The Coming Chinese Car Invasion of the USA?
In 1970 General Motors sold 39% of new cars in the US, Ford 28%, and Chrysler 15%; the US “big three” sold 8 out of 10 new cars. At the same time Japanese cars were seen as a joke by the executives of those companies, who could not envisage Japanese car manufactures as a threat. Toyota had a 2% market share, Nissan 1.5%, and Honda 0.04%; the Japanese big three had only a 3.5% market share. Then came along the oil price crises of the 1970s, and the small fuel-efficient Japanese cars started to become popular – taking market share from the US manufacturers. In 1980 the US big three had fallen to a 69% market share (approx. 7 out of 10 cars sold) and the Japanese big three had grown to 14.5%.
After the government bailout of Chrysler at the beginning of the decade, the 1980s were much kinder to the US big three, as oil prices fell and a “voluntary” limit on Japanese car exports to the US took effect. The Japanese manufacturers reacted to these changes by building car plants in the US to bypass the export limitations, and to expand their model range to include larger vehicles. With the exception of the very successful Ford Taurus, the US big three moved away from mainstream car products and into larger vehicles such as minivans and sports utility vehicles (SUVs) and raised prices. Although the Chinese big three increased market share to 18% in 1990 this was not at the expense of the US big three who also grew market share to 71%. In the 1990s the US big three lost further market share, down to 65%, while the Japanese big three continued to grow – to 20%.
Then came the first decade of the new century, and a disaster for the US big three. Their market share collapsed to 44%, while the Japanese increased to 33%. During the 2008 Global Financial Crisis, the US big three had to be bailed out and Chrysler was sold to Fiat – creating Fiat Chrysler Automobiles (FCA). The next decade was relatively uneventful, with the US big three maintaining market share and the Japanese losing 3%. A new variable was the Korean manufacturers, with Hyundai-Kia having grown to a 7% market share. Another country whose care manufacturers had been made fun off not that far in the past.
1970 to 2010 from https://knoema.com/infographics/floslle/top-vehicle-manufacturers-in-the-us-market-1961-2016
2019 from https://carsalesbase.com/us-car-sales-analysis-2019-brands/
As we move through the 2020s, the US big three are faced with a number of challenges – but mostly not from the Japanese big three or Korean manufacturers. The greatest one is a fundamental change greater than the 1970s price shocks which aided Japanese imports; the move to electric vehicles (EVs). In the home US market EVs hold a small amount of market share, at around 3%. In contrast EV sales have boomed in Europe and China, to 10% and 12% respectively (pure BEV, not hybrids), and are set to rise further in 2022, especially in China. With China being the largest national car market, this gives the Chinese car manufacturers (and Tesla that produces and sells EVs in China) significant scaling and learning economic advantages. In addition, the BEV takes away the need to produce an internal combustion engine, a technology area in which the Chinese manufacturers were lagging.
The Chinese have a major cost advantage, as new EV prices have fallen from 41,800 euros to 22,100 euros in the domestic market since 2001, while in Europe they rose from 33,292 euros to 42,658 euros[i]. In November 2021, the average selling price for a new car in the US rose to US$46,329 (40,769 euros)[ii]. Although some of this price is due to a microchip shortage that has US manufacturers focused on the more expensive brands and models (and with lots of add-on accessories), it is part of a longer-term trend. This is in stark contrast to a US median wage that has stagnated for the past four decades in real terms (and fallen if undercounting biases in the US CPI were removed)[iii] [iv]. Inflation also tends to be higher for lower income families as they focus more on buying essentials and therefore do not benefit as much from technology-driven price falls. Only through the effects of Walmart and dollar-store low prices (much of them based on cheap Chinese imports), together with increasing debt and debt maturities (e.g. the 72-month car loan) have median and lower income families been able to maintain consumption. With interest rates at the zero bound, debt maturities maximised and Walmart etc. already driving prices to the lowest, that consumption trend is now under threat.
This situation provides the perfect entry point for cheaper manufacturers to enter the US market, offering cars that lower earnings percentile households can afford. Currently higher oil prices which may also go significantly higher given the tightness of supply, will also benefit EV sales relative to internal combustion engine (ICE) sales. Given that the Chinese manufacturers predominantly make sedans and SUVs, the biggest threat may be to the Japanese and other foreign brands as the US big three predominantly sell trucks and SUVs (Ford 50%+ trucks and 40% SUVs[v]; GM 60% trucks and 26% SUVs[vi]; FCA 43% Jeep SUVs, 40% trucks[vii]); to all intents and purposes the big three have exited the small and medium-sized sedan market and even their SUV sales (and profits) tend to concentrate on larger vehicles. These factors may insulate the US big three somewhat, but not domestic car manufacturing as many of the foreign manufacturers have significant US-based production. FCA’s Jeep brand may also be protected by the heavy off-roading capabilities that is a focus of the brand, which contrasts sharply to many other SUV brands that have limited off-roading capabilities. The threat to the US big three may more come from Tesla (the cyber truck) and the other new manufacturers of trucks (e.g. Rivian); hence the rapid belated reaction of the US big three to the new electric truck manufacturers entry into the market.
The US car market may very well see an “invasion” of Chinese EV manufacturers, with the US big three losing some market share as they further move away from small to medium-sized SUVs and sedans, while attempting to stave off the challenge to their truck sales from Tesla and other EV start up manufacturers but may still remain viable. Overall though, a Chinese EV invasion may significantly displace domestic production through the US plants of the Japanese and other foreign car manufacturers, further deindustrializing the US and exacerbating the US trade deficit with China. The possible export of China-made Tesla cars to the US market, and the dominant position of Chinese manufacturers with respect to battery technology may also increase US imports. Just as the Japanese manufacturers managed to diversify their products into minivans, SUVs and trucks, the Chinese may start to move into the core sales areas of the US manufacturers over time. With the US manufacturers so far behind with respect to SUVs, the 2020s may become a decade of continued slow decline for the US big three. Attempts to limit Chinese car imports will also be restricted by the amount of capital invested in Chinese car plants (e.g. Tesla, SIAC-GM-Wuling), capital that may be at risk if significant restrictions are placed upon Chinese manufacturers. GM owns 44% of SAIC-GM-Wuling and Berkshire Hathaway owns 8.2% of BYD. It is quite possible that GM focuses its US plants on high end / high margin products (e.g. full-size trucks, SUVs and luxury sedans) and imports less expensive vehicles from its joint venture to sell under its own US brands. What may be good for GM will most definitely not be good for US manufacturing. With Tesla possibly doing the same, a significant level of Chinese car imports may be sold under US brands – made in China cars hiding in plain site with US badges.
Ford and Chrysler do not have significant Chinese operations therefore they may become significantly disadvantaged to a GM that does. If Ford and Chrysler continue to give up market share as they retreat into full-size truck, SUV and off-roading vehicles, then the 2020s will witness their move into a smaller and smaller set of market niches which become subject to increasing threat from other manufactures. The recent moves of the big three into EVs, especially in full-sized vehicles, shows some level of consciousness of the threat, but that consciousness is of the belated kind. Walmart, and the “dollar” stores, helped facilitate the huge increases in cheap Chinese imports, at the expense of US manufacturers. The move to EV’s and the market strategies of the US car manufacturers may facilitate an invasion of Chinese-made cars (under US and Chinese brands) that further deindustrializes the US. Such an eventuality will remove relatively well-paid manual and semi-manual jobs, leading to further precarity and therefore the demand for cheap imports in a negative spiral; while at the same time facilitating Chinese leadership in EVs and the related technologies.
Those technologies include electric power trains, batteries, software and industrial automation; all areas central to continued technology dominance. With China already well ahead in wind turbines, solar, nuclear, and smart grids, the result may be a significant decline in US industrial capabilities and technology leadership vis a vis China. Declines in these areas will represent in US national power and international prestige, adding to the US relative decline overall un comparison to China. With the possibility of a Chinese car invasion of Europe also, and the bad bet by Japanese manufacturers on hydrogen fuel cells, the position of the West as a whole may be significantly undermined.
I will end with the analysis of some experienced “car guys” with respect to a Chinese car invasion.
[i] https://www.euronews.com/next/2021/09/28/china-s-carmakers-are-making-cheaper-electric-vehicles-and-they-have-their-sights-on-europ
[ii] https://www.kbb.com/car-news/average-new-car-price-increases-for-eighth-straight-month/
[iii] https://sgp.fas.org/crs/misc/R45090.pdf
[iv] https://www.nationalreview.com/2021/04/how-official-statistics-underestimate-inflation/
[v] https://media.ford.com/content/dam/fordmedia/North%20America/US/2021/04/01/Q1-Ford-sales-2021.pdf
[vi] https://stockdividendscreener.com/auto-manufacturers/general-motors-sales-numbers-by-vehicle-type/
[vii] https://www.prnewswire.com/news-releases/fca-us-reports-fourth-quarter-and-full-year-2021-sales-results-301454067.html