Roger’s $0.02 - Chinese Deflation Part 2: American EVs

This past week, a Hong Kong court ordered China’s largest property developer, Evergrande, to liquidate its assets to pay creditors. This is on the backdrop of an already slowing Chinese economy that has seen $9 trillion dollars of value wiped from its stock market. As the country rides through a deflationary cycle, the Central Government's plan to restart the economy has been seen as too little too late. With the ability to produce its own energy, a large domestic market, and a recent trend of re-shoring and friend-shoring factories and supply chains, the US market has emerged relatively unscathed from China’s economic woes. Plus, unlike countries in Asia, Oceania, and Europe, the US is well-insulated from events in the Middle East and Eastern Europe. Container ships bound for US ports can be reached via the Pacific, the Panama Canal, or the Atlantic. And there is a side benefit to this latest chapter in Chinese deflation. As domestic demand recedes, Chinese factories could spur increased international demand by dropping prices. The one big unanswered question, however, would be for EVs.

Demand for EVs has softened in recent months with Ford cutting back on production of its all-electric F-150 Lightning. And it's not alone GM, Volkswagen, and others have scaled their plans as well. But if you look at the details an interesting picture emerges. Demand for EVs has slowed but not reversed. People want them but not on the same scale. Worries about charging infrastructure, maintenance, and ownership costs have spooked consumers. But the biggest reason is cost. Many of the EV models announced in the US in recent months have all targeted the more affluent consumer. And with the lack of entry-level EVs in many automaker portfolios, there has been an opening that hasn’t been adequately addressed. Enter China’s EV automakers.

BYD has recently beaten Tesla for a 2nd second year, building more than 3three million EVs in 2023. China is now the largest producer of EVs in the world. But if China’s domestic market can’t soak up all these new models, where will companies like BYD, Geely, and others sell them? Overseas of course. A flood of cheap, well-built Chinese EVs entering the European market has caused a mild panic among European automakers as they see their market share shrink. Europe’s politicians are currently in the midst of looking for ways to fight back, but the threat is complex.

Although they face a 10% import tariff, Chinese EV makers have several advantages. Many of them have partnered with local automakers. In some cases, like with Volvo and MG, they bought the entire company. Another benefit is that, unlike their European competitors, Chinese EV makers aren’t saddled with a large unionized workforce. EVs are less complicated to build and use a relatively smaller workforce than traditional automobile manufacturing. Finally, Chinese EVs are cheaper than local alternatives sometimes by 20%. This is the last point that has some EU politicians crying foul. They claim that the cost of manufacture is kept artificially low by enormous state subsidies. China’s government suggests such claims are simply protectionist rhetoric but, as economic storm clouds hover over both Europe and China, that fight is not going away.

At 27.5%, US automobile tariffs on Chinese automakers are much higher than in Europe. It's one reason why few Chinese EVs are sold in the US. Some politicians, company executives, and labor representatives view inexpensive EV imports as a threat to local production and jobs. Even free market libertarian Elon Musk has expressed alarm claiming Chinese competitors could “demolish” rivals without tariffs. But if China’s economy slips even more, there could be a scenario where the prices could drop even further making even their pricing advantageous even with the import markup.

For consumers the benefits of cheaper Chinese EVs on American roads are obvious. Cheaper cars that people want and as the number of EV owners grows the demand and creation of an infrastructure will also grow. Chargers and repair shops specializing in EVs.  The flip side is the political ramifications of Chinese makers muscling in on the American car market. Having a strategic rival so close to the heart of US auto manufacturing might be too much to ask in the current political climate. Accusations of dumping and higher import tariffs on Chinese goods would be one obvious outcome. However, a more positive outcome would be the creation of EV factories in the US. Much like what has been done by Japanese and European automakers with their factories in Alabama, Tennessee, Indiana, and South Carolina. Companies like BYD and Geely would easily set up shop in states like Texas, Nevada, and Ohio near existing or forthcoming EV plants. Of course, this would also be subject to political calculus. This time from China’s government. Building plants in the US doesn’t help with China’s deflationary issues nor will it employ the same number of Chinese workers. Plus it will allow a geo-strategic rival to benefit from Chinese know-how. Ultimately the benefits to US consumers from China’s economic downturn will be limited to goods we currently receive from them. But if China’s automakers get desperate building EV manufacturing plants in the US will be a win for them and American consumers.