US Auto Industry Under Threat at Home and Abroad

Governments with strong policies to reduce vehicle emissions often see domestic automakers have success in the global market. Japan launched the Top Runner efficiency standard in the late 1990s. The first Toyota hybrid, the Prius, was introduced around that time and since then, the Toyota brands have netted over 15 million hybrid sales globally. Similarly, California implemented vehicle greenhouse gas emissions efficiency regulations in 2009 and early in the following decade, Tesla went from a niche operation to a major disruptor. Similar successes are coming, but this time, they are likely to come from automakers in China and Europe. 

These examples have come at a cost for other automakers, typically those with sales concentrated in countries where emissions policies are lax. Leading up to the Great Recession, US efficiency standards had been stagnant since the early 1990s and oil prices were high and rising. Alongside issues with US brand quality and strategic investments by Japanese brands in products for the US market, the more fuel-efficient hybrids helped the Japanese brands increase market share in North America from 30% in 2004 to 40% in 2009. 

Auto Market Booming in China and Europe

As of 2Q 2020, the underlying conditions are not dissimilar; oil prices are low but the price of carbon (monetized in real dollars or in the minds of consumers) is high. Meanwhile, the current US administration’s proposed and disputed Safer Affordable Fuel-Efficient Vehicles rule is putting US policy behind those of other major automotive markets, namely China and Europe. This placement sets the stage for Chinese and European automakers to increase share abroad—at a cost for US automakers. 

Auto manufacturing in China has been booming for decades; however, its effect on the global stage was small because it largely fed China’s domestic demand. Due to aggressive efficiency standards, zero-emissions vehicle mandates, and EV purchase subsidies, the domestic market is quickly turning to EVs. This turn is generating momentum for Chinese EVs that has started spilling onto the global stage. AIWAYS and SAIC have begun deploying the first Chinese-made light duty EVs to Europe, and other Chinese EV makers like Byton are looking to do the same.

The deployment of Chinese EVs initially to Europe rather than the US follows a broader industry assumption that the European EV market is set to grow much faster than the US market. This assumption is because, alongside its considerably higher fuel prices than the US, the EU has set aggressive emissions reduction targets. European countries and cities have ambitions to ban internal combustion engines and have provided significant incentives and funding for EV market development. These factors have attracted Chinese automakers. This attraction has also prompted significant investment in EVs from domestic EU automakers, like Volkswagen. As European-owned brands have nearly 70% of the market, they are best positioned to reap the benefits of scale these policies require, and translate the resulting productive capacity abroad.

US Automakers Must Look Abroad or Work Their Strengths at Home

The advantages of Chinese and European automakers in their home markets place US automakers at a disadvantage globally and domestically. This is a challenge for the US auto industry, which has placed considerable investments in EVs and introduced market-leading innovations. The potential of these investments and innovations is limited by the scale the North American EV market, forcing US automakers to seek scale abroad (as GM plans to do in China) or where brand presence is strongest (like Ford’s hold on light trucks). The strategic moves by these companies toward EVs is encouraging, but relaxed efficiency standards in the home market are not going to help them compete in the market of the future. When EVs from Europe and China arrive stateside, these foreign competitors are expected to be strong. This strength could further reduce the already declining presence of US owned brands abroad and at home.