What does the future look like for the US car industry?
If you like classic cars, it’s hard to go past the 1950s gems from America. The Fords, Chevys, Chryslers, Cadillacs, Buicks, Lincolns, Plymouths, Dodges; all sleek, chrome-laden, with distinctive tailfins, roomy interiors and big engines. They epitomized the style, innovation, craftsmanship and confidence of the US auto industry at the time, an era when the US led the auto world.
The 1973 oil crisis started to see the US dominance challenged. Consumers sought more fuel-efficient cars, and were lured by the quality and innovation coming out of Japan and Europe. Despite the strength of American culture globally, its car manufacturers have struggled to translate this into car sales, not adapting as fast to changing consumer needs as the Europeans, Japanese and, more recently, the Koreans. While America had the biggest pick-ups and popularized the People Mover, it wasn’t until Elon Musk launched Tesla that the US showed real leadership again with its cars.
A couple of weeks ago, Joe Biden announced a 100% tariff on Chinese-made electric vehicles as part of a package of measures designed to protect US manufacturers from cheap imports. Biden is encouraging other countries to follow suit.
There are drivers behind the US tariff decisions other than protecting American jobs. It is an election year and anti-China policies are popular with many voters in America. There is also the security angle: Chinese EVs are effectively smartphones on wheels. They could theoretically be controlled by someone in China and also send a lot of data back to Beijing. And if there was a war – let’s hope there isn’t - car assembly lines can quickly be pivoted to making military hardware. It is why Washington is so protective of its auto industry, and one of the drivers behind the subsidies and $85 billion bailout of GM and Chrysler in 2009.
The US approach is the opposite to Germany, who is pushing for Europe not to slap tariffs on Chinese cars.
Germany’s argument is two-fold. The first is that they are concerned that tariffs will be reciprocated, and put their massive China business at risk. The other, as noted by BMW CEO Olive Zipse, "We don't think that our industry needs protection," adding that operating on a global basis gives major automakers an industrial advantage. "You can easily endanger that advantage by introducing import tariffs."
To compete globally these days, brands need to be able to foot it against Chinese brands. China is already the largest trading partner to more than 120 countries including Japan, South Korea, Australia, New Zealand and the ASEAN bloc. Chinese brands are increasing their presence in these markets, and many others. It isn’t just EVs, but Tiktok, Temu and everything from smartphones to fashion – as Zara and H&M will attest. Chinese packaged goods brands are also spreading their wings. In the dairy category, which many Chinese were once afraid of local products, Yili is recognised as the most innovative milk brand in the world, and Mengniu is increasingly everywhere through its global sports sponsorships such as the Olympics and FIFA.
Last month’s announcements that Volkswagen will be investing $2.7 billion in a Chinese production site, and BMW’s $2.8 billion Chinese factory upgrade is a testament of the importance the German car makers are placing on remaining competitive in China, and by proxy, the world.
The CEO of auto giant Stellantis, who owns Chrysler, Dodge, Jeep, Ram, Fiat, Peugeot, Citroen, Alfa Romeo, Maserati and others, vowed to compete with Chinese brands, saying “We don't think that protectionism will give us a long-term way out of this competition.” Even Elon Musk opposes decoupling, recently doubling down on his China operation.
Whatever the drivers, putting up protectionist tariffs of 100% on Chinese EVs will disincentivise US car makers to be efficient and innovative. Losing this will further diminish the competitiveness of US cars, which doesn’t paint a rosy picture for the US industry in the medium-term.
The picture isn’t too rosy for the planet either. After Greece and Australia, the US has the lowest EV adoption rate in the West. The new tariffs will likely see US EV sales continue to fall behind. American’s transport emissions are already more than the next four highest countries combined: China, India, Russia and Brazil.
As JPMorgan's AsiaPac CEO Sjoerd Leenart noted last week about China: "You can’t ignore it, you have to do business there, even if you decide not to do business there, you need to understand what’s going on," adding that what happens in China "influences every industry around the world."
If you are reading this newsletter, there’s a good chance that you’re selling in the China market. In addition to the direct opportunities, it positions you well to understand Chinese competitors, and be more competitive globally as a result. Don’t lose sight of that.
Anyone who has spent time in China is likely to have noticed how elaborate the packaging can be relative to similar products in Western countries. Goods are wrapped up as if for high tea in the depths of a Heilongjiang winter - one may have to make their way through four or five layers of intricate wrapping before reaching a tasty morsel buried deep inside. The perceived status, discovery or safety from fanciful packaging trumps any environmental concerns for most consumers.