By Robinson Meyer
It happened very quickly, so fast that you might not have noticed it. Over the past few months, America’s Big Three automakers — Ford, General Motors and Stellantis, the oddly named company that owns Dodge, Chrysler and Jeep — landed in big trouble.
I realize this may sound silly. Ford, General Motors and Stellantis made billions in profit last year, even after a long strike by autoworkers, and all three companies are forecasting a big 2024. But recently, the Big Three found themselves outmaneuvered and missing their goals for electric vehicle sales at the same time that a crop of new affordable, electrified foreign cars appeared, ready to flood the global market.
About a decade ago, America bailed out the Big Three and swore it wouldn’t do that again. But the federal government is going to have to help the Big Three and the rest of the U.S. car market again very soon. And it has to do it in the right way — now — to avoid the next auto bailout.
The biggest threat to the Big Three comes from a new crop of Chinese automakers, especially BYD, which specialize in producing plug-in hybrid and fully electric vehicles. BYD’s growth is astounding: It sold three million electrified vehicles last year, more than any other company, and it now has enough production capacity in China to manufacture four million cars a year. But that isn’t enough: It’s building factories in Brazil, Thailand, Hungary and Uzbekistan, to produce even more cars, and it may soon add Indonesia and Mexico to that list. A deluge of electric vehicles is coming.
BYD’s cars deliver great value at prices that beat anything coming out of the West. This month BYD unveiled a plug-in hybrid that gets decent all-electric range and will retail for just over $11,000. How can it do that? Like other Chinese manufacturers, BYD benefits from its home country’s lower labor costs, but this explains only some of its success. The fact is that BYD and other Chinese automakers like Geely, which owns Volvo Cars and Polestar brands, are very good at making cars. They have leveraged China’s dominance of the battery industry and automated production lines to create a juggernaut.
The Chinese automakers, especially BYD, represent something new in the world. They signal that China’s decades-long accretion of economic complexity is almost complete: Whereas the country once made toys and clothes and then made electronics and batteries, now it makes cars and airplanes. What’s more, BYD and other Chinese automakers are becoming virtually global car companies, capable of manufacturing electric cars that can compete directly with gas-burning cars on cost.
That is, on the surface, a good thing. Electric cars need to get cheaper and more abundant if we are to have any hope of meeting our global climate goals. But it poses some immediate and thorny problems for American policymakers. After BYD announced its $11,000 plug-in hybrid, it posted on the Chinese social media platform Weibo that “the price will make petrol car assemblers tremble.” The problem is many of those gasoline-car makers are American.
Ford and GM plotted an ambitious E.V. transition three years ago, but it didn’t take long for them to stumble. Last year Ford lost more than $64,000 on every E.V. that it sold. Since October, it has delayed the opening of one of its new E.V. battery plants, and GM has fumbled the start of its new Ultium battery platform, which is meant to be the foundation for all of its future electric vehicles. Ford and GM have notched some wins here (the Mustang Mach-E and Chevrolet Bolt are modest hits), but they aren’t competing at the level of Tesla and Hyundai — companies that operate factories in less union-friendly states in the Sun Belt.
Jim Farley, Ford’s chief executive, recently disclosed that the company had a secret development team building a cheap, affordable electric car to compete with Tesla and BYD. But producing electric vehicles profitably is an organizational skill, and like any skill, it takes time, effort and money to develop. Even if Ford and GM now bust out innovative new designs, they will lag their competition in executing them well.
The other looming problem for Ford and General Motors is that their balance sheets, while superficially robust, conceal a structural vulnerability. While the two companies have done generally well in recent years, their billions in profits have overwhelmingly flowed from selling a relatively small number of vehicles to a small group of people. Specifically, Ford’s and GM’s earnings rest primarily on selling pickup trucks, S.U.V.s and crossovers to affluent North Americans.
In other words, if Americans’ appetite for trucks and S.U.V.s falters, then Ford and GM will be in real trouble. That creates a strategic quandary for them. In the coming years, these companies must cross a bridge from one business model to another: They must use their robust truck and S.U.V. earnings to subsidize their growing electric vehicle business and learn how to make E.V.s profitably. If they can make it across this bridge quickly, they will survive. But if their S.U.V. profits crumble before their E.V. business is ready, they will fall into the chasm and perish.
That’s why the flood of cheap Chinese electric vehicles poses such a big problem: It could wash away Ford and GM’s bridge before they have finished building it. Even a wave of competitive electric cars from the Sun Belt automakers — like Kia’s EV9, a three-row S.U.V. — could eat away at their S.U.V. profits before they’re ready.
Perhaps the Big Three deserve destruction; after all, they hooked us on S.U.V.s in the first place and then fell behind in the E.V. race. But letting them die is not a tenable political option for the Biden administration. One goal of Mr. Biden’s presidency is to show not only that decarbonization can work for the American economy but also that it can revive moribund fossil-fuel-dependent communities in the Rust Belt. Mr. Biden has also fought for and won the endorsement of the United Auto Workers, which just cemented a generous new contract with the Big Three and now needs them to thrive.
He has reason, in other words, to help the Big Three even before you get to the harsh electoral realities: The legacy auto industry employs more people in Michigan than in any other state, and Mr. Biden’s path to re-election all but requires him to win Michigan in November. (Recall that Donald Trump won Michigan by just under 11,000 votes in 2016.) Mr. Biden cannot allow the possibility of another China shock to hit the Midwest’s auto economy. So what should he do?
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