The Electric Slide

When Tesla Motors announced plans in 2017 to open its first overseas factory in Shanghai, a spokesman emphasized that, “while we expect most of our production to remain in the U.S., we do need to establish local factories to ensure affordability for the markets they serve.” The Chinese Communist Party, of course, was delighted. “Such a strategy is a must in China, which charges steep tariffs for imported cars,” explained the New York Times.

China gave Tesla a sweetheart deal on prime industrial land, expedited the necessary approvals and infrastructure with unprecedented speed, and granted unique permission to operate without a Chinese partner and with access to the subsidies otherwise offered only to Chinese companies. What the Chinese Communist Party understood, even if Elon Musk did not, was that Tesla would soon be, in effect, Chinese. In 2021, Tesla acknowledged in its annual impact report that the majority of its “key stakeholders” were in China. By 2023, Shanghai wasn’t just Tesla’s largest manufacturing site; it accounted for the majority of all Tesla vehicles globally. Elon Musk was pledging to uphold “core socialist values.”

Nonetheless, Tesla’s market share in China is collapsing, down to just 4% in April, as sales fell 18% from a year earlier despite the Chinese market expanding 33%. China has chewed Tesla up and is now spitting it out. One local provider of automation equipment gloated that “Tesla is like the Whampoa military academy of EVs,” referring to the hallowed institution created by Sun Yat-sen and Chiang Kai-shek in the 1920s that built the new China’s corps of leaders. For his part, Musk is begging American policymakers for protection from Chinese producers, which he calls “the most competitive car companies in the world,” predicting “if there are not trade barriers established, they will pretty much demolish most other car companies in the world.” Tesla’s market capitalization has fallen by more than half.

Of course, Musk is hardly the only business leader to have sold his own company and American industrial leadership down the river for short-term gain. Perhaps he is perfectly satisfied with his especially generous compensation. For the United States, though, the result is a disaster—and Exhibit A in the catastrophic cost of playing by the global economy’s old rules long after China had made clear it would abide by none of them. The loss of leadership in electric vehicles (EVs) was not only entirely predictable, but also plainly predicted, and it now stands as a brutal, final refutation of the market fundamentalists who insisted the American model of free enterprise would always triumph over China’s state capitalism.

Unfortunately, cars are not some intriguing niche business that might make for an interesting episode of an eclectic podcast. Economically, the U.S. automotive sector is among the nation’s largest by output and employment, and a cornerstone of its industrial base. Politically, it stands as a potent symbol for the American way of life and plays an outsized role in a set of midwestern states that have become the fulcrum of the Electoral College that determines presidential elections. Environmentally, transportation is the largest source of U.S. greenhouse-gas emissions, and light-duty vehicles account for the majority of emissions therein. Between the Inflation Reduction Act (IRA) and the Infrastructure Investments and Jobs Act (IIJA), the federal government has committed more than $80 billion to EV and battery production. EPA regulations would require two-thirds of all new vehicles to be EVs by 2032.

As a result, EVs sit squarely at the center of a dizzying array of policy issues: trade with China, Europe’s geopolitical orientation, labor organizing and disputes, subsidies for domestic investment, the Inflation Reduction Act’s efforts at a “green transition,” regulation of natural resources. For Democrats, the rubber of their usually empty rhetoric on climate change has finally met the road of the real economic tradeoffs that a transition entails, triggering a political crisis. “There are few things that would decarbonize the U.S. faster than $20,000 EVs,” MIT economist David Autor has observed. “But there is probably nothing that would kill the U.S. auto industry faster, either.”

Republicans face their own conundrum, as they reorient their economic agenda around confronting China, recovering from globalization, and reindustrializing the domestic economy. A vital technology falling under Chinese control would seem the perfect candidate for aggressive protection and investment, but in this instance, the technology is in focus predominantly for its carbon footprint, rather than its economic value, and thus is deeply unpopular with Republican voters. Why bother protecting and promoting domestic EVs that carmakers lose money producing and consumers don’t want to buy? While simply barring Chinese imports, eliminating EV mandates, and letting the domestic market proceed on its own has short-term appeal, EVs may well be the technology of the future—most automakers think they are. If that proves right, granting the Chinese and their increasingly subservient European partners a decades-long head start would be a disaster in the long run.

The only path through starts from a large sign reading: batteries. The battery is the key to EV economics. The Chinese investment and U.S. failure at every stage of the battery-making and -using process—the critical minerals, the processing, the manufacturing, the charging infrastructure—is the reason that one has surged and the other fallen woefully behind. Batteries are why U.S. manufacturers can’t compete, why consumers don’t want the cars, and why a transition would harm workers.

Fortunately for conservatives, the contradictions at the heart of the progressive “green jobs” agenda are prompting this in-progress pile-up, and a host of conservative policies offer the only way out. Rather than just demeaning EVs, the focus should be on ensuring that American workers can produce the cars that consumers want at prices they can afford. If and when those cars are EVs, U.S. manufacturers must be poised to win throughout the supply chain. The required policies are the same ones needed to support reindustrialization broadly, and should be pursued as part of that strategy.

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In the United States, adoption of electric vehicles appears stalled. Growth isn’t just slowing, battery electric vehicle (BEV) market share fell in the first quarter of 2024, despite massive price cuts from manufacturers and dealers desperate to unload inventory. Tesla cut prices by 15 to 25% and still missed its own growth targets, declining for the first time to give forward guidance. Ford lost more than $100,000 on every EV sold, double the loss rate from a year ago, and has postponed $12 billion in EV investment. GM lost nearly $2 billion on EVs last year and has also scaled back its plans. Neither sells as many EVs in the U.S. market as Hyundai/Kia.

Consumers simply aren’t flocking to the EV value proposition, even as aggressive discounting brings prices (though not costs to the manufacturers) closer to parity. EVs are still perceived as luxury goods—Cadillac, Mercedes, BMW, and Audi are all reporting strong sales growth, while GM has unceremoniously discontinued the Chevy Bolt. Repairs and thus insurance cost more and resale values have plunged 30%. Hertz reports that it pays twice as much to repair the EVs in its rental fleet as to repair its conventional gas-powered vehicles. Charging networks remain inadequate. Secretary of Transportation Pete Buttigieg acknowledged awkwardly on Face the Nation last month that the Inflation Reduction Act’s $7.5 billion program has thus far installed fewer than ten new stations. President Joe Biden’s efforts to promote—and, in the medium term, mandate—the technology have prompted further skepticism and a partisan backlash.

In China, meanwhile, EVs are going gangbusters. Six EVs were sold in China last year for every one sold in the United States, and battery and plug-in hybrid vehicles now account for the majority of car sales in the country’s 35 largest cities. China is home to three of the world’s four largest EV makers, led by BYD, which has surpassed Tesla as the world’s top producer and sells base models for less than $10,000. Without tariffs, BYD could likely sell its cars in the U.S. market for less than $20,000, while the cheapest EVs available here today retail for more than $30,000.

None of this is by accident. “The size and scope of China’s EV-oriented industrial policy would make even the most-devoted dirigiste policymaker blush,” notes Luke Patey, formerly the lead senior research fellow at the Oxford Institute for Energy Studies. “On top of direct subsidies, the Chinese automobile industry benefits from tax deductions, public procurement, land provision, cheap energy and low-interest loans. One study estimates that from 2016 to 2022 China’s central government EV purchase incentives were five times larger than those in the United States.” At every stage, China excluded foreign competitors and suppliers from its market and the benefits of its programs.

China’s enormous incentives for investment have led to significant overcapacity, both for the conventional gas-powered vehicles that have been left behind and for EVs where so many firms are chasing market share. The country’s production capacity for conventional vehicles is now twice its domestic demand, yielding an overhang equivalent to the entire European Union market and all U.S. production combined. Its EV exports have risen from $400 million in 2019 to $34 billion in 2023, a preposterous 85-fold increase that has made it the world’s largest car exporter overall. Those vehicles are flooding Latin American and European markets—with nearly 40 percent of Chinese EV exports going to the EU last year. IG Metall, Europe’s top industrial union, has warned the influx threatens “creeping deindustrialization.”

Europe is relatively helpless, having made the fatal mistake of allowing its auto industry to become entangled with China’s, and dependent on sales in the Chinese market. The German automakers, especially, fear that they would face retaliation from China for any effort by the EU to keep Chinese-made vehicles out. Mercedes-Benz, for instance, actually wants lower tariffs on imports. In early June, the EU announced plans to impose tariffs as high as 38% on Chinese EVs, but now the sides are sitting down to negotiate and “Beijing has suggested Germany’s luxury car manufacturers could benefit if Berlin convinces the European Union to drop tariffs,” reports Bloomberg. There is no future in this, only an effort to keep the band playing until the ship goes under. “Europe’s auto industry faces a ‘bloodbath’ if it doesn’t adapt,” warns Stellantis CEO Carlos Taveres. But thus far his idea of adapting is to partner with a Chinese competitor. “‘I am trying to be[] opportunistic,’” he explains.

The United States has thus far refused to allow Chinese vehicles into the American market; in May, the Biden administration quadrupled the tariff rate on EVs from China to 100%. But battery supply chains remain heavily dependent on China, and U.S. manufacturers are pursuing partnerships with Chinese battery makers, even as the House Select Committee on the Chinese Communist Party highlights the latter’s involvement with slave labor and other human rights abuses in Xinjiang. BYD is planning to begin EV production in Mexico, which the Alliance for American Manufacturing (AAM) calls “an effort to gain backdoor access to American consumers by circumventing existing policies that are keeping China’s autos out of the U.S. market.”

“The introduction of cheap Chinese autos—which are so inexpensive because they are backed with the power and funding of the Chinese government—to the American market,” warns AAM,
“could end up being an extinction-level event for the U.S. auto sector.” Without China, though, the rapid transition to EVs, demanded by advocates for ambitious U.S. climate policy, is dead on arrival.

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One technology, the battery, lies at the heart of America’s failures in the EV race, has responsibility for the irreconcilable conflicts at the heart of President Biden’s climate policy, and must be the focus of better policy going forward. In many ways, the battery is the electric vehicle. Not by coincidence did China’s BYD start as a battery maker before expanding into EV manufacturing. The battery accounts for roughly 40% of an EV’s cost and its limitations are responsible for most of the EV’s drawbacks—not only sticker shock, but also range, charging time and network, repair cost, and resale value.

Conversely, if producers could overcome the battery’s challenges, an EV offers extraordinary advantages. Electric motors are more efficient than internal combustion engines (ICEs), they provide much greater acceleration, they have fewer moving parts, they can be “refueled” at home, they are almost too quiet. Many automakers worldwide are betting that, regardless of climate policy, batteries are making sufficient progress that the EV is the technology of the future.

What does it mean, in practice, to deploy an EV battery? From the perspective of an automaker and its workers, all of the cost and complexity associated with building an ICE powertrain for a vehicle is replaced by dropping a large battery into the chassis. Ford CEO James Farley has estimated that an EV thus requires 40% less labor. But that figure is misleading—and should look familiar, closely paralleling the battery’s share of the vehicle cost. The proper comparison would place the labor and cost of building a conventional vehicle next to the entire supply chain associated with building the battery as well as the EV: the mining of critical minerals, their processing into battery materials, manufacturing of the battery, and finally assembly of the EV around that battery.

In this picture, an EV does not require less labor; in man-hours it may require much more. But the labor has been moved out of the automaker, either to lower-paid non-union workers in foreign-owned battery factories, or overseas entirely—for instance, to children mining cobalt in the Democratic Republic of Congo. Battery materials typically travel as much as 50,000 miles—from mining to processing to refining—before arriving at a U.S. facility. This was the fundamental problem that drove the UAW to strike last fall.

The importance of batteries was long obvious. Andy Grove, the great Intel CEO from the era when Intel was a great company, used them more than a decade ago as his illustration of the long-term costs of shortsighted U.S. economic policy:

There’s more at stake than exported jobs. With some technologies, both scaling and innovation take place overseas. Such is the case with advanced batteries. It has taken years and many false starts, but finally we are about to witness mass-produced electric cars and trucks. They all rely on lithium-ion batteries. What microprocessors are to computing, batteries are to electric vehicles. Unlike with microprocessors, the U.S. share of lithium-ion battery production is tiny.

That’s a problem. A new industry needs an effective ecosystem in which technology know-how accumulates, experience builds on experience, and close relationships develop between supplier and customer. The U.S. lost its lead in batteries 30 years ago when it stopped making consumer electronics devices. Whoever made batteries then gained the exposure and relationships needed to learn to supply batteries for the more demanding laptop PC market, and after that, for the even more demanding automobile market. U.S. companies did not participate in the first phase and consequently were not in the running for all that followed. I doubt they will ever catch up.

Unfortunately for the United States, Grove was correct and China, lacking a retinue of economists convinced that the “knowledge problem” precludes policymakers from identifying key technologies for investment, took full advantage. China’s CATL is the global leader in batteries and a partner of Tesla, as well as Ford in the United States. “China dominates production at every stage of the EV battery supply chain,” explains the International Energy Agency. “Two-thirds of global battery cell production, as well as around 80% of the production of cathode and over 90% of anode material, is in China.” To compare, notes the Roosevelt Institute’s Elizabeth Pancotti, “OPEC’s 13 member countries produce 40 percent of the world’s crude oil and provide about 60 percent of global petroleum trades.”

The issue is not access to natural resources—indeed, the good news is that the United States has massive quantities of most materials needed. While U.S. lithium production fell from a world-leading 37% of the global total in 1995 to 1% in 2021, major new deposits keep appearing. In September 2023, a deposit identified on the Nevada-Oregon border was reported to be among the world’s largest. In May 2024, researchers discovered that fracking wastewater in Pennsylvania’s Marcellus Shale contained a “shocking” amount of lithium. Large quantities of cobalt and nickel are available, too.

But developing productive mines can take 10 to 20 years, a timeline obviously incompatible with EPA regulations aiming to convert most sales to EVs in less than a decade. In addition to the physical complexity and enormous capital requirements, the regulatory framework is woefully outdated. Oil and gas exploration has been a subject of intensive focus in recent decades, but mining has languished, still governed by an 1872 law and often overseen by multiple agencies with overlapping jurisdiction. Then come the endless objections and lawsuits from the same environmental groups demanding action on climate but unwilling to accept any tradeoffs.

Long timelines also leave mining companies facing intolerable risk from extreme price volatility and outright market manipulation by China in defense of its dominant position. Lithium prices, for instance, increased ten-fold in 2021–22 before plunging more than 80 percent in 2023. Cobalt prices doubled in 2021 but had fallen back below 2020 levels by 2024. “It is our belief that that behavior can be intentional, can be happening with the purpose of driving companies in our country, in those of our allies, out of business,” complained Canadian Deputy Prime Minister Chrystia Freeland. A cobalt mine slated to open in Idaho last year has instead been idled. A flood of nickel from Indonesia funded by Chinese investment has thrown that global market into “chaos,” leaving “some in the industry questioning if there’s a future for most mines outside of Indonesia.”

Moving down the supply chain, the processing of materials—where China has established its firmest stranglehold—may be a greater challenge. State subsidies and disregard for environmental protection are major factors, but Chinese processors have also developed major competitive advantages through decades of fine-tuning. A facility for refining lithium can be built in China for less than one-third the cost of a facility elsewhere. The story in Indonesia, reports the Wall Street Journal, is that “Chinese companies have built a fleet of highly efficient nickel and cobalt plants over the past few years after mastering a technology Western miners long considered glitchy and expensive.”

Finally, even if policymakers and private producers could partner to put an affordable, high-quality, made-in-America battery in every driveway, the question would remain of how to charge them all. Most analysts believe that utilities will be able to generate enough electricity, but transmission is another matter. Boston Consulting Group estimates that necessary upgrades to the electric grid will cost thousands of dollars per new EV on the road, which all ratepayers will have to fund through price increases. Installing the infrastructure, a precursor to the charging stations that get most of the attention, will take years and require tens of millions of new distribution transformers that the United States is ill-equipped to produce. Mark Mills and Jonathan Lesser of the National Center for Energy Analytics estimate the total cost of preparing the grid to meet the EPA’s targeted EV penetration at more than $1 trillion by 2035.  

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If an endgame exists, or a coherent strategy at all, it is difficult to discern. The Biden administration has angered Democrats like Senators Sherrod Brown (D-OH) and Joe Manchin (D-WV) with its attempts at threading the needle on how much foreign (and, especially, Chinese) content can go into an EV before it becomes ineligible for subsidies. Already, EPA has loosened its goals for the years leading up to 2032, even while keeping the original 2032 target in place. It’s only a matter of time before that falls by the wayside, too. In the meantime, not enough progress is underway to foster the prerequisite conditions for an eventual, more appealing transition. Under the pretense that the transition must occur regardless of how the cars are made, targets and investments have focused heavily on getting EVs on the road, expecting somehow that if the cars get built, the supply chains will come.

The right policy would reverse this dynamic, focusing upstream at the value chain’s start and moving forward from there, anticipating that if the United States returns to its historical role as a leading producer of raw materials, it will reinforce efforts to rebuild capacity for processing, which in turn will create opportunities in battery assembly. If those supply chains develop, and if EVs truly are the technology of the future, an economically viable transition can occur. For progressives who see emissions reductions as the top imperative, such an approach surely seems too slow and speculative. But its benefit is not supposed to be in its speed or efficacy; its benefit is that it is the only approach whose costs in both dollars and industrial strength the nation might accept.

Conversely, for many conservatives, the approach—or any approach—may seem unnecessary. Why worry about EVs at all? One reason, noted above, is to hedge. Enough automakers and policymakers sincerely believe that EVs will dominate in the future that the outcome must be taken seriously. Simply abandoning the field and falling decades behind other regions of the world would be unsustainable. Staying in the game is worthwhile. Relatedly, American producers want to compete in global markets where EVs have become mainstream. If American battery leadership helps primarily with exports, that would be no small achievement.

Finally, investment upstream has a wider range of applications. Domestic mining and processing of critical minerals is a top priority for policymakers regardless of their application in EVs, as the House Select Committee on the CCP emphasized with the recent launch of its Critical Minerals Policy Working Group. “Critical minerals are the building blocks of everything from basic consumer goods to advanced military technology,” said Chairman John Moolenaar, “America’s reliance on the Chinese Communist Party’s control of the critical mineral supply chain would quickly become an existential vulnerability in the event of a conflict.” Batteries, and the advanced manufacturing capabilities critical to battery assembly, are vital regardless of what is traveling down our roads. So are the relevant skills in the workforce. The policies that will ensure an EV transition can occur, if consumers want one, are mostly the policies necessary for reindustrialization anyway.

So, what are those policies?

First is a hard break from China. This is a strategy that American Compass has advocated across the board (see our white paper, and essay in Foreign Affairs). Fortunately, because the American economy is not yet dependent on Chinese EVs and batteries or otherwise entangled in the Chinese automotive market (unlike Europe), the move on EVs in particular is not too costly. U.S. policy should prohibit the sale of EVs with any content made in China or by PRC-controlled entities, as well as any investment by such entities within the United States. Likewise, policy should prohibit U.S. investment in the Chinese EV industry and any technology transfer to it. Tesla will have to choose whether it wishes to be an American or a Chinese company, or perhaps break itself in two. If Elon Musk would prefer to commit his fortunes entirely to the whims of the Chinese Communist Party, he can do so.

Second, the United States needs a comprehensive policy for reshoring mining and mineral processing, akin to past efforts at natural resources development in the context of oil and gas reserves. Mining regulation needs to be modernized and consolidated within a single jurisdiction. Permitting reform has to move forward; the National Environmental Policy Act (NEPA), with its years-long reviews and litigation as purely procedural hurdles, should be repealed. As in other commodity markets, producers will need price insurance that insulates them from booms and busts as well as manipulation in global markets. The federal government should establish a critical minerals strategic reserve both to help buffer price fluctuations and ensure supply in a crisis.

Third, the United States should create a permanent industrial financing authority that provides capital and loan guarantees for strategic projects of all kinds. Mineral processing facilities as well as battery and EV factories could qualify, but so could semiconductor fabs and major infrastructure projects including grid modernization. The Biden administration’s $2.3 billion loan for a lithium carbonate processing plant at Thacker Pass, the major lithium deposit on the Nevada-Oregon border, is a good example of worthwhile government support upstream of not only the EV industry, but also many other industrial applications. Such investments should be treated as part of a broader reindustrialization strategy, not narrowly targeted climate policy.

Fourth, the United States should establish a framework within which an industry’s competitors can form a subsidized consortium to collaborate on foundational research and development. This model has been successful in the past, such as with Sematech, created during the Reagan administration to foster semiconductor innovation under pressure from competition with Japan. Industry participants should provide half the funding and government the other half, ensuring that public dollars go only toward efforts where the private sector also sees value. Many industries might benefit from consortia and all should have the opportunity to form them, but American automakers working on EVs are an obvious application. Battery technology, manufacturing processes, and workforce development could all be areas of focus. Only American firms and ones from allied nations in joint ventures with American partners should participate.

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“China Rules the Green Economy. Here’s Why That’s a Problem for Biden.” Under this headline, the New York Times recently reported that:

In an ideal world, where the clean energy transition was the top priority, [the United States and China] would be on friendlier terms. Maybe affordable Chinese-made electric vehicles would be widely sold in America, instead of being viewed as an economic threat. Or there would be less need to dig a lithium mine at an environmentally sensitive site in Nevada, because lithium, which is essential for batteries, could be bought worry-free from China, which controls the world’s supply.

Everything about this is wrong, for precisely the reasons the Left’s EV agenda has flopped. The idea that prioritizing a “clean energy transition” reduces the “economic threat” of Chinese-made EVs is incoherent. Prioritizing the climate might be a justification for accepting economics costs, but it makes them no less real.

The idea that concern for “an environmentally sensitive site in Nevada” should lead to purchasing lithium “worry-free” from China is bizarre. In environmental terms, mining and processing in China should be cause for a great deal of worry, about both conventional degradation and higher carbon emissions. In economic terms, disavowing participation in vital activities central to the automotive supply chain is unwise to say the least. Describing this hypothetical world as “ideal,” in a news report no less, suggests residence in a reality far removed from our own.

In the real world, there is great need to dig a very big lithium mine very quickly at an environmentally sensitive site in Nevada. In an ideal world, environmentalists would understand that making progress on their transportation-related climate goals will happen if and only if they reorient themselves from blocking to accelerating such development. No world, ideal or otherwise, exists in which the U.S. will pursue an EV transition without establishing a strong position upstream in the battery supply chain. Solving that problem should be something all sides can agree to focus on, making possible a bright future for EVs, and benefiting the American economy regardless.