BYD electric vehicles are waiting to be loaded onto a ship in China this month. STR/AFP via Getty Images
China has become an electric vehicle powerhouse. His automaker BYD recently topped Tesla in global electric vehicle sales. Elon Musk warned Chinese automakers: “If there are no trade barriers, they will all but destroy most other automakers in the world. “They are extremely good.”
On Friday, the Alliance for American Manufacturing sounded the alarm, releasing a report titled, “On a collision course: China's existential threat to the American auto industry and its path through Mexico.”
The report, which outlines policy recommendations to combat overcapacity and unfair trade practices, notes that BYD is building factories in Thailand and Hungary to serve as regional export hubs. Then it is added:
“More concerning, however, is the heavy spending by Chinese companies on facilities in Mexico, through which they can access the United States through more favorable tariffs under the United States-Mexico-Canada Agreement (USMCA). This strategy is essentially an attempt to gain backdoor access to American consumers by circumventing existing policies that keep Chinese cars out of the U.S. market.”
In the US, Chinese-made electric vehicles are currently subject to a 25% tariff, which is in addition to a 2.5% tariff on imported cars. This has prevented them from making significant progress. However, manufacturing in Mexico could change the equation.
A “coming wave” of Chinese electric vehicles
House Democrats recently warned about China's “industrial strategy to dominate the global auto market” and its electric vehicle manufacturers “creating a back door into the U.S. market through our key trading partners.” They called for existing tariffs on Chinese-made cars to be maintained or even increased, describing a “coming wave” of Chinese vehicles that “will be exported by our other trading partners such as Mexico.”
The Financial Times recently reported that Chinese car manufacturers such as MG, BYD and Chery are looking for production sites in Mexico. Meanwhile, imports of Chinese cars into Mexico are increasing sharply.
While Musk credits Chinese electric vehicle manufacturers for being “extremely good,” the Alliance for American Manufacturing focuses more on the government support they receive, writing:
“With strong government support, Chinese automakers and suppliers have become industrial powerhouses, controlling the production nodes of virtually the entire electric vehicle value chain.”
BYD, backed by Warren Buffett's Berkshire Hathaway, keeps its costs low by, among other things, owning the entire supply chain of its electric vehicle batteries – significant since a battery accounts for about 40% of the price of an electric vehicle.
“Nobody can compete with BYD on price. Period,” Michael Dunne, CEO of Asia-focused auto consultancy Dunne Insights, recently told the Financial Times. “Boardrooms in America, Europe, Korea and Japan are in shock.”
Ford CEO Jim Farley recently said that to deal with the Chinese threat, he is willing to work with competitors on battery production. His GM colleague Mary Barra expressed similar sentiments.
According to the Alliance for American Manufacturing, this threat is scarier than many people realize. It writes:
“The introduction of cheap Chinese cars – which are so cheap because they are backed by the power and financing of the Chinese government – into the American market could be a doomsday event for the U.S. auto sector.”