Chinese Automakers Are Knocking on America's Door

Chinese automakers are preparing to come on-shore in America. Companies including BYD and Nio have promised to begin delivering vehicles to U.S. customers in the coming years.

The COVID-19 pandemic and market conditions have pushed some automakers' North American market launch plans into the later half of this decade. There is no doubt that the marketplace is tough, even for brands that have been established for decades in the country. Volkswagen, Alfa Romeo, Fiat, Mitsubishi and Mazda continue to struggle to gain market share.

American automakers, including the foreign ones that build locally, will be forced to adjust to the influx of new brands and increased competition. And, all parties will be held to the restrictions and incentives that are a result of the Inflation Reduction Act.

It comes at a time when the Chinese automotive market is on the rise. China's national automakers are expected to outsell foreign automakers for the first time this year in the country, capitalizing on a decline in sales by American-owned General Motors and Ford Motor Company.

Additionally, the country's auto industry now leads in global exports for the first time, according to global consulting firm Alix Partners Global Automotive Outlook, beating rivals like Germany and Japan.

The Chinese auto market is massive, moving more than 23 million new vehicles in 2022 versus the 14 million sold in the United States. China offers massive tax breaks for EVs, with the government spending $28 billion on subsidies from 2009 to 2022, according to China Dialogue, an independent, non-profit that focuses on the country's climate and environment news.

Chinese automakers who import their models to the U.S. for sale have those models subject to a 25 percent import tariff that was put into place during the Trump administration. This is on top of the standard 2.5 percent import tariff that applies to vehicles made outside of the country.

Electric vehicle batteries made in countries outside the U.S. are subject to their own set of tariffs.

Additionally, the Chinese models and their buyers would be further disincentivized as they would not be eligible for the full breadth of the tax incentives created as a result of Inflation Reduction Act rule making.

"For GM and Ford to succeed in China nowadays - a complete lineup of EVs (including hybrids) that are (technologically) feature rich and priced competitively with their product development folks marching out new products and features every six to nine months. Even mighty Tesla has failed to keep up with 'China EV Inc.' and need price cuts to keep the metal moving," Tu Le of Sino Auto Insights, an analyst firm based in Beijing, told Newsweek.

Many Chinese automakers are already tied to America through joint ventures and technology co-sharing, including three of the largest four. Dongfeng Motor Corporation operates a joint venture with Stellantis. Changan has agreements with Ford and Mazda. SAIC (Shanghai Automotive Industry Corporation) has ventures with Buick, Chevrolet and Volkswagen.

"China's homegrown brands have been laser-focused on integrating CASE into vehicles at attractive price points and at a faster pace than traditional automakers," said Mark Wakefield, global co-leader of the automotive and industrial practice at AlixPartners in the report referring to connected, autonomous, shared-mobility, electric/electrified technologies.

"To compete, automotive companies need to become 'New Tech'-driven and adopt a challenger mindset with the risk appetite of a start-up company," he said.

Chinese companies seem to do better at meeting their customer needs quickly, the report found, while American companies are engineering-driven and have difficulty leaving traditional product-development processes behind. They are too cautious when bringing new technology to market and overspend on things today's customers don't highly value, the report concluded.

AlixPartners found that Chinese EV brands have 11 percentage points higher penetration of advanced driver-assistance systems than their non-Chinese counterparts in the highest-volume mid-range price segment in China. Chinese EVs also get revamped more often, 1.3 years in the market, compared to 4.2 years for non-China brands with mostly internal combustion offerings.

Some companies are changing the way they operate to be more in line with the Chinese automaker product cycle, introducing major updates every few years rather than a new generation every seven to eight years. Genesis has done this with its G90 sedan and the first generation of the Porsche Macan has been updated three times in nine years, and will continue to be alongside the new Macan EV when it comes to market in 2024.

Chinese vehicles have historically underperformed in crash tests, including Europe's NCAP testing. This is no longer the case. In 2023, nine Chinese-branded vehicles scored the highest marks possible, five-stars, in the test.

Cars made in China are already utilizing the vehicle-to-infrastructure technology (V2X) that is masking its way into the American market. V2X allows road signs, construction zones and first responder technology to directly interact with vehicles via their in-car operating system to warn them of roadworks, traffic, and hazards.

Coming to America isn't an easy path. Toyota, Kia, Hyundai, Nissan and Honda have had to forage paths and their brands took decades to gain wide acceptance. Le thinks its unwise to equate Chinese EVs entering the U.S. market now with what the Japanese and Koreans did in the past.

"That's not going to be the case for Chinese EVs. I've driven dozens of these vehicles and many of EVs sold in China would sell in the U.S. market today, especially if politics are set aside. They are designed well and well-built and I anticipate that they would undercut US built EVs once they enter en masse, hence the tariff," he said.

There are few brands that are poised for success here, including BYD and Geely. BYD has only a small connection with the U.S., Geely a much bigger one.

BYD, one of the two largest privately-owned automakers in China along with Geely, is one of the most interested in the U.S. market. It has already made inroads across the world in Norway, Australia, Britain, Brazil and more. It operates a bus and truck factory in Lancaster, California, where it also makes batteries. Notably, the company is backed by Warren Buffett's Berkshire Hathaway firm.

"BYD has been the best kept secret until recently. It's the company that Charlie Munger convinced [Warren] Buffet to invest $225 million way back in 2008. It is a machine. They are vertically integrated and fab their own chips and build their own batteries, enough of them to rank number two with about 16 percent of global battery market share," Le said.

"BYD also sells those same batteries to American companies like Ford and Tesla. In fact, they supply the battery cells for the China-built Ford Mustang Mach-E. It will sell 3.5 million battery-electric and plug-in hybrid vehicles combined in 2023. They'll outsell Tesla this year and the VW brand in the China market for the first time ever. Over the last three years, they've entered more than 55 countries."

Le also said American automakers should also be keeping an eye out for some of the Geely brands: Zeekr, Polestar, Volvo and Lotus, but says that having American ties isn't especially significant. China already knows the importance of the U.S. market, the second largest in the world. He expects 10 to 15 more brands to enter the U.S. market over the next several years joining the current joint ventures.

The Geely-owned Polestar, Volvo and Lotus are not only sold here, the brands are also investing heavily in U.S. manufacturing. Earlier this year, Polestar said it would move production of its 2 sedan to South Carolina, joining the 3 SUV and Volvo EX90 SUV starting in 2024.

"Localized production is more critical than ever, particularly in the growing electric vehicle sector. Geely was an early Chinese auto giant to produce vehicles in the U.S., and it is taking a tactical approach to increasing U.S. production beyond a single car — Volvo's S60 sedan," Paul Waatti, manager of industry analysis at AutoPacific told Newsweek.

He explained that Geely's decision is a strategic response to the evolving U.S. electric vehicle market, encompassing business efficiencies, regulatory compliance, adherence to federal incentives, market positioning, consumer perception, and aligning with global strategic objectives crucial for success in the competitive and growing U.S. EV sector.

"First, China EV Inc isn't coming, they are here. The Polestar 2 is currently shipped from China to the US market. Tesla is shipping Shanghai built Model Ys to Canada. And although not an EV, GM ships the Shanghai built Buick Envision to the US market as well. There will be more, from both Chinese automakers and non-Chinese automakers," said Le.