U.S. Carmakers Are Facing Major Competition | Stephen Ezell

Chinese EVs are getting significant market share by providing cheap cars. And the cheapest one is at $6,000 per car. Meanwhile, they're new to this industry. They didn't have a very strong car production companies back in the day. So you may wonder how did they do this? And what's the implication of all of this globally for other countries like German cars, Japanese cars, Korean cars, and American cars? Today we sit down with Steven Ezell, who's a trade, manufacturing, and international competitiveness expert. He's here to tell us what's going on with Chinese EVs, how they built this industry, and what's the future of the car industry landscape look like. These aren't market-based competitors. These aren't companies that have to earn market-based returns the way Western companies think about them. You know, China practices predatory trade. Well, they don't care about profitability. They care about market share. They care about dominating sectors. I'm Siamak. Welcome to Market Insider. Steven, it's great to have you on. Welcome. Thank you. It's a pleasure to be here. We want to talk to you about the EV race. There is a global EV race, and there are factors and players, and there's a major shift happening in the global car market. Can you tell us what's happening right now? Sure, but I'd like to take us back for just a second to the year 1985, because in that year, China manufactured a grand total of 5,200 passenger vehicles. Last year, in contrast, China will manufacture 34 million vehicles and account for over one third of global vehicle production. China's production of vehicles over the past 10 years has increased 300% to the extent, well, they will manufacture three times as many vehicles as the United States this year. And of course, this is all about EVs, right? China now accounts for 75% of global vehicle production and over 80% of the EV batteries that power these vehicles. Wow, so they've taken a significant amount of the market share. And who has been impacted by China's growth like this? Well, there are a number of dynamics here. You know, the first thing to note in the context of global competition is that China is just cleaning up in new vehicles, especially new EV sales across the developing world. Over the last couple of years, China EVs have accounted for 80% or more of new car sales in countries like Brazil, Malaysia, and Thailand, massive increases in sales in places like Mexico. You know, but even Europe, over the first six months of this year, over 12% of new vehicle registrations in the European Union and the UK were Chinese vehicles. So the competition is going to be felt globally. Companies like Toyota that depend very much in these developing economy markets are already being impacted very significantly. But this is also gonna hit European American competitors. In fact, over the past year, Chinese EV makers have sold as many cars in Europe as the Mercedes-Benz vehicle group. Wow, wow. So, and how is this impacting these countries and these car companies? When we turn our attention to the United States, it would be very fair to say that at least U.S. headquartered automakers, the big three, have really, you know, over the past year, refocused their product portfolio on, you know, extremely profitable, large trucks and SUVs, sport utility vehicles using internal combustion engines. Because, you know, these are the types of cars that Americans love. Since the start of this year, the big three have written down over $50 billion in EV investments. So the signal from the U.S. industry has been very clear that they're gonna retrench, they're gonna focus on, you know, these highly profitable ICE vehicles. Now, you know, that works in the United States because, you know, gas is cheapest in the world here in the U.S., even if it's more expensive than it has been, but still the cheapest in the world. You know, we have a bespoke, you know, marketplace, we got a large country, people love their SUVs. But the question for our auto companies is, is this Fortress America approach gonna work over the long run? You know, companies like GM and Ford have largely left developing markets in, like, Brazil, just ceded that to China. So the dynamic's gonna be that the Chinese EV maker is gonna hoover up market share all across the rest of the world, and can our big three survive over the long term if they're really, you know, concentrating on the U.S. marketplace? And by the way, that strategy only works if we keep the Chinese EVs out of our market. And of course, that's what we tried to do, you know, the Biden administration, now the Trump administration, has put in place these 100% tariffs on Chinese EVs. There's new legislation in Congress now called the Connected Vehicle Security Act that would essentially make it illegal for vehicles from countries of concern that have connectivity components to be sold in the United States. But, you know, this is a play that can work over the short term, but the question is, what's gonna be the long-term competitive situation of U.S. automakers? Now, Stephen, when you look at all this, how's China able to do this? The first point to make here is that achieving leadership in electric vehicles and electric vehicle batteries has been a core goal of the CCP for at least the past two decades. And a part of that was that they weren't really catching up in the internal combustion engine technology. They're very bad at engines. We see that in aerospace. They're very behind in jet engines. They're also behind in ICE engines. So that was part of the reason why they wanted to focus on EVs. Another reason was why they wanted to decrease foreign dependence on oil. And you decrease dependency when you go to EVs. So how'd they get there? Well, by a combination of both fair and unfair practices. To unfair practices, the Chinese government has supported its EV sector with over $230 billion in industrial subsidies over the past 15 years. They have made a coherent effort to proffer whatever kind of foreign intellectual property the Canada space, the former director of the CI said the two industries that China targeted most heavily for IP theft were automotive and aerospace. So they've used a lot of unfair practices. Now, at the same time- So they've been stealing some information from other companies here in the US and other countries. Oh, yes, absolutely. There are extensive reports. We've written extensive reports on that ourselves. So a lot of unfair practices. Now, to be fair, they have also innovated in a number of dimensions. Interestingly, it was long thought with regard to EV battery technology that lithium ion phosphate batteries were just a dead end. The type of nickel manganese cobalt formulations that companies like Tesla pioneered were seen as the future. But China and Chinese researchers have made groundbreaking research breakthroughs into how to more effectively develop lithium phosphate ion batteries. And they completely changed the entire global game in EV batteries through technological innovation. Part of that though, it should be said is because Chinese entities now control over 80% of the processing and refining for the key, critical minerals, rare earths, all the way down to the mines in Congo. So because they have access to a cheap supply of these critical inputs, they can iterate and experiment very rapidly in these battery chemistries. But it's gotten to the point now where some of the leading edge Chinese batteries can go 1300 kilometers on just a five minute charge. So they're clearly dominating in EV battery technology. Now that matters when for an electric vehicle, 40% of the value or the cost going into a car is the battery itself. So that's a key source of their advantage. It should be noted that they've made a lot of other innovations. They're probably surpassing US companies in their use of digital technologies in vehicle design. And that's a core reason why they can bring a car from blueprint to production about 25% faster than Western automakers can. And overall, fastening all these things in, cheaper labor, more use of robots. In fact, they use four times as many industrial robots in the auto sector than we do in America. All these factors contribute to why they can bring these EVs to market at about 30 to 40% less costs than comparable Western vehicles are. And in fact, that's why Jim Farley, the head of Ford, the CEO of Ford, recently said, quote, Chinese EV automakers are producing better cars than anything Ford produces today. How about the infrastructure? When you're mentioning these countries, and here in the US, it's hard to build the infrastructure for charging, charging stations. How are these countries adopting EVs? Like all these East Asian countries that are not very developed, like Brazil, are they building infrastructure for EVs? You know, the US is a very different marketplace, right? I mean, we wanna drive our cars, you know, 500 miles up to Northern Michigan to go to the Great Lakes, right? We drive very long distances. But what you see in many of these developing countries, right, the EVs are country in the cities, right? And that's where the most wealthy people live in a lot of cases, right? So then it's easier in, you know, Shanghai and the Rio de Janeiro and Seoul, you know, to put in place the charging infrastructure there because it's a more concentrated geographical environment. Whereas in the US, our challenge is, we gotta, you know, put these charging stations all along, you know, the interstate highway system. So there is, to some extent, the reality that, you know, in these very dense urban areas, it does make it a bit easier to more effectively and cost efficiently deploy the charging infrastructure. And of course, when you factor in, you know, congestion and pollution, you know, so many of these countries around the world really wanna get the internal combustion engine vehicles off the road, right, for, you know, smog and pollution. So that's been a real incentive. And by the way, in some countries like Laos and Cambodia have, in fact, made it illegal to import internal combustion engines into their economies. Some of these countries are just going 100% electric vehicles, seeing it as the future. But there's, you know, other things, like, you know, in China, you really can't get a license plate for an ICE vehicle. You can only get license plates going forward for EVs. So in a lot of countries, policymakers are putting the skill, their hands on the skill very heavily for electric vehicles. You mentioned that we have tariffs here, like we have the 100, how much is it, 100% tariffs? It's 100% tariffs on Chinese EVs, yes. And European countries have put 30%, 20-something percent tariffs? Yeah, it's more, it's about 39%, but there's gradation. But yeah, so yeah, about 39%. And are these tariffs stopping these EV companies to grow in China, in Chinese EV companies to come into these markets in the US and Europe? It stopped it in the US, largely. In Europe, not so much, or not nearly as much. Now, one of the key issues to consider here, of course, is that Chinese automakers like EYD have made concerted efforts to begin production in Europe. So now they have production facilities in Hungary and Turkey. I believe a stat I read was that they're seeking to produce about 25% of the EVs they wish to sell in Europe domestically by the end of the decade or so. For that reason, my think tank has written extensively that US policymakers should, under no circumstances, permit Chinese automakers to manufacture vehicles here in the United States, because obviously, they would want to get around the tariffs imposed. So if these tariffs were not there, do you think the automakers here would go out of business over time? I don't think they would go out of business, but it's conceivable that one of the big three could go bankrupt or be acquired. I think that could be a realistic outcome. So about a decade ago, the big three manufactured 9.9 million vehicles a year in the United States. That's down to about 4.6 million. Now, they sell more because they're making more in Canada or Mexico, so there's a difference between what they're producing versus what they're selling. But the question is, in 10 years' time, how many vehicles are gonna be manufactured? The other challenge I should mention as well is what's called peak auto. That's the notion that for the past, well, really since COVID, auto companies sell about 12 to 13 million vehicles a year here in the United States. That's gonna be a trustable market, right? And that hasn't grown. You've seen that the average car on US roads is now 12.8 years. The average age of a car buyer is 53. That's more expensive. So if you have a constrained marketplace where there's only 12 to 13 million vehicles, well, if there's an aggressive competitor that comes in that hyphens off a large share of that marketplace, then where are your sales gonna come from? And especially if you're seeding the global market, as we said, to China, then that's an existential threat of the longterm for these US automakers. When you were saying that it looks like the American car companies don't want to compete for the developing world, you seemed a little disappointed about that. What are your thoughts on that? You know, if you look at a company like Boeing, it sells 95% of its product outside the United States, because 95% of global consumers are outside the United States. And in industries like airplanes, where there's just tremendous economies of scale in their production, right? And these are innovative industries or scale industry, like semiconductors, right? And imagine if our semiconductor industry only sell semiconductors in the United States. It would potentially miss a large addressable global marketplace. And the revenues from that market, that large international market, is what's critical for reinvesting into future generations of R&D and innovation, is a competitive risk if, again, the big US automakers would in the future be in a situation where, you know, the vast majority of their revenues come from the United States. In terms of the subsidies, so we've been told that the Chinese government gave a lot of subsidies, you know, and to these car companies to be able to build this EV industry. Do you think it's the technology of the EV cars, or do you think it's the subsidies that are helping them, or do you think it's their innovation? How do you think they are doing all of this, like capturing this huge market share with very low cost cars? I mean, there are a number of dynamics to that type of question. You know, I mentioned the estimate of the $230 billion in subsidies to the sector. You know, the key point to note about that is what that does is contribute to overcapacity, or a lot of capacity. In fact, at one point, there were 500 Chinese automakers. That's... Which is insane, like when you think about it, like 500 automakers in one country. That's shaken out to about 150 or so now. Now, of course, why 500? Well, because every single province in China has to have their own solar panel, or steel mill, or car. So that's why you had this massive overcapacity. But actually, some academic scholars will argue that this is kind of by design, that the way the CCP tries to do this is, you know, seed all these startups, or companies, and let it winnow out, and the best, you know, win, and that, you know, we wanna get to a, they wanna get to a BYD, or a Xiaomi, that's the best, and then they'll compete. But, so, there's no question that the scale and the below-cost ability to experiment and innovate comes from the subsidies in the first instance. Now, that said, over time, we talked, you know, you get these agglomeration effects, you get economies of scale, and, you know, you surface the winners to the top. So, yeah, some people say, well, there's not as many subsidies today for the sector, which isn't quite true, it might be less. But, anyway, it does, kind of, the idea is that these subsidies to stand this industry up eventually gets it to a point where it's more kind of self-sustaining. It's still unfair to global competition, because, you know, the fact that they can produce the car 30% lower, yes, you know, part of that is innovation, to be sure, but part of it is the subsidies that have had this flywheel effect over time. One of the big debates in the industry right now is, you know, an EV car is actually quite different than an internal combustion engine car, right, for, like, the types of things you often have in the car, right, the, again, the battery system, the motor, you know, all the stuff you have, you know, with the internal combustion engine, you don't need, so they really have reimagined the vehicle, right, and how you produce it, and that can actually take a lot of the cost, you know, out of the vehicle design. There was another estimate that they do, like, a fraction of the vehicle testing that we do, like, physical, you know, vehicle testing, so, like, kind of maybe a lax or a looser regulatory environment also takes out a lot of the cost of designing, developing these vehicles. So anyway, there are all kinds of factors that go into this cost differential, again, some fair, some unfair, and one other point to mention is just the kind of the, you know, the depth of the supplier ecosystem that exists within China. When I did the series of three reports on the auto industry, talking with one auto company there, they were telling me, just imagine, like, the heads-up display in the car, right, you wanna change that for, like, a big three automaker. Well, you know, you gotta change the SKU, you gotta send a supplier. Usually, it's about a six-month process to change just the heads-up display in the car. In China, they do it in two weeks, because they're all right there, right? So you get in these kind of, it's the innovation cycle that becomes much faster, just because you have the supplier base of these key components there. Chinese companies are rolling out new vehicle models on the average every 1.3 years, where in the US, for like a, you know, a really new vehicle design is about four years in the US. So it's just the innovation, the product development cycle is much faster over there. So you are seeing, essentially, the prices we are seeing are real on these cars, so there's not an element of subsidy in them, or do you think there is some element of subsidy in there, where when they come in and take the market share, they might raise the prices later? Do you see that happening, or do you think it's kind of, like, settled already, the subsidies are already? I would say that one contributing factor to why they can sell these cars 30% less than comparable vehicles made by Western firms today is, in part, a legacy or a result of the subsidies they extended to the industry in the past that led to these economies, economy of scale effects that show up in the relative cost difference today. Not necessarily a subsidy, today that's making the difference, it's the artifact of the subsidies over the past 15 years that have empowered their industry to take it up. Now, they do still have subsidies, that's still happening, to be sure, but it's more the historical effect of getting their companies into a situation. You mentioned there's about 150 car companies that are still, out of the 500, now 150 have survived, and how many of them are profitable and real brands based on, do you know that number? A fraction. I don't know the exact number, but it's a fraction. So there's only a few of them that are really actually marketed, like BYD and some other ones. But again, it's also important to note on that point that the CCP, Chinese companies, especially ones that are state-owned enterprises or heavily state-influenced, well, they don't care about profitability, they care about market share, they care about dominating sectors. Now, at some point in the future, like in solar panels, where they get to 80% global penetration and they can jack up their prices, but these aren't market-based competitors, these aren't companies that have to earn market-based returns the way Western companies think about them. China practices predatory trade, trade and economic practices that are explicitly designed to harm foreign competitors and foreign companies to the interest of China and its enterprises. One reason that they can sell at lower prices is because they don't always care about earning market-based rates of return like our companies are doing. Now, what about other countries? Which car companies do you think, which countries are most vulnerable right now? Are the Japanese and Korean cars, or is it the European cars are the most vulnerable right now? Volkswagen must have some concern. I understand their sales of vehicles in China have declined by 37%. Part of that is because the Chinese government has said that they want, in fact, they have achieved that 80% of EVs sold in China by 2025 be domestically produced. So certainly companies like Volkswagen that have long depended upon vehicle sales in China as a core part of their portfolio will be impacted. You know, Toyos are all gonna be fine. Now, they're gonna sell less vehicles in developing countries than they have before. I think that's true. So how do you think things will go from here based on what you're seeing? Like, do you think other countries, other car makers have a chance to compete in this space? You know, one would argue that there are three technologies currently transforming the global auto industry. Obviously, electrification, we've talked about, but also automation, of course, driverless cars, and in software-defined vehicles, like vehicles that you can control their capabilities remotely, like Tesla can raise or lower the chassis, the suspension remotely. And, you know, in the future, I think we're gonna reach a place where it's about the vehicle that combines all these elements, right? You're super-sophisticated Tesla, right? You don't want the driverless car, or at least heavily automated safety features with the electrification and with the software capabilities, like the digital bling that we've talked about in China where there's karaoke machines and refrigerators in the car. So I think that's gonna be the future of the car. Competition's open there. There are opportunities to innovate. You know, we know that Ford has recently said they want to come out with an EV truck that's less than $30,000. Jeff Bezos is funding a company called Slate, which wants to make $25,000 EVs. So, you know, I think right now you'd argue, at least on the EV battery side, EV side, China's ahead, but we could still catch up. That said, let's make no mistake. The China auto threat is an existential threat to America's auto industry. And, you know, unlike in the 70s and 80s, where it took us 15 years to respond to the Japanese auto threat, we don't have 15 years today. We gotta turn this around within the next five years. Now, Steven, based on what you're saying, do you think that these EVs will replace the combustion engine cars all over the world over time? Over the past year, EVs accounted for about 30% of all global vehicle sales. I would certainly think that gets to at least, you know, half of global vehicle sales by the end of the decade. Certainly, there are markets where, you know, Americans love their internal combustion engine, so they're not going to go away entirely. You know, if you talk to, actually, the environmental folk, they actually say that what can actually be more environmentally friendly is a hybrid, because the combination of EV and the fossil can actually be, you know, more, and have a cleaner environmental impact. So you may, one of the things you will see is the hybrid market increasing as well. But, you know, it's not discount the potential that there could be innovation breakthroughs in the internal combustion engine. We know that gasoline, frankly, is a much more effective medium for converting horsepower, right? You know, one could certainly imagine a world where there are internal combustion engine breakthroughs that make the ICE vehicle competitive again. So I don't think that, I would say that EVs will entirely take over the world and be the only form of vehicle technology going forward. For the U.S. companies to bring innovation back, what does it take? What do they need to do to bring innovation back to this space in the U.S. auto? I think the number one thing they need to do is start challenging long-held assumptions about like, you know, what features need to be in a vehicle or what our production processes are. I mean, you know, China has a term of like radical simplification, how they're re-imagining the EV. I think our type of companies have to adopt some of that. One thing we need to do to become more cost-effective is adopt more robots and automation technologies in the vehicle manufacturing process. Japan and Korea deploy 2.5 times more industrial robots on the automotive line per employee than we do. So we're gonna have to get more effective at the production process behind these vehicles. If you wanna, as Ford has said, making a vehicle for $25,000, that means you gotta, you know, challenge everything. So that's all part of, I think, you know, there've been challenges that have affected our industry for a long time, the U.S. auto industry for a long time, particularly, you know, labor management challenges. I think when we're dealing with such a transformative set of technologies here that we're gonna need labor and management to really work in lockstep and understand, you know, we have to reimagine these production processes. And so there's much that, you know, workers and the managers are gonna have to get right to make that happen. You know what, I spoke with a lot of analysts, industry analysts, in doing these reports, and the feedback I constantly got was, oh, you know, America has just lost the EV battery race. It's gone. We've lost it to China. We'll never get it back. We have to get tech transfer from China to do this. I think that's really misguided. I think we need a national crash course or a crash effort to develop a world-leading EV battery. We'd be like saying, well, we lost semiconductors, so it's just not important. Let's let it go. We need public-private partnerships. We need public investment, I think, to support our companies developing some of these next-generation automotive technologies. And let's have some more institutes like the Manufacturing USA Network to have a national institute for advanced vehicle technology and EV battery technology. There's more public policy we can do to support the components of our industry. So we shouldn't give up, right? We shouldn't have the attitude of giving up. Stephen Izell, it was great to have you on Marketing Insider. Thank you for coming on. Keep it up, man. Tell us what you think about this discussion, and would you buy Chinese EVs here in the U.S.? We know there is a big tariff on them. Have you seen them, or would you buy one? Let us know in the comments. I'm Siamak. This is Marketing Insider. We'll see you next time.