Analysts Assess China’s Challenge to U.S. EV Makers

John Murphy of Bank of America Merrill Lynch says U.S. automakers face having to make a “dual transformation” of optimizing cash flow via their core ICE-vehicle businesses while building new business around BEVs.

Roger Schreffler

April 11, 2024

5 Min Read
BYD seal-vs-tesla-model-3-08
BYD Seal Premium (left) squares off against Tesla Model 3 in BEV marketplace.

NEW YORK – American automakers are seeing the first signs of China as a global competitor in the electric-vehicles market, and the rivalry eventually could expand to this country, industry analysts say at the recent New York Auto Forum.

John Casesa, senior managing partner at Guggenheim Partners, and John Murphy, managing director and lead U.S. auto analyst at Bank of America Merrill Lynch, both raise caution flags for U.S. automakers.

“I think in the short run that the new EPA (emissions) standards give the (domestic) companies a bit of breathing room to adjust their EV plans,” Casesa (pictured, below left) says. “The long-term risk, of course, is that the Chinese are going to be competitive globally and ultimately in the U.S. at some point.”

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The new standards announced March 20 would require lowering CO2 emissions to 85 grams per mile by 2032 – to 73 CO2 grams per mile for cars and 90 grams for light trucks. BEVs, according to the analysts, are projected to account for 46% of retail sales by then.

“There has been an organic technology change,” Murphy notes. “EVs are getting cheaper, the batteries are improving, and a lot of people want them. The adoption rate is not a straight line, but there is a secular direction upward. So that’s kind of my baseline.”

Automakers are having to carefully balance their internal combustion engine business with their EV business during the transition to EVs. “You have an industry that now has to execute a dual transformation…(it) has to optimize its core business, which produces the cash flow, while it’s building a new business. That’s very hard to do,” he says.

“The auto industry challenge: To make electric cars (as) profitable as their existing business, the cost has to come down,” says Casesa, “There have to be places where you can charge them. People have to really want a Chevrolet electric car as much as they want a Tesla. And that just takes time.”

The analysts were asked if China’s BYD, the world’s second-biggest BEV maker after Tesla, will be able to produce in the U.S.

“There’s a lot of pressure for their cars to go somewhere. China has 45 million units of capacity, both electric and ICE,” Murphy says. “So, we’re now entering this era of enormous trade pressure where the Chinese must export, and the rest of the world has to catch up on EVs. I think we’re entering this period of enormous trade tension, both tariff barriers and non-tariff barriers.” 

There is a difference between U.S. relations with China today and U.S. relations with Japan in the 1970s when companies like Toyota and Honda began making inroads. Japan became a friend and ally to the U.S. after World War II. U.S. politicians of both major political parties, though, are hostile to China because of the country’s Communist Party leadership, economic competition, cheap labor, sympathy with Russia and a pattern of cyberattacks on the West.

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“With the Japanese, we had these voluntary export restraints that motivated the Japanese to build plants in North America. I think you could certainly see something like that. But you also have, compared with the Japanese, a much more serious geopolitical struggle between China and the U.S.,” says Murphy (pictured, left).

“So, I do think that BYD, which appears to have some very significant competitive advantages, will find ways to sell cars around the world,” he says. “It may require a lot of local content and jumping through a lot of hoops, but the rate at which that expansion is going to happen would be greatly constrained by tariff and non-tariff barriers. It’s just beginning.”

BYD was a major supplier of batteries for mobile phones and other consumer electronics before it entered the EV sector, and analysts say they want to see how well the vehicles hold up over time before passing judgment on the company’s potential.  “We still don’t know how well these vehicles wear over three, four, five, 10 or 20 years. There’s been a massive surge in improved quality over the last three to five years. (But) I think there are still significant questions,” says Casesa.

Ahead of the U.S. presidential election in November, Casesa notes, Donald Trump “has already said that he would tax Chinese electric vehicles by 100% with a new tariff. But would he block the Chinese coming to the U.S. to build a plant in Idaho, Iowa or Ohio, some place that might welcome 5,000 jobs? There is no governor or senator who is really going to say no to that, even if it’s BYD or Geely. So I think at the local level, there is probably going to be an acceptance of this.

“If they build their plants here and employ Americans, that’s fantastic,” Casesa says. “So I think there’s a lot of questions (about), if they take the Japanese, Korean and European approach and employ Americans and build their businesses here, why wouldn’t you allow them in?”

Broadening the discussion, Murphy notes “M&As (mergers and acquisitions) are inevitable. And when you see Honda and Nissan deciding they’re going to make electric cars together, that would be hard to predict many years ago. But they both need volume and it’s very expensive to do it on your own. So, you’re going to see those sorts of arrangements in spades – projects, platforms and companies.”

Both Casesa and Murphy raise the issue of struggling BEV startups Lucid and Rivian. 

In Lucid’s case, they believe its connections to Saudi Arabia and Aramco, the country's state-owned oil and natural gas company, will help it survive. Aramco made more than $100 billion last year. The Saudi government’s Public Investment Fund holds a 60% ownership stake in the automaker.

“The Saudi government is committed to that company and to building an auto industry in Saudi Arabia,” Murphy says. “Lucid is building a plant there. They’ll get the capital regardless of what the stock market thinks.”

As for Rivian, he admits he doesn't know what will happen. “But Rivian’s product is excellent,” Murphy says. “The consensus is that they’re trying to do a lot at once. They’re trying to do in five years what Tesla did in 15. I think they’ll get the capital and, if they don’t, you might see another automaker that becomes a strategic investor. They’ll have a lot of options and, again, the product is very good, and they’ve got a pretty robust business model.”

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