always at
the top. The Americans and the and the Europeans produce cars
that have inferior software and don't use the latest chip. Gm sales are down by more than 50%, Ford is down by
more than 60%, and Jeep has actually gone bankrupt in China and had to get out. President Biden slapped Chinese automakers with stiff
tariffs, effectively doubling the price of a Chinese export EV. Donald Trump pledged to place a 100% duty on any car
made in Mexico by a Chinese company. Chinese automakers are going to come here eventually,
and they're going to do it regardless of if there's a tariff or not. In the world of electric vehicles, Tesla has reigned
supreme, but its days as top dog may be numbered. In China, the world's largest EV market, it's been
losing ground to domestic automakers as a ruthless price war has inflamed an already competitive
market. If Tesla had not had price cuts of 20 to 30%, they
probably would have actually had sales drop last year. And there's one carmaker in particular that has given
Tesla a run for its money. Warren Buffett backed BYD. The Chinese automaker logged 2.4 million new car
insurance registrations in 2023, making it the top brand in China with a market
share of 11%. I don't think anywhere in the history of the automobile
has any company enjoyed such explosive growth in such a short period of time? Byd has grown into this powerhouse. You look at the monthly rankings, they're always at
the top. In 2023, BYD produced more than 3 million new energy
vehicles, which include plug in hybrids and battery electrics, surpassing Tesla's
production of 1.84 million cars. BYD is so much ahead of Tesla in China. It's like a it's just it's almost ridiculous. Early on, Elon Musk was dismissive of BYD. Chinese carmakers weren't taken seriously by their
rivals. It used to be that foreign brands had the majority of
the market share in China. Now it's Chinese brands. And when you look at the vehicles that these Chinese
OEMs and Chinese brands are putting on the market, they are some very good vehicles now. They're a serious threat as they not only dominate the
Chinese market but have grand ambitions of expanding globally. In 2023, BYD's exports grew 334% to 242,765 vehicles across 70 countries. About 40% of the EV market in China is owned by BYD,
and they're just starting to export globally to places like Australia, Japan,
Europe and potentially very soon, the United States. CLSA has some predictions that by 2026, BYD will enter the top five automakers in the world, and this
year they reached the top ten. Byd, short for Build Your Dreams, was originally
started as a battery company in 1995 by Wang Chuanfu in Shenzhen, China. It started out in the 90s as a manufacturer of
batteries for cell phones, and for the first ten years, low cost was their magic
formula. We're going to undercut all the competition. After building a successful business supplying
customers such as Motorola and Nokia, it decided to enter the auto business. It bought Shiyan Qinchuan automobile and launched its
first internal combustion car in 2005, the F3. In 2008, it launched the F3, DM, DTM, a plug in hybrid
EV. I remember driving in and riding the earliest beads. They were called the F3 and the F1, you know, inspired
by Formula One racing, which is almost comical because their cars were these sort of
mediocre commuter cars that were powered by Mitsubishi engines. In 2010, it unveiled its first fully electric vehicle,
the E6. It was progress, but it wasn't perfection. Still, you know, taxis would buy the electric vehicle
because they got incentives to do so. But very few private individuals had any appetite for
BYD cars. The company's auto division didn't see much growth
through the 20 tens. Sales increased, but only gradually. Profits on those sales were mediocre, in fact, in 2018
and 2019, BYD's sales year on year were declining. Up until very recently, it was it was on the fence
whether or not it was going to make it as a car company. However, it managed to turn things around. In 2019, I saw some of their new products called the
Tang and the Han, designed by German designers, world class designers in the first time you
see, oh, these are actually good looking cars. There's potential here. In 2022, the company stopped production of its ICE
vehicles, focusing on building battery electric and plug in hybrids. The majority of their cars are in the mass market, so
that helps with volume, and they've also not completely shifted into pure electric
vehicle at once. Byd is backed by Warren Buffett's Berkshire Hathaway
and considered entering the US market in 2008, when Buffett acquired 10% of the company. Warren Buffett himself said, I'm betting on the man. I don't understand the technology. I'm not sure about the China market. Will EVs take off or not? But this guy is one in a 10 million. So he recognized something special in Wang Changfu,
and it's with that that he gave his blessing to an investment. But quarter billion dollars. A lot of. The reason why he invested was because of the battery
business, more so than the vehicle business. And that has grown dramatically along with their
vehicle sales. Byd's stock is up over 1,400% since Buffett first
invested. Berkshire Hathaway did pare down its stake in the
company, selling more than 60% of its shares since last summer. Why would he draw down? So one is geopolitics, as he's mentioned with Taiwan,
he said, I don't like TSMC because of the location. Second thing going on, Tesla ignited a price
war about one year ago at the end of 2022, and that price war has
been ferocious, so much so that most EV makers in China are losing money. Today there's only Tesla, BYD, and a couple others
that are actually able to make a profit. At the core of BYD's winning strategy. Price. Many of its vehicles undercut the competition
in Munich. Just a few months ago, they launched the Seagull,
priced at get this: $11,500 very competitive in the segment of $35,000 in under. Its expertise in batteries. Typically the most expensive part of an EV has helped
here as well. Byd designs, develops, engineers its own batteries at
scale, so not only do they have the capability and the capacity for their own products,
but they're also supplying batteries globally with plans to build battery plants all over the world. They are one of the top companies in the world building
lithium iron phosphate batteries in particular. They cost about 30 to 40% less per
kilowatt hour to manufacture, and LFP batteries are also extremely durable. They last a long time. As a leader in battery technology. It actually supplies batteries to other carmakers like
Tesla, Toyota and Kia. In 2020, it launched the blade, a lithium iron
phosphate battery that the company touted as a breakthrough in
high energy density with high levels of safety. By many accounts. Byd's blade battery is best in class globally right
now. What they've done, essentially, is to maximize the
energy density, and this is attractive to everyone in the industry. Byd is not just in the passenger car market, it makes
trucks, busses and other vehicles as well. The company actually builds and sells electric busses
in the U.S. at a factory in Lancaster, California. They have had a big business in the commercial fleet
vehicles including busses in the U.S., Latin America. But its passenger cars are what account for the
majority of its sales. The company offers several models at a variety of
price points. The dynasty series includes the kin, with a price
starting around $14,000, two vehicles priced all the way up to the tang on the
high end, starting around $34,000. The vehicles that really put BYD on the map for the new
energy segment is the hand. It's a sedan that they launched in July 2020,
and this car just shook off. The ocean series appeals to younger consumers and
features the Seagull, BYD's smallest car with a starting price around $10,000, up
to the Ciel, a sedan that starts around $22,000. When they released the Dolphin and Seal models, one of
the things that I was told was, well, we have many different colors. It's supposed to appeal more to
young families and especially women. Byd has also introduced vehicles under luxury subbrands
Denza Yonghuang and Fangsheng Bao. Denza, a joint venture with Mercedes Benz, created in
2010, introduced a few EVs for the Chinese market before undergoing a restructuring
in 2021. Mercedes has since reduced its share to 10%, but BYD
has continued to develop new vehicles, starting with the D9, a luxury minivan, the
N7. A direct competitor to the Tesla model Y, and the N8,
a larger SUV. Yang Yonghuang created in 2023, targets the high end
segment with a supercar, the U9, and a luxury SUV, the U8. Details of its next car, the U7, recently revealed it
will have quad electric motors with a range around 500 miles. Fangsheng Bao, also created in 2023, launched its
first vehicle, the Bao five, in November last year. Yang Wang is definitely BYD's effort to enter that
really luxury segment of the market. The cars are either extremely gigantic
or they're in the sports car category, which is very different from BYD's other cars. Most automakers, at some point in their history, try to
create halo vehicles that will reflect well on the rest of the brand and and create
an image for the brand. And BYD is no different. It's a sign of their growing confidence and say, look,
we can do what Ferrari or Lamborghini or Porsche can do. Uh, just as well, if not better. Being the leading electric carmaker in China, BYD has
set its sights on bringing its cars to other markets. Starting around 2018 2019, markets slowed and margins
started to drop, and all Chinese automakers said, uh oh. If we stay still in our domestic market, we're going
to drown in overcapacity and hyper competition, and we're already seeing that play
out. It's already a major player in Southeast Asia, where it
has 43% market share in EVs and is currently the top selling EV maker in
Thailand, Brazil, Colombia and Israel. In Thailand, they were basically non-existent in the
market a year ago, and just in the last few months, they've become the top selling car brand, and I
believe they also have targets to double their sales in the Philippines and Singapore this year. Last year, the company started selling in Mexico and is
looking to enter Japan. They just are launching the dolphin in Mexico now,
increasingly growing into other markets in South America, where Tesla doesn't really have as much
of a presence right now. Byd is building up its presence in Europe. Last year, it sold 13,000 vehicles there and now has
its own massive cargo ship capable of carrying 7000 vehicles. It recently delivered 3000 cars to Germany in its
first voyage. It's pretty in line with BYD's strategy overall to make
sure they have as much as possible in-house with the ship. That just gives BYD extreme control over costs. It's safe to say that their number one priority right
now overseas is Europe, because in Europe there's legislation that go electric, there's people with
money to buy electric cars, there's decent charging infrastructure. The company has said it will open its first European
plant in Hungary, but the Chinese automaker is facing obstacles abroad. The EU in the last couple of months has announced
they're going to be investigating subsidies that went into the production of Chinese made electric vehicles. The EU Commission saying, hey, we don't believe your
costs. We think that you're probably dumping or over
subsidizing your products, and that's why you're so competitive. Here in China, new energy vehicles have received
substantial support from the government. Rhodium Group estimates that BYD received
approximately $4.3 billion in state support between 2015 and 2020. But the biggest question of all will BYD try to sell
its cars in the US? They're definitely preparing for the US market, waiting
for the right timing. Us and Europe promise a profitable market. They have to enter and compete and win here to thrive
globally. Currently, tariffs make it expensive. With Made in China, EVs hit with a 25% tax, on top of
the 2.5% tariff imposed on imported cars. A lot of these companies and the investors in these
companies, which in some cases includes various levels of government in China, there seems to be more of a
tolerance for, at least for the time being, taking losses in order to grow market share. It recently announced it will build a factory in
Mexico, possibly to gain a foothold in the North American market. Few people know it, but China is the number one
supplier of cars to Mexico already, and the next natural step will be for them to build manufacturing
plants in Mexico. They're already looking at sites they're well advanced
in their research, and we'll ship our vehicles up through the border into the US, starting probably
their expectations after 2025. What is the possibility of the Chinese getting closer
and closer to our market. Within the next 5 or 6 years? You will see several automakers likely begin final
assembly in Mexico. Why is that important? Because of NAFTA. It basically eliminates that tariff. People will say Americans won't buy Chinese. You know what you ask somebody, do you want to pay
$9,000 for an SUV? Or do you want to pay 19 or 20,000 for an SUV? No contest. And that's what we found with everybody we've talked
to down here. U.S. Lawmakers have warned Chinese automakers could
flood the market and be a threat to domestic automakers. People in D.C. definitely have an eye on that, and you
can bet that they're talking to the Mexican authorities. The risk is real for the U.S. at a time when UAW has just negotiated all time record
high wages and and perks. In Australia, Chinese automakers aren't restricted by
tariffs, and BYD has grown considerably there after entering the country in 2022. It now has 14% of the EV market. Tesla leads with a 53% share but has been selling
there since 2014. The Chinese car companies are the most competitive car
companies. In the world. I think they will have significant
success outside of China, depending on what kind of tariffs or trade barriers are established. Frankly, I think if there are not trade barriers
established, they will pretty much demolish most other car companies in the world. They're extremely good. But with China becoming such an automotive powerhouse,
it may be hard to keep its ambitions at bay. Chinese automakers have learned very quickly how to
produce really appealing vehicles that are more affordable, and they're arguably in many
respects, better vehicles. The rest of the industry has reason to be scared. China today has capacity to deliver half of the world's
demand for vehicles. Half. And given their strength and their low cost and
their increased designs and improved quality, you start to wonder, like, what is going to
stop this juggernaut? Just four decades ago, private car ownership was
unheard of in China. For most people in a country where private cars still
don't exist, the journey to work is still by flying pigeon bicycle. And there was almost no auto industry in the country,
but now it is the largest auto market in the world by far, some of the biggest
beneficiaries of this meteoric rise were foreign automakers, including
American ones. They made piles of money, but the good times have come
to an end and their future in the country is seriously threatened. Detroit is under pressure in China and that for the
same reasons they're losing in China, they could very easily lose globally. Lured by the promise of access to a burgeoning market
of at the time, more than 1 billion people. Global automakers agreed to strict trade rules
and taught inexperienced Chinese partners a lot about making cars. For a long time, it was worth it. Foreign companies enjoyed prestige and popularity, but
Chinese firms caught up fast to the point that foreign firms are now being
pushed out. The new market isn't quite like the state owned
industry, one might imagine. Many top firms are privately owned. There are fewer restrictions. It's highly competitive. New models can come to market in a fraction of the
time it takes automakers elsewhere in the world, and always at lower prices. Increasingly, Chinese consumers prefer to buy Chinese
brands, and the CEOs who run these companies have close and direct relationships with
their customers. It's unlikely that. Once they've once you've been dethroned, that you'll
regain any any power in the market. Despite the daunting circumstances. Some say foreign firms, including American ones, need
to double down. If If you don't compete in China, then what are you
going to do when China shows up in your backyard? How do you know how to compete with them? You haven't even tried. China's automotive industry dates back to the early
1980s. Two Chinese automakers formed joint ventures with
foreign manufacturers, one with an American firm, another with a German one. The industry was tiny at the time. The first vehicle, the Volkswagen Santana, sold 7500
units and dominated the market. The only vehicle buyers were government institutions
and the like. Concept of a family car or a private car? It wasn't. Nobody was even allowed to buy cars. But reforms in the 80s and 90s opened the floodgates
and created the 21st century auto market recognizable today. In 1994, one of China's top planning commissions
issued the policy for the Automotive Industry, also known as the 1994 Auto Policy. This rule allowed foreign automakers to take up to a
50% share in a joint venture with any Chinese auto manufacturer. Foreign firms could start no more than two joint
ventures for any single type of vehicle. Later rules favored foreign automakers capable of
producing cars that met global quality standards from locally sourced parts. General Motors, the biggest automaker in the world at
the time, entered China in 1997, partnering with Shanghai Automotive Industry
Corporation. As China's economy liberalized and grew, so did auto
sales. Demand pretty much tripled the 1990s and about 2000
2001. China finished its negotiations to enter the WTO, and
that gave more security and reliability predictability to foreign
automakers, and China really took off. Sales grew ten fold in less than ten years, and China
became the world's largest car market that year. At its height from 2014 to 2018, General Motors made
$2 billion a year from its China operations and joint
ventures. In in 2017. The company sold 4 million cars in the country, about
half a million more than it sold in North America. The Buick brand especially saw incredible
success in China. About 80% of Buick's global sales were in the country,
five times as many as in America. Gm used to be the poster child for an awesome US-China
relationship. At one point the CEO from GM China told me, Here in
China, we're making more money than God. Things are great. Chinese people love our Buicks. We're bringing Cadillac soon, and it looked like there
was going to be a forever annuity for the big three GM, Ford and Jeep in China. But that didn't go as planned. A quick look at the market share of international auto
manufacturers in China illustrates how rapidly things have changed. Gm's sales in China have fallen from that high water
mark consistently since 2017. In 2023, they fell to 2.1 million, lower than their US
sales for the first time since 2009. Equity income from the country GM's metric for
how much it earns in its second largest market fell 34% in 2023 to $446 million. It fell 54% during the fourth quarter alone. Things have been downhill and accelerating downhill, so
much so that GM sales are down by more than 50%, Ford is down by more than 60%, and Jeep has
actually gone bankrupt in China and had to get out. So in the last five, six years, we've seen just a
disastrous, you know, outcome for the Detroit three. It's very abrupt. It's very sudden. But I think it shows the the maturity basically of these Chinese competitors. So here is how it happened. First, Chinese cars improved by a lot. When Chinese firms first started exporting and they
started to soon, as the Koreans did 30 years earlier, they didn't have the requisite
quality. They failed miserably in many crash tests,
particularly in Europe, and the internet was full of pictures of Chinese cars crumpling like tinfoil. Five, ten years later, they have extremely good
results in crash testing. You don't hear a word about it. A lot of that improvement was thanks to what Chinese
automakers learned from foreign partners. The whole point of the joint ventures was to bring them
up to speed, to make sure that, uh, Chang'an, that fa, that Shanghai all could come up to a to a point
where they could compete with basically their partners and everybody else if they hadn't seen that
coming, that's on them. But Bill Russo, a former Chrysler executive who now
runs a consulting firm in Shanghai, sees it somewhat differently. Cross-border investments made by Chinese
investors and some non-Chinese ones were perhaps even more important than joint ventures in
creating globally competitive brands. Nanjing Automotive Group bought the legendary British
brand MG in 2005, and began making cars in 2007. Geely bought Volvo Cars from Ford in 2010 for $1.8
billion, and then spun out the Polestar performance line as a standalone
EV brand. Geely also bought British sports car maker Lotus in
2017. American investor Warren Buffett took a stake in BYD,
although he has since reduced it. Some leading brands are privately owned and didn't
grow out of joint ventures. Government support, of course, played a crucial role. The country knew it needed some kind of edge on
incumbents. It bet big on EVs, spending an estimated ¥200 billion,
which comes out to about 27 billion American dollars. Byd received over $3.6 billion in direct subsidies
between 2018 and 2022, most of it in that last year. Partly, this was to combat China's intolerable air
quality problems. Decades of industrial development had left cities like
Beijing with some of the worst air pollution in the world. But the decision was also economic. The Chinese felt that they had a hard time competing
with the Western and especially Japanese companies with internal combustion engines, because then it would be
hard to catch up. So they decided they would leapfrog and go into
electric vehicles. And this is an area which nobody was proficient. In 2008, at the height of the financial crisis, the
Chinese government made massive investments in transportation worth about $586 billion, including
investments in a nationwide high speed railway system, airports and critically,
highways. The following year came tax cuts on smaller cars and
incentives on vehicle sales in rural areas. A new policy outlined eight goals for the next two
years. The plan grow car production and sales and fund
research on EVs, plug ins, hybrids and fuel cell vehicles. Those investments have given China a considerable leg
up. A lot of the supplier base, including critical
materials, is local. Chinese firms are really leading the world in battery
development and battery battery production. And there's a tendency in the US, again, to think of
this as all a matter of subsidies or cheap labor or lousy environmental controls, and all those things
have some role to play and particularly played a role in the past. But it underestimates the degree to which
Chinese dominance is based on technical capacity. Strengths go beyond batteries and motors. Chinese firms have become quite strong in software and
infotainment systems, a benefit of the country's rise in the mobile phone and electronics industries. Volkswagen, for example, had big problems with the
software trying to hold together its EVs, and they've looked to China to help
solve that. And I think that's a really important part of the
story that you don't hear much about. Recent entrants with backgrounds in the technology
industry include Li Auto, Xpeng, Nio, Xiaomi, Huawei, Baidu, Tencent and Alibaba. A little bit like Tesla, they're new. They don't have the burden of history. They don't have old factories to or not so many old
factories to reconfigure, and they have a very fast pace of
development. These companies view the car as a technology platform
for the distribution of services and the continual collection of service revenue, rather than a thing
that is simply sold once and then forgotten. The concept of the car as a rolling smartphone or
computer is already normal in China. China's younger buyer base prefers the highly
connected products Chinese firms are selling. They now are often saying that the Americans and the
and the Europeans produce cars that have inferior software and don't use the latest chip, and are not as
much on the cutting edge. The image many non-Chinese may have of the Chinese
economy is one where the central government controls these large state owned enterprises. That's partly true, but there's a lot of nuance. Three of China's major automakers are controlled by
the central government in Beijing, but most of them are owned by provincial or municipal governments. A few are completely private. It's not all operating perfectly according to market
principles, but if you look at the number of producers and the number of models, it is by far the most
competitive market in the world. You know, they probably will surprise a lot of people,
especially given this year's, um, bloodbath. Right. Of pricing pressure, economic headwind, trying to push
these vehicles out into the marketplace at lower prices, sacrificing
profitability for volume. And so the foreign automakers, they have to
look at this and they have to balance, do I want market share or do I want
profitability? The bloodbath Lei Xing is speaking of is the price war. Tesla started in 2023. It began in China, but for years, an incredibly
cutthroat environment has dramatically accelerated the pace of vehicle development in the
country compared to other parts of the world. Normally, a car company might refresh or update a
vehicle every 2 to 3 years and then make a significant generational change every 5 or 6. In China, a refresh can happen within 12 months, and
the company will sell it at a lower price than the outgoing model. And this is where kind of foreign automakers, because
of that legacy, they can't keep up. In addition, Elon Musk is not the only CEO who talks to
customers on social media. Chinese CEOs do, too. Through China's major platforms such as Weibo and
TikTok, they also solicit comment through the app's customers use to interact with and maintain
their cars. This creates tight feedback loops. Michael Dunn, who for decades has been studying the
auto industry in China and its neighbors, says politics are also to blame. We look back at 2017. It was a year in which GM and South Korea signed this
agreement to supply South Korea with anti-missile defense facilities. Important ones. China didn't like that. And since then, we've seen the sales and market share
of both the Detroit three and the Korean automakers just nosedive. No one made an announcement and said, hey, you guys
are in trouble. You're going to be shoved out of the market. But it's pretty clear that 2017 was a time in which
the tide turned, and the usefulness of the Detroit three just sort of
began to fade as far as the Chinese were concerned. At the same time, a lot of the rules the Chinese
government once had in place, like requiring joint ventures, have since been rolled back or removed
entirely. The Chinese themselves learned they grew strong enough. So no, there's no more production needed. Let's just have people compete. Let's have the market open up. I don't want to sound overly dramatic. I just want to be realistic when I say that within the
next five years, Ford, GM, Hyundai, Kia, Nissan more likely than not, will be
out of China. Some automakers, such as Volkswagen, the first foreign
firm in the country, are trying to retrench and stay in the game. They're working with local firms and trying
to move faster from decision to execution. Tesla might be in better shape than its Detroit
rivals, at least for now. It was the first foreign automaker to be able to set
up shop in China without a joint venture, thanks to the liberalization of trade policies. Just over one out of every two Teslas sold in the
world is made in China. But even leaders face daunting odds. In In my 27 years of living and working in China, what
I've seen is a consistent pattern that is, China. Invites in world class companies learns as quickly as
they can the secret superpowers of those companies. And then gradually and, you know, almost methodically
sees them to the exit door. And so Tesla one day will also meet this fate. You can bank on it. Russo, the former Chrysler executive, hopes US firms
will not back out of the country and instead invest more in local design, development and
production. My fear is most of the the global automakers have
delayed the investment in EV because they don't see Americans embracing the
electric vehicle. He thinks foreign firms can still compete in the market
and maybe even chalk up some wins. Stay in the game in the next 3 to 5 years. Don't give up, right? Invest and find some way to introduce those products,
maybe even build them in China. If you can't find scale in the United States, and then
you at least have the hedge on the possibility of competing with China as they go
global. China has become the world's largest auto exporter. $9,200 equivalent US dollars. Chinese automakers are going to come here eventually,
and they're going to do it regardless of if there's a tariff or not. 40 years ago or so, the Chinese auto industry barely
existed. Today, the country makes enough cars to supply half
the world. I call it the Great Godzilla. The world has never seen an auto industry of this size
scale. This is a giant machine just getting ramped up. And it has its eyes on the United States, which, thanks
to China's rise, is now the second largest car market on the planet. There are no Chinese car brands for sale in the US at
the moment, although a few other ones like Volvo, Polestar and Lotus are Chinese
owned. But insiders say it's only a matter of time. The country has been ramping up exports to offload
over capacity. Surveys indicate a large share of shoppers, especially
younger ones, would be happy to buy a Chinese car despite concerns over privacy, etc. but not everyone shares the enthusiasm. President Biden slapped Chinese automakers with stiff
tariffs, effectively doubling the price of a Chinese export EV, which can otherwise be at least as cheap as
$11,500 within the auto industry. Opinions vary, but many say tariffs might
not be that effective in the long run and may do more harm than good. So what are the alternatives? We asked some industry insiders to find out. For the Detroit three, for Toyota, for Hyundai to
compete well against these Chinese brands. It's going to take something more than simply raising
the tariff from 25% to 100%. I'm not exaggerating when I say what China that the
challenge that China is presenting the world, including the United States, is unprecedented. You know, in the case of the Japanese and Koreans,
when they came into the United States, we were able to persuade, maybe coerce a little bit. Hey, if you want to sell here, you have to build your
transplant here. But they could own it. And they were our allies, and
ultimately they were more dependent on us than we were on them. They were more in China's case, we
don't have that kind of leverage with them. China has the capacity to make half the world's cars
four times as many as the US typically makes. Annual demand within the country is about 25 million
units. That leaves 15 million cars for export, nearly as many
as the US can sell in a good year. China sent 5 million cars to over 100 countries in
2023, making it one of the largest exporters in the world, you see. Chinese cars now in virtually every market except for
the United States and Canada. And because there's so much capacity at home and the
market at home is has a price war. The Chinese automakers themselves are super
motivated to get out and push their products into Europe. The United States. A mix of favorable policies and a booming economy got
them to where they are today. China welcomed foreign automakers into the country
beginning in the 1980s, and especially after some policy changes in the following decade. Rules were simple foreign firms could sell cars in the
country as long as they partnered with a local Chinese automaker. Chinese firms also made some cross-border investments. Chinese automaker Geely bought Volvo cars from Ford,
for example. And finally, many companies are government owned, and
even private firms receive generous subsidies. Ev maker BYD received $3.7 billion between 2018 and
2022. For example. In state capitalism, the objective is we're going to
build a world powerhouse auto industry. To get there. We need great companies. But oh, by the way, at the local, provincial and
federal level will also offer all kinds of help. So the Western automakers look at that and say,
how in the world do we compete? But Chinese companies have also built strong products. When they came to the Detroit Auto Show 15 years ago,
their cars were not competitive. You could see the quality issues with those vehicles
as you sat in them, as you played around with them. Now the cars are much higher quality. They are very competitive. Once they hit the ground. And they pay attention to all the configuration of
every seat in the car, not just the driver's cockpit. Uh, that's what I think. Obsoletes the traditionally designed in style vehicle. Bill Russo, a former Chrysler executive, says the
Chinese have been extremely successful in developing new business models based around software and
services. Many recent entrants have backgrounds in technology,
electronics and mobile devices markets. When the iPhone came, the Nokia products went away
quickly. That's what's happening in China now in the car
business. American consumers are also receptive to Chinese cars. Nearly half of respondents in a recent survey said
they are familiar with Chinese vehicle brands, and 76% under the age of 40 said they would consider
buying a Chinese car. Consideration then declined significantly among older
consumers. Grappling with this new reality, tariffs have become a
popular political tool, especially with former President Trump beginning in 2018. Auto executives at the time, famously, Tesla CEO Elon
Musk decried what they considered an imbalance between US and Chinese trade rules. Lately, it is the Biden administration who is focused
on tariffs first and foremost, EVs. Tariffs on them will increase from 25% to 100% in
2024, the administration says. China's extensive subsidies and non-market practices
have led to substantial risks of overcapacity. Chinese EV exports grew 70% from 2022 to 2023. They're also raising tariffs on an array of materials
used in car making lithium ion batteries, graphite, magnets, steel, aluminum and semiconductors. China controls more than 80% of certain segments of
the EV battery supply chain, the administration said. That leaves U.S. supply chains vulnerable and risks national security
and clean energy goals. Some politicians are pushing for even harder
restrictions. The industry's response is mixed. Labor leaders are in support, for obvious reasons. So is the Alliance for Automotive Innovation, the auto
industry's major trade association. Tesla CEO Elon Musk criticized the tariffs, but even
he had said earlier in 2024 that without trade barriers, most Western automakers would
be demolished by Chinese competition. They can sell EVs cheaper than the cheapest fuel
burning cars and, according to some, are way ahead of competition in software and tech. But Russo is skeptical of tariffs. The Trump era trade war may have been a missile aimed
at Beijing, but it landed squarely on Detroit, he once wrote. Two things happened. First, the trade war drove up the costs of a lot of
parts American automakers sourced from China or elsewhere. Gm and Ford both reported that the Trump
tariffs in 2018 saddled them, each with an additional $1 billion in steel and
aluminum costs. Secondly, it likely accelerated the globalization of
Chinese companies looking to circumvent trade rules by making investments beyond their own
borders. They're building factories in Mexico. They're building factories all over the world Africa,
Middle East, Europe, Eastern Europe, Western Europe, Southeast Asia. There's never been a bigger, uh, effort by China to
decarbonize its supply chain than right now. If elected, Donald Trump pledged to place a 100% duty
on any car made in Mexico by a Chinese company. Policy analysts say doing so would violate
the terms of the very agreement Trump made with Mexico. It might also cause further friction with the
country, which in 2023 became the US's largest trading partner. In any event, executives like Russo argue that these
measures are delaying the inevitable American firms need to face up to the fact that Chinese
companies have extremely competitive and attractive products, and American consumers want them. If you can make aspirational products affordable with
configurations that surprise and delight the users of that platform, that's a universal
value proposition. And sorry, Americans buy Chinese stuff and have been
for decades have been enjoying the benefits of that in terms of affordability for ever. If you shut that off, all you're going to do is make
it more expensive. There are alternatives. Take a page from what China did 30 years ago when it
was just starting out and it said, hey, you want to come into our market, the United States? Welcome. But by the way, in order to sell here, you
have to manufacture here, you have to build plants here. And when you manufacture here, you have to form
a joint venture with an American company that will own half of the business. Oh, okay. And by the way, we'd like you to export from America,
too, so that we get extra benefits of you being here. We could do the same. That's called flipping the
script. The problem isn't that we have to keep them out. The problem is, we should let them in to give
ourselves the benefits of the DNA that they've been able to create. And then but do it under a guided process, do it with
policies. And right now, nobody's writing those policies,
nobody's writing policies that allow some of the benefits of globalization and scale and product
configurations and technologies to flow back to the Western world. And that's going to really weaken the it's not going
to help the industry. It's going to weaken the industry. If we if we don't allow that to happen. And even though there are no Chinese branded cars for
sale in the US yet more than 100 Chinese owned automotive companies have a presence in
the United States already. They are concentrated in Detroit and Silicon Valley,
and there are Chinese auto suppliers scattered across 30 US states. But you'd never know it because we don't see Chinese
cars on American roads, so it doesn't occur. Know what? That can't possibly be true. But it is. They're here. They're getting ready for the time when it's right to
enter and sell their cars to Americans.