Trump's tariffs won't save Musk from China's BYD
No one wins in a trade war, as economists have insisted for decades. Yet Elon Musk sure does seem to be blowing this maxim to smithereens.
In January 2024, the Tesla billionaire warned that America's electric vehicle industry had no chance of beating China's without massive tariffs. Fast forward 14 months and Musk finds himself in the winner's circle as Trump hits the global car industry with 25% tariffs.
As Musk told shareholders back then: 'Our observation is generally that Chinese car companies are the most competitive car companies in the world. If there are no trade barriers established, they will pretty much demolish most other car companies in the world,' he continued.
Though China has many EV success stories, Musk clearly had BYD in his sights. At the end of 2024, just as Trump was gearing up for another stint in the White House, China's EV juggernaut leapfrogged Tesla on revenue as BYD sales topped the US$100 billion mark.
BYD, backed in its early days by Warren Buffet, did so by wooing customers with a savvy high-tech fleet of EVs and hybrid vehicles, leaving Japan Inc in the dust.
Case in point: BYD's recent disclosure of a new charging system, powered by an enviable ecosystem, giving drivers 400 kilometers of range in five minutes.
Commenting on BYD's 100% stock surge over the last 12 months, Michael Dunne, CEO of Dunne Insights, credits BYD with 'achieving the most explosive growth we've seen in the auto business in a hundred years' while noting that 'this thing has been on fire.'
Yet Trump's auto tariffs have Musk getting some of his best headlines in years. Musk's EV giant has enormous factories in Texas and California that produce all the cars it moves in the US market.
This mostly protects Tesla from Trump's new taxes on autos and parts. By very sharp contrast, carmakers from Germany's Volkswagen AG to South Korea's Hyundai Motor to US giant General Motors are all in the collateral damage zone.
Goldman Sachs analyst Mark Delaney thinks Trump just upped the price of imported cars by between $5,000 and $15,000. Thanks to supply-chain arrangements, the cost of locally manufactured automobiles could surge by as much as $8,000.
This 'hurricane-like headwind,' as analysts at Wedbush Securities describe it, is compounded by Trump choosing 25% rather than, say 20% or 30%. The levy Trump settled on, they argue, is 'almost an untenable head-scratching number for the US consumer.'
To be sure, says Wedbush analyst Daniel Ives, 'we continue to believe this is some form of negotiation and these tariffs could change.' But for now, he added, the industry is in quite a whirl.
Tesla, says Garrett Nelson, analyst at CFRA Research, is the 'least exposed' auto giant. Musk's company, it's worth noting, is already touting itself as making the 'most American-made cars.'
TD Cowen's Itay Michaeli agrees that Tesla is a 'relative winner' in the tariff wars. 'Tesla a relative beneficiary given 100% US production footprint, substantial US sourcing and with Model Y competing in a midsize crossover segment where close to 50% of vehicles could be subject to tariffs,' Michaeli says.
Analysts at Deutsche Bank, note that 'Tesla and Ford appear to be the most shielded [from tariff impacts] given location of vehicle assembly facilities although Ford does face incremental exposure on imported engines. GM has the most exposure to Mexico.'
Nor is Tokyo happy. Toyota Motor, the globe's biggest automaker, exports roughly half the vehicles it sells to the US market. This is despite Toyota running sprawling factories in Indiana, Kentucky, Mississippi and Texas and large engine plants in Alabama and West Virginia.
It's also despite Japan's 100% compliance with the free-trade agreement Trump 1.0 negotiated with former Japanese leader Shinzo Abe.
One question is the impact on US consumer sentiment. Even if one can argue, as Trump World does, that these tariffs will boost investment in US manufacturing that increase auto-industry efficiency, the disorientation factor could matter more.
'For consumers navigating higher prices in the short term, the promise of future gains may feel distant – at least for now,' says Jessica Caldwell, head of insights at advisory Edmunds.
Then, there are the retaliation risks. As Robert Habeck, Germany's economic affairs minister, warned Thursday (March 27): 'It needs to be clear that we will not take this lying down.'
European Commission President Ursula von der Leyen called Trump's tariff escalation 'bad for businesses, worse for consumers.'
The stories analysts like to tell about the global car industry are rarely straightforward. Musk, for example, didn't found Telsa – he bought the company from Martin Eberhard and Marc Tarpenning.
Nor is it clear Tesla would've survived without a ginormous $465 million federal loan from US President Barack Obama's administration.
Would BYD, meantime, be where it is today without the role German design veteran Wolfgang Egger, an Alfa Romeo veteran, played in helping to create the brand? Or the role Buffett's Berkshire Hathaway played as an early marquee-caliber cash infuser and the 'halo effect' it imparted?
Then there's China's own efforts to keep global auto companies at bay.
'It is no secret that President Donald Trump loves tariffs,' Dunne of Dunne Insights explains. Trump, Dunne notes, says 'I'm the Tariff Man' and 'with zero trace of inhibition.'
But 'what's less well known,' Dunne says, 'is that China embraces tariffs in a big way, too. And China's love affair with tariffs – quiet, almost clandestine – has been going on for decades. A tall, imposing brick wall of taxes on imports, blended with targeted industrial investments, have played a pivotal role in China's rise as a manufacturing powerhouse.
How powerful? In 2024 alone, China ran a one trillion-dollar trade surplus with the world.'
When Dunne started his first company in Beijing in 1990, 'China was an automotive weakling. Annual production was less than 500,000 cars; thin wood shavings compared to more than 13.5 million that Japan produced.'
To 'gain industrial traction,' he adds, 'regulators in Beijing slammed the door shut on imports. They set tariffs at 100%. They also strictly limited the number of import licenses granted each year. It was a double layer of protection – non-tariff barriers on top of tariffs.'
Ultimately, 'China's message to global automakers was crystal clear,' Dunne notes. 'If you want to sell cars in China, you will need to manufacture them inside China. And to secure an approval to manufacture inside China you must first marry up with a Chinese partner. And, by the way, the Chinese partner will own no less than 50% of the joint venture.'
In 2024, China produced 31 million vehicles, three times more than the US, where the automobile was invented. Beijing's tariff and non-tariff barrier matrix largely remains intact. In the 35 years that China spent becoming an auto manufacturing superpower, Dunne notes, 'China never permitted car imports to exceed 6% of the total market.'
Even so, Trump's tariffs are testing the global economy's shock absorbers as rarely before. And they're causing Musk's EV company some serious agita. Tesla is facing backlashes around the globe over Musk's outsized and controversial role in the Trump White House.
In February alone, Tesla registrations in European Union countries fell 47%. Trump's Attorney General Pam Bondi went so far as to call acts of arson of Tesla cars and showrooms 'domestic terrorism.'
Analysts at William Blair & Co write that 'pushback from Musk's foray into politics' has led to 'brand damage and even vandalism,' for Tesla at a time when the company's supply has been impacted by its pivot to the Model Y and 'Chinese competition continues to heat up.'
This latter point is worth remembering, though. The surge in BYD's stock relative to Tesla's 40%-plus plunge since mid-December is a reminder that the China EV threat isn't a passing one.
The irony is that BYD is arguably the hottest car company in the world and yet consumers still can't buy one in the US. Former US President Joe Biden, for example, slapped 100% taxes on Chinese EVs.
Yet Musk's problem is no longer just the Buffett favorite BYD. It's an entire fleet of EV upstarts clogging the commercial roads in Asia's biggest economy. And increasingly, Global South nations where lower-cost Chinese EVs are thriving.
The shares of mainland EV startup Xpeng jumped 85% since the start of the year. Nio and automotive conglomerate Geely — which runs EV startup Zeekr and others — are seeing double-digit share price gains, too.
It doesn't mean the rallies will continue, but it does mean that the future isn't necessarily Tesla's to lose. No matter how close Musk sits to Trump's Oval Office.
Follow William Pesek on X at @WilliamPesek
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