The global automobile sector stands at the intersection of three major geopolitical trends: shifting trade dynamics, the transportation revolution and the rise of China as a technological competitor to the United States. In the short term, automobiles represent a key focus of the administration of U.S. President Donald Trump, which has proposed measures that would target foreign cars with tariff barriers. Steel and aluminum tariffs, combined with extensive tariffs levied against China (as well as Beijing's retaliation to the United States), have the potential to disrupt supply chains and increase component costs. As electric vehicles themselves alter automobile markets over the coming decade, partnerships will be crucial to reducing developmental costs and standardizing components. And though the U.S. auto market will remain one of the world's largest, it will be dwarfed by the market opportunities that will emerge as demand for electric vehicles climbs in China, especially if a protracted trade battle limits access to the Chinese market for U.S.-based manufacturers and parts suppliers. But at a time when the industry is on the cusp of a major breakthrough, uncertainty over trade caused by factors such as the Trump administration's tariffs has the potential to influence business decisions that won't just affect the present day but the years to come.
The auto sector remains a primary target of White House trade policies that have significant global implications. The auto sector itself, however, is also on the cusp of a technological revolution in which automation and electrification will become prevalent. Though current trade policies might not continue, they could have a lasting impact on the market, influencing major decisions on the development and expansion of electric vehicles and self-driving cars.
The Tariffs Slowing Down Electric Vehicles
Electric vehicles currently comprise just a small fraction of the global vehicle fleet. But because battery costs are plummeting alongside policy initiatives in Europe and China to ban or limit the sale of new gasoline-powered vehicles for environmental reasons, the industry is expected to grow rapidly over the next several decades. By 2040, electric vehicles will account for more than half of all vehicle sales, as well as a third of the global fleet, according to Bloomberg New Energy Finance. Undergirding this growth are nearly 100 projects and $265 billion in planned investments, AlixPartners said in a report, noting that many manufacturers have especially taken action to expand their electric vehicle offerings in 2018.
The major automobile companies in Japan, the United States and Europe, as well as numerous Chinese manufacturers, currently control the electric vehicle market, accounting for nearly all electric vehicle manufacturing and demand. The Asian technology giants of China, Japan and South Korea control the production of the batteries for new-energy vehicles, yet Beijing is poised to grab nearly 75 percent of the battery manufacturing capacity for electric vehicles within the next two years. China has made a concerted effort to control all stages of the lithium-ion battery supply chain as it has perceived it as a strategic technology. To that end, Chinese battery manufacturers have aggressively pursued expansion. While U.S. producers led by Tesla are working to keep battery manufacturing capacity in the United States, tariffs on key components, including steel and aluminum, may complicate their efforts to compete globally. U.S. authorities have removed certain electrolyte components from the initial tariff list and have also exempted rare earths used in permanent magnets, as their supply remains highly dependent on China, but ongoing trade uncertainty has the potential to pause, if not completely halt, plans for new or expanded facilities. This holds true not just for batteries and permanent magnets but other electric vehicle components as well.
Just as tariffs are driving up the cost of traditional vehicles in the United States, they will also increase the manufacturing costs for electric vehicles. Washington is currently pursuing separate bilateral negotiations with Brussels and Tokyo that could benefit the manufacturers of both types of automobiles, but success is far from guaranteed, leading governments and businesses alike to hedge their bets, especially as there appears to be little prospect of a trade truce between the United States and China. Dyson, for instance, has announced plans to enter the electric vehicle market but has noted that the current trade disputes will affect where it ultimately decides to locate its production plant. Ultimately, U.S. actions could limit the country's ability to compete globally with China and Europe, potentially accelerating manufacturing within China itself. Tesla has already made plans to build a facility in Shanghai, but if trade negotiations with the United States continue to deteriorate, other manufacturers could relocate more of their supply chain to capitalize on the massive Chinese market.
Trade Uncertainty Threatens Private Partnerships
As all manufacturers work to move into a higher gear, partnerships will remain important for a number of reasons. Developmental partnerships between complementary businesses and, occasionally, even competitors can help defer the high costs of bringing an emerging product into the mainstream. Additionally, partnerships will help refine and standardize the new supply chains that will emerge because of the shift from the internal combustion engine to the electric motor. At the moment, no standard electric vehicle powertrain exists; instead, battery cell shapes and cooling systems vary according to producer. Accordingly, if companies located in a particular country become isolated from global markets at this crucial time due to trade policies, it could subsequently limit their ability to catch up to their competitors.
There is no place where electric vehicle partnerships are more critical than in China. In addition to marching toward overwhelming control of lithium-ion battery manufacturing, the country's demand for the vehicles themselves is unparalleled. The sheer size of Chinese demand will prove exceptionally enticing for other producers looking to grab a slice of the market. China, however, is currently experiencing oversupply, while the government is also attempting to consolidate the market, which could create uncertainty. In the end, market access remains a tool for Beijing to use, independently or in conjunction with tariffs. The ongoing trade dispute between the United States and China could benefit European carmakers, which are already heavily invested in the market and could take advantage of U.S. companies that are squeezed out of the Chinese market by either tariffs or non-tariff barriers.
The Primacy of Intellectual Property
Another key trend in transportation is increasing automation. Numerous automated vehicle initiatives remain in the pilot stages, but the technology continues to advance. As cars become increasingly dependent on data and computing to function, the nature of their vulnerabilities in trade relationships will also shift. At present, the sector will suffer fewer effects from the current trade disputes (apart from the semiconductors required to power these increasingly computerized vehicles, as they could be subjected to additional duties), since the mass production of automated vehicles remains a number of years away.
Partnerships to develop automation will, however, face threats in the current trade war, in part due to the collaboration between tech giants in Silicon Valley and counterparts in China. As trade negotiators modernize agreements, the growing ubiquity of data-based technologies will ensure that articles on intellectual property will become more prominent in new trade deals, meaning U.S. officials could implement more stringent intellectual property requirements and protections that would likely have a much longer shelf life than tariffs. Concerns over technological theft and intellectual property protection are front and center of the U.S. concerns regarding Beijing. However, even with that looming fear, a number of Chinese companies, such as Baidu and other startups, already have facilities in Silicon Valley, facilitating Beijing's attempts to attract top talent and ultimately close the gap on the United States, the global leader in such technologies. As a result, the United States' efforts to implement more stringent protections for intellectual property could thwart China's attempts to benefit from foreign talent. Naturally, U.S. action to protect its intellectual property on automated vehicles would provide the United States with the opportunity to consolidate its position in the race toward technological prominence in the field.
Though specific trade policies might ultimately be fleeting in terms of overall economic relations, the world has arrived at a crucial juncture in the evolution of transportation technologies. As cars become increasingly electrified and automated, governments and industry leaders are sitting down to make crucial decisions on where and how those technologies develop — and who develops them for whom. In such a situation, the trade uncertainty of this year and next will do much to shape the market for electric and automated vehicles in the 2020s and beyond.