In just a little over 10 years, Chinese electric vehicle (EV) makers have gone from automotive afterthought to being widely acknowledged as producing some of the most advanced EVs on the planet. There is widespread concern in the U.S. automotive industry about Chinese products entering the U.S. market and significantly undercutting domestic automakers, causing an existential threat to domestic manufacturing. Just recently, Geely became the first Chinese manufacturer to export EV crossovers to Canada, which might be giving the foreign automakers a foot in the door. That might sound like a good time for investors to panic, but let's take a look at the details first.
Multiple concerns
Here's a bit of context for the many concerns surrounding the potential of Chinese EVs entering the U.S. market. First, as previously mentioned, many Chinese automakers have taken advantage of government subsidies and, with their advanced supply chains and cheap labor, can produce EVs at far lower cost. That level of price undercutting makes it incredibly challenging for automakers such as Ford Motor Company (F 0.78%) and General Motors (GM 0.97%) to compete.
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Key Data Points
A second concern is that as more software-defined vehicles, which are filled with massive computing power, cameras, microphones, and other systems, take over the road, they will represent a potential security threat. For example, they could be used for surveillance or, in a nightmare-like scenario, disabled during a global conflict.
While the administration's tariffs on imported EVs, as well as auto parts, are a significant hurdle for Chinese automakers to enter the U.S. directly, there is concern that they could use neighboring countries such as Canada and/or Mexico to circumvent some North American trade rules. This, however, isn't as likely as many believe.
Image source: Getty Images.
The first have arrived
That context surrounding the Chinese entering the U.S. market emphasizes how big of a move Geely's becoming the first Chinese company to export EVs from China to Canada is -- far more important than only 18 Lotus Eletre crossovers in May would suggest.
There are a couple of factors that should help investors sleep at night, for now. First is that the Eletre is an EV crossover that went on sale in China in September starting at almost $80,000. This likely means high-end EVs are more likely to pass certification under Canada Motor Vehicle Safety Standards, and those aren't the low-cost models most automakers are concerned about.
Further, while Canada could be using this for leverage in negotiations with the U.S., it's limiting the Chinese opportunity to low volumes that will grow slowly each year. The initial agreement between Canada and China is that the former will allow up to 49,000 China-built EVs annually at a low 6.1% tariff rate.
Lastly, and most importantly, is that the 100% tariffs on imported vehicles into the U.S. are set so that it applies to any China-built EVs, regardless if they come from Canada or China itself. Those tariffs still effectively price out China-built EVs from entering the U.S., even if they were initially sent through another country.
What it all means
While the idea behind the Chinese entering the U.S. indirectly from neighboring countries seems concerning, Canada's low-volume agreement won't initially deal a significant blow to the U.S. manufacturers, especially considering the 100% tariffs will still prevent them from being shipped across the border in the near term. That said, the storm is brewing as large Chinese automakers prepare to begin vehicle exports and build sales networks in Canada.
Both BYD and Chery Automobile are recruiting employees and navigating details to bring one or more of their Chinese brands into Canada, sooner rather than later. The Chinese threat to domestic automakers is absolutely one that needs to be highlighted in an investment thesis, because Ford and GM will have to fight this battle eventually, and now is the time to prepare. Investors should panic only when concrete plans for Chinese brands to produce vehicles in North America gain traction.
