Detroit may be making the same mistake on EVs that it made with Japane

BYD, SAIC Motor Corp and Chery Automobile, among China’s biggest producers of EVs, have lately been looking to set up factories in Mexico.  (REUTERS)
BYD, SAIC Motor Corp and Chery Automobile, among China’s biggest producers of EVs, have lately been looking to set up factories in Mexico. (REUTERS)

Summary

  • US carmakers must fend off Chinese EV-makers by developing products that can compete with them, and not rely on trade barriers for protection.

Once upon a time, Japanese cars were seen as exotic vehicles that could never take on the might of Ford and General Motors. Right now, Chinese EVs are in a similar place.

“Corolla, New Economy Car, Is Shown Here by Toyota," the New York Times yawned in a 1968 headline, introducing history’s best-selling automobile to the US market. Four years later, another piece noted with idle curiosity that Honda Motor, “primarily a motorcycle name in the US," was starting to sell “diminutive" four-wheelers as well. The story of America’s Big Three automakers’ hubristic fall to Japanese rivals is well known, and should caution carmakers who underestimate China’s competitive threat. With designers focused on large, powerful gas-guzzlers that earned better margins for Detroit’s inefficient production lines, the US auto industry in the 1970s failed to comprehend the appeal of affordable Japanese cars that sipped fuel, needed minimal maintenance, and came packed with standard features that local buyers were used to finding only as pricey add-ons.

By 1981, heavy political pressure forced Japan to accept voluntary caps on the number of cars it would export to the US. In response, Asian car-makers launched luxury brands that could earn more export dollars for each vehicle sold, giving birth to Lexus, Infiniti and Acura. Meanwhile, they built factories in the US to market their popular vehicles free of trade curbs. About one in three US autoworkers is employed by a Japanese company now. Only pickup trucks, defended by a 25% tariff, have remained largely immune.

Chinese EVs are currently as rare a presence in the US as Japanese cars in the late 1960s, put off by a 27.5% tariff imposed under the Trump administration and the tacit understanding that local factory investments won’t be welcomed. Things are changing, however. Tesla last year started shipping models from its Shanghai factory for sale in Canada. In Mexico, mainly petrol vehicles from Chinese carmakers accounted for about one in five car sales in the first 10 months of last year. Its buyers like an array of upmarket features at low prices, the tacked used by Japanese car-makers in the 70s and 80s.

“The Chinese car companies are the most competitive car companies in the world," Tesla’s chief executive officer Elon Musk told investors in a January earnings call. “If there are not trade barriers established, they will pretty much demolish most other car companies in the world."

The protectionist blanket may be lulling Detroit into a false sense of security. Right now, it’s in a strikingly similar situation to where it was in the 70s. The better margins on trucks priced at $60,000 or more are causing manufacturers to promote them and cease production of cheap, efficient sub-compact cars. Yet it’s the smaller vehicles around half that price, better suited to the constrained budgets of current buyers, that are flying off dealers’ lots.

There’s a real opening for Chinese brands to muscle their way in here, if they can thread the regulatory needle. Recent models like BYD’s Dolphin and Great Wall Motor Company’s Ora are gaining a reputation as reliable urban runabouts that sell for less than $30,000 in export markets such as Australia.

The trick is to find a way around those 27.5% tariffs, but that’s not beyond the wit of a wily exporter. BYD, SAIC Motor Corp and Chery Automobile, among China’s biggest producers of EVs, have lately been looking to set up factories in Mexico. There would be no point in establishing such investments if the prize of the US market wasn’t in the offing.

Tax lawyers reckon Chinese marques established in Mexico would even be able to qualify for some of US President Joe Biden’s tax credits for domestically-made clean cars, so long as they manage to exclude sufficient Chinese parts from their supply chains, as Bloomberg News reported last week.

Such moves may well raise protectionist hackles in the US, just as the earlier Japanese expansion did—this time sharpened by the fact that the Asian exporter is an aggressive geopolitical competitor, rather than an ally. Paranoid rhetoric treating the tens of thousands of Chinese-made EVs exported to the US each year as a security threat more profound than the hundreds of millions of mobile phones moving in the same direction are a taste of things to come.

Yet, Detroit’s carmakers can only defend themselves against Chinese EV-makers if they develop products that can compete and undercut them. That’s the lesson they failed to learn when confronted with Japanese rivals half a century ago. The only way to win this race will be to start competing with the next wave of Asian imports, rather than trying to disqualify it. ©bloomberg

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