It’s been decades since Japanese or Korean autos have felt like foreign brands to American car buyers. More than 2 in 5 cars sold here are made by Toyota, Hyundai/Kia, Honda, or Nissan, all of whom have significant domestic manufacturing operations.1 Competition for US market share is between these folks, the “Detroit 2.5” (GM, Ford, and Stellantis’ Jeep and Dodge), German carmakers (Volkswagen, BMW, Mercedes), and Tesla.
Might this ecosystem soon be shaken up by new names from China like BYD, Nio, SAIC, and Chery?2 They’re not here yet, but are making rapid inroads around the globe. In 2023, China became the world’s #1 exporter of cars, surpassing long-time top dog Japan and cementing a spectacular rise over just the past few years.
The rest of the auto industry is sounding alarm bells:
“My No. 1 competitor is the Chinese carmakers. This is going to be a big fight. There is no other way for a global carmaker… than to go head-on with the Chinese carmakers.” — Carlos Tavares, CEO of Stellantis
“The Chinese car companies are the most competitive car companies in the world… They will have significant success outside of China depending on what kind of tariffs or trade barriers are established. [Otherwise] they will pretty much demolish most other companies in the world.” — Elon Musk, CEO of Tesla
See how quickly a market can turn: in Mexico, Chinese firms’ market share has gone from <1% in 2016 to 20% today. They’ve done this just with exports, their prices still low enough to undercut locally-produced cars. From Bloomberg:
When [Jorge] went to buy a new pickup in October, he encountered an enticing option from a little-known brand in a Mexico City dealership: the JAC Frison T8… [priced] about $10,000 less than similar trucks from Chevrolet, Ford and Toyota.
After inspecting under the hood of a bright blue model and peeking inside its spacious leather interior with HD touchscreen, he was impressed… “In general, all Chinese brands offer greater technology at a lower cost.”
As a next step, some worry, Chinese carmakers setting up factories in Mexico could avoid US tariffs and be very cost-competitive here.
Moreover, China has made formidable progress in the transition to electric vehicles. By late last year, a quarter of new cars sold in China were fully electric (and another ~12% were hybrids). Compare that to just ~8% EV market share in the US. Crucially, China dominates the battery supply chain, the single most important factor in EV production. More than 80% of battery cells are made in China, and they are made there for 11% cheaper than in the US and 20% cheaper in Europe.3
There are several reasons, though, to believe this juggernaut isn’t unstoppable:
China’s record exports are fueled by gas cars, which won’t last — the surge of the past few years is due to waning domestic demand for gas cars. As Chinese consumers shift to electric, the country’s gas cars are going to Russia, Mexico, and elsewhere… but eventually they just won’t get made4
The US (and EU) will use tariffs and other protectionist measures — the US already imposes a steep 27.5% tariff on imported EVs, and now restricts buyers’ tax credits to “made in America” vehicles. France recently, and perhaps soon to be followed by Italy, adopted similar restricted subsidies. Expect additional anti-China tactics, including a fixation on a Mexico “loophole,” regardless of whether crime-enthusiast Donald Trump retakes the White House
Chinese government subsidies can’t help abroad — to facilitate the EV transition, a decade-long national program saved consumers thousands of dollars per vehicle, while standardized, government-backed charging stations blanketed the country. But the Chinese government will be less keen to absorb costs on behalf of foreign consumers, and (sadly) EV charging infrastructure in the US is dismal
Current Chinese autos are a better fit for the European market — small, environmentally-conscious cars (where China has its biggest production advantage) are way more likely to gain traction in the EU than the US. (We love our cars big and our gas guzzled! 🫤) So what former auto exec John Dunne recently called out as a “Detroit” shortcoming, I view as an unintended moat:
GM, Ford and Jeep-Dodge are very good at building quality large trucks and large SUVs for Americans at a profit. Period. Detroit is not competitive anywhere else.
Success requires a significant local presence, which takes a long time — this, to me, is the biggest impediment to a quick Chinese takeover of the US market. It took decades for Japanese and Korean carmakers to succeed in the US—gradually building up brand recognition, improving their quality, growing their infrastructure for sales and maintenance, and most importantly, producing locally. This is true even for new American manufacturers: Tesla, a best-case scenario, struggled for 15 years. No other challenger has come close
So, even with all of China’s resources and demonstrated advantages, I’m very skeptical that they can make significant in-roads in the US any time soon. But—poll below—what do you think?
Calculated from 2023 sales estimates here. Add in Subaru and Mazda, and close to half of US car sales are to Japanese or Korean manufacturers.
Volvo (including its EV subsidiary Polestar) has been owned by China’s Geely since 2010. Volvo’s US market share is only ~1%.
It’s not surprising, then, that the EU claims Chinese exports are undercutting European car prices by 20%.
One quirk about China’s record-setting 2023 is that their shipment margin over Japan is pretty much accounted for by exports to Russia. Chinese firms filled a void left by other carmakers exiting the market after Russia’s invasion of Ukraine, but have themselves acknowledged this is a one-time blip.
Nice article Jay! Tesla will always find a way to overtake these Chinese companies…especially as ‘Redwood’ enters the market
I rented a Geely in Costa Rica. It felt cheap (no USB ports, poor visibility) but it drove. The major hurdle Chinese manufacturers will face is convincing Americans that their cars are safe and reliable. It took Korea (Hyundai/Kia) about 30 years to do that.