$BYD COMPANY (01211.HK)$The Seagull is a four-door hatchback with a lovely appearance. Compared to the body$Tesla (TSLA.US)$The Model Y is three feet short, and the bright yellow body looks a bit like a Minions from the back. The price is also very affordable, only 10,000 US dollars. All of this made the seagulls seem unaggressive.

However, Seagulls and cars similar to them are obviously extremely scary, to the point where they have prompted the Biden administration to raise tariffs on Chinese electric vehicles. The additional tariffs are aimed at preventing the US auto industry from being crushed by these low-cost cars. The US will levy 100% import tariffs on popular electric vehicles such as the BYD Seagull or GAC AION S, while imposing 25% tariffs on some batteries and battery modules.

Former President Trump is also unwilling to lag behind; he promised to levy higher tariffs. These punitive measures are actually aimed at stopping Chinese automakers from bringing their cars to the US and encouraging US automakers to invest in domestic electric vehicle parts manufacturers.

Americans still have fresh memories of the damage caused by Japanese car companies to the US car industry in the 80s (maybe this memory is slightly distorted), and they have every reason to be afraid of Chinese car manufacturers. China has now become the world's largest market for new cars and electric vehicles, and is also the largest exporter of automobiles. Even US car executives, including Tesla CEO Musk, praise the quality and innovation of Chinese cars.

However, low-cost cars do not pose a threat to US car manufacturers. What they need to worry about is that cars produced in China are better. Even if the tariffs imposed by the US make it even later for such cars to land in the US, they will eventually arrive. American automakers must use this time to design and build more affordable electric cars; otherwise, history may repeat itself.

Pablo Di Si (Pablo Di Si), CEO of Volkswagen Group of America (Volkswagen Group of America), said about these punitive tariffs: “This is equivalent to building a wall to protect oneself. This type of public policy is valid for up to 10 years.”

China has become a leader in the global electric vehicle industry

Electric vehicle market share

Low-cost Chinese electric cars are hard to sell in the US

It's no surprise that Chinese automakers are able to produce cheap cars. The reason why BYD can produce a 10,000 dollar car is because the company makes its own batteries and has removed “luxury goods” such as “front luggage” (frunk) and rear wiper, and only installed a front wiper.

None of these are innovations; they are simply choices made to reduce costs to meet market expectations. John Murphy (John Murphy), an analyst at BofA Securities (BofA Securities) said, “There's nothing amazing. In the US, not everyone wants to buy a streamlined small car.”

China can also support more expensive cars. Starting at $35,000 in China, the Tesla Model Y is the best-selling electric car in China. The price is higher because it is larger (the Model Y is 50% larger than the Seagull), requires more iron, plastic, copper, and other materials, and because the Model Y is a larger luxury car that requires a larger battery pack and a more powerful electric motor.

Due to differences in safety standards and labor costs, the Model Y does cost 10,000 dollars less in China than in the US or Europe. At the end of the day, it's cheaper to make a car in China, but that cost won't be transferred overseas.

There are no barriers for American car manufacturers to produce similarly cheap cars. GM's Wuling Hongguang is one of the highest-selling electric vehicles in the Chinese market. Over the past 12 months, it has sold about 130,000 units, and the price is about 5,000 US dollars. The two-door Wuling Hongguang has a range of 75 miles, a top speed of about 60 miles per hour, and a length of 115 inches (about half of a full-size truck), about 5 feet shorter than the Toyota Corolla. In front of Wuling Hongguang, the BYD Seagull looked like a luxury car.

Freedom Capital Markets (Freedom Capital Markets) analyst Mike Ward (Mike Ward) compared China's low-cost cars to the Yugo, a compact car manufactured in Yugoslavia that was popular in the mid-80s of the last century in the US and sold for only $4,000. From 1985 to 1992, Yugo sold about 150,000 units, and its market share in the US was about 0.1%. This car is cheap, but it is also considered by critics to be one of the worst cars in America. Although Chinese cheap cars are of better quality, they are made for the Chinese market.

“They're not going to sell big in America,” Ward said.

Low-cost cars also have a “side effect”, that is, the profits of Chinese car manufacturers are lower than those of their European and American peers. GM, Ford, and Tesla had an average operating profit margin of 7% in the first quarter, while BYD's operating margin was only 4%. NIO, Xiaopeng, and Zero Run are still at a loss.

David Baron (David Baron), portfolio manager at Baron Capital, said, “I know everyone is worried about these Chinese competitors. Chinese original equipment manufacturers (OEMs) don't make money... every one of their cars is being sold at a loss.”

Even Toyota, one of the world's most profitable car manufacturers, has failed to successfully sell cheap cars in the US. In 1958, Toyota began selling cars in the US. At the time, Toyota cars sold for less than $2,000 and were equipped with a four-cylinder engine with a power of about 60 horsepower. The car ended in failure.

Early failures did not stop the Japanese car manufacturer. Toyota later established its own distribution network, and the Corolla, which was launched in 1968, was very popular, but even so, it took 20 years for Toyota to occupy 6% of the US market.

It wasn't until 2000 that Toyota's market share exploded due to lower labor costs, Toyota's willingness to switch to trucks and sports utility vehicles, and “improvement” (kaizen, meaning continuous improvement in Japanese), which helped Toyota to gain an equal position with GM.

BYD is most likely to be the “next Toyota”

Among all Chinese electric vehicle manufacturers, BYD is most likely to be the “next Toyota” to enter the US market. BYD grew rapidly, with sales volume of 3 million units in 2023, a fivefold increase over 2021. Sales volume even surpassed Tesla in the fourth quarter of last year. This is the first time that a Chinese car manufacturer has surpassed Tesla in sales.

BYD also has a full lineup of models, including plug-in hybrids, from the low-priced Seagull to the $150,000 U8. The average price of each car at BYD is around $22,000.

Currently, BYD is looking overseas; however, low-cost cars may still be a “Chinese phenomenon.” The starting price of seagulls sold in Brazil and Mexico is about 23,000 US dollars and 24,000 US dollars respectively. According to BYD, in order to meet mainland European standards, the price of seagulls in Europe is about 20,000 euros (about 216.42 million US dollars). BYD Europe Managing Director Michael Shu (Michael Shu) said at a conference held by the Financial Times on May 9, “We have dozens of models in China, and not all models are suitable for the European market.”

This did not stop BYD from “going out to sea.” Exports account for more than 10% of BYD's automobile sales, mainly to Southeast Asia. In the 12 months up to March 31, BYD exported about 25,000 cars to Europe, of which nearly 5,000 cars were exported to Germany. Germany is the European country that imported the most BYD cars.

BYD's goal is to gain a leading share of the electric vehicle market by the end of the current decade, which may mean making its sales account for 15% of total sales of all-electric or plug-in hybrid vehicles. This is an incredibly ambitious goal considering that BYD currently accounts for 0.7% of electric vehicle sales in Germany. Achieving this goal requires building a factory in Europe. Currently, BYD is building a factory in Hungary and is also looking for a second factory site.

Currently, Chinese automakers aren't very interested in the US market, not just because of tariffs. Currently, Chinese brand cars are not sold in the US; in addition, only JAC has a factory in Mexico. The current strategy of Chinese automakers seems to be summed up in one word — “someday.” BloombergNEF (BloombergNEF) analyst Mi Siyi said, “Given factors such as tariffs, an unstable policy environment, sluggish demand, and different consumer preferences, North America is not the primary consideration for Chinese automakers.”

However, Chinese electric vehicle manufacturers are not completely ignoring the US market. Building a factory and establishing a distribution network is a tried and tested way to enter the US market, but it takes a relatively long time, but other companies will enter the US market through a “back door” approach. The owners of some car brands, including Volvo, are already in China, and Geely's Polestar and Lotus electric cars manufactured in China are exported to the US and are subject to customs duties. Polestar plans to begin production of Polestar 3 at its new plant in South Carolina later this year.

List of cheap cars

Profitability is as important as price

Investors will also begin to see cooperation between East and West. In 2023, Stellantis announced an investment of 1.6 billion US dollars in the Chinese electric vehicle manufacturer Zero Sports. The cooperation agreement includes the establishment of a joint venture to “export, sell and manufacture Zero Sports products outside of Greater China.” Stellantis will hold 51% of the joint venture, which means that one day, Zero-Run all-electric vehicles may appear in Jeep dealers' stores near Americans' homes.

US car companies must hurry to launch more affordable electric cars

Stellantis, the parent company of GM, Ford, and Chrysler, also has a glimmer of hope that Chinese automakers are unlikely to “derail” the American automobile industry like Japanese automakers did in the seventies and eighties of the last century.

First, the US auto industry is more fragmented today than it was then. In 1980, the Detroit Big Three held 75% of the market share; today, this share is close to 40%. Most of this share is concentrated on large light trucks, which are not suitable for rapid electrification.

There is another important difference between electric cars and traditional cars — the battery cost for electric vehicles is about twice the cost of labor, so cheap batteries, rather than cheap labor, can be a decisive competitive advantage in producing smaller, cheaper cars.

This gave Ford, GM, and Chrysler an opportunity to become winners through their own efforts without having to cede market share to foreign automakers a second time. Ford seems to be aware of this, and the company is investing heavily in the next generation of electric vehicles at its “skunk works” (skunk works, referring to secret research division). Ford's new electric vehicles may include smaller SUVs and trucks. Currently, investors only understand that the profit margin of new electric vehicles is expected to be comparable to that of traditional cars, which means Ford is focusing on reducing product costs.

GM, which owns the Wuling Hongguang mini electric vehicle, knows the electric vehicle business in China better than most American car companies, but in the US, GM is pinning its hopes on battery production controlled by the company itself and the Ultium electric vehicle battery technology platform. GM has made progress in launching lower-priced pure electric vehicles, including the all-electric Chevrolet Explorer Equinox, which was launched later this year, with a starting price of $35,000 (the traditional Explorer starts at around $27,000, which is one of the highest-selling models in the US, with sales volume of 21.27.1 million units in 2023).

The next generation Chevrolet Bolt will be launched in 2025. Another possibility is that as long as GM can maintain its dominant position in the SUV and pickup truck market, the company may not need to succeed in the US electric vehicle market through sedans.

Bill Nygren (Bill Nygren), portfolio manager at Oakmark Fund, said, “The question is, how fierce competition will China bring in these fields? In theory, GM and Ford can survive very comfortably in a passenger car market dominated by cars imported from China.”

Tesla's losses will be the biggest if no action is taken. What GM and Ford need to do is cut costs and launch electric cars that traditional buyers are willing to try, while what Tesla needs to do is speed things up.

Tesla is making slow progress in launching low-cost electric cars, and the company has been taking time to fully implement new manufacturing methods aimed at reducing the total cost of this low-cost car by 50% compared to the Model 3, which means that the cost of producing an electric car in North America is close to $17,000.

Later, the growth of electric vehicles declined sharply, in part because Americans could hardly buy cheap electric cars. In response, Tesla is speeding up development of its low-cost car called the Model 2 by investors. Accelerated production means the car will cost a little more, but it is likely to hit the road in early 2025.

Wedbush analyst Dan Ives (Dan Ives) called the decision a smart strategic move and believes Tesla will be the leader in the low-end market. Now Tesla has to speed up according to the schedule, which has never been an easy task for the company.

Musk previously predicted that driverless cars will be launched in 2017, while Cybertruck, which was originally scheduled to be launched in 2019, will not be launched until 2023. Musk wrote on X in May: “I'm a bit of a morbid optimist when it comes to timing, and I've been like this since I was a kid.”

The Model 2 should be released a little sooner; otherwise, these cheap Chinese electric cars might actually become a big problem.

Editor/Jeffrey