Once upon a time, Japanese cars were seen as an exotic and quirky product that could never take on the might of Ford Motor Co. and General Motors Co. 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 U.S. market. Four years later, another piece noted with idle curiosity that Honda Motor Co. — “primarily a motorcycle name in the United States” — was starting to sell “diminutive” four-wheelers as well.
The story of the Big Three automakers’ hubristic fall to Japanese rivals is well-known, and should act as a warning to manufacturers 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 U.S. 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 U.S. In response, the Asian manufacturers set up luxury brands that could earn more export dollars for each vehicle sold under the cap, giving birth to premium brands such as Lexus, Infiniti and Acura. Meanwhile, they built factories in the U.S. itself, which could sell their popular vehicles free of trade restraints. About one in three U.S. autoworkers is now employed by a Japanese company. Only pickup trucks, defended by a 25% tariff, have remained largely immune.
Chinese EVs are currently as rare a presence in the U.S. as Japanese compact 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 Inc. last year started shipping models from its Shanghai factory for sale in Canada. In Mexico, mainly gasoline-powered vehicles from Chinese manufacturers accounted for about one in five car sales in the first 10 months of last year. Buyers there seem to like the array of upmarket features at low prices — the same thing that made Toyota, Honda and Nissan Motor Co.’s Datsun such appealing brands when they started offering innovations such as bucket seats, power steering and automatic transmissions on their standard models.
“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 might be lulling Detroit into a false sense of security. Right now, it’s in a strikingly similar situation to where it was in the 1970s. The better margins on trucks costing $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 in here, if they can thread the regulatory needle. Recent models like BYD Co.’s Dolphin and Great Wall Motor Co.’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 Co., among China’s biggest producers of electric vehicles, have been looking to set up factories in Mexico for months. There would be no point in establishing such investments if the prize of the U.S. market wasn’t in the offing.
Tax lawyers reckon Chinese marques established in Mexico would even be able to qualify for some of President Joe Biden’s tax credits for domestically-made cars, so long as they managed to exclude sufficient Chinese parts from their supply chains, Bloomberg News reported last week.
Such moves might well raise protectionist hackles in the U.S., 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 U.S. 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 can only really defend itself against Chinese EV-makers if it develops products that can compete and undercut them. That’s the lesson it 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.