The Decline of the U.S. Auto Industry and the U.S.-China Electric Vehicle Rivalry

Folks, that ITIF think tank is really in a panic. They’ve churned out a lengthy three-part report, but I’ll break it down for you in just five minutes. With the U.S. auto industry in decline, ITIF is naturally worried. The first part of the report alone is 20,000 characters long—if it were up to me, I’d have whittled it down to a few thousand characters by now. These think tank folks watch day in and day out as American cars struggle while Chinese cars rise, and it’s driving them crazy. The very first sentence of the report reads, “The automotive industry is not just about vehicles themselves; it’s also tied to national power.” That makes sense, but the key is how it’s applied. From an economic perspective, the automotive industry’s supply chain is incredibly long, encompassing eyewear, machine tools, plastics, rubber, electronics, and semiconductors—all of which can drive overall prosperity. More importantly, national power is a continuum, with national defense and military industries at one end and everyday consumer goods like underwear and T-shirts at the other. The middle ground consists of dual-use industries like aviation and semiconductors, as well as “enabling industries” such as the automotive sector. Even if the U.S. auto industry stopped building cars, arms manufacturers would still operate, but the auto industry involves technology development, process innovation, and skills training—all of which serve as “industrial construction sites” shared by the manufacturing sector. The U.S. auto industry has already lost a significant number of supporting “energy-negative industries,” leaving the entire industrial system severely lacking in resilience—which is why the ITIF is so concerned. The U.S. auto industry contributes 5% of GDP and 5% of jobs annually, creating $591 billion in intermediate value for upstream industries. At the peak of the manufacturing era in the 1950s, seven or eight out of every ten cars worldwide were American. Today, that figure has dropped to 11%, with Chinese cars accounting for 34% of that share. The three major U.S. automakers—Ford, General Motors, and Chrysler—had a combined market share of 92% in the 1960s, but by 2024, that figure had fallen to 38 percent—with General Motors dropping from 51 percent to 17 percent, Ford from 29 percent to 14 percent, and Chrysler, now renamed Stellantis, proving more resilient due to its smaller scale. Japanese cars’ market share has risen to 37%, tying with American cars, while Korean cars account for 11% and European cars 10%. Over the past 60 years, the American auto industry can be divided into several periods. From 1965 to around 2000 was a period of decline lasting more than 30 years, with Japan, Europe, and South Korea as competitors. After 2000, the industry gradually improved and was even once seen as the hope for driving economic recovery. After 2015, outsourcing to Mexico and the rise of electric vehicles from China posed even greater challenges. The U.S. auto industry’s first decline came when it was defeated by Japanese automakers. Against the backdrop of the two oil crises, consumers shifted toward fuel-efficient compact cars, but the U.S. auto industry remained fixated on large-displacement vehicles and reacted too slowly. The key issue lay in an outdated management system; it took the Big Three 10 to 15 years to learn Japan’s lean manufacturing methods. Their lagging production efficiency allowed foreign automakers to gain an advantage in the U.S. market. As for the challenge posed by electric vehicles, the U.S. auto industry is even more reluctant to accept defeat, given that it was the pioneer in inventing both electric vehicles and batteries. In the early 20th century, before the widespread adoption of the power grid, one-third of the vehicles on American streets were electric. Today’s mainstream battery technology—lithium iron phosphate—was originally developed at the University of Texas and commercialized by the startup A123. However, due to inadequate manufacturing fundamentals, A123 went bankrupt and was acquired by a Chinese company, resulting in a transfer of technology. The report acknowledges that China’s lead in battery technology is entirely attributable to related innovations. Currently, China accounts for 85 percent of global battery production capacity—12 times that of the United States. In terms of EV battery patents, China holds 74 percent of the global total, followed by Japan with 9 percent and the United States with 6 percent. How does ITIF explain the success of China’s electric vehicles? First, technological innovation; second, government intervention—or “innovation mercantilism.” This implies that strategic national considerations have been at play from the very beginning. First, developing electric vehicles can enhance energy security and reduce dependence on oil imports. Second, since breakthroughs in internal combustion engine technology are difficult to achieve, developing electric vehicles can break free from technological dependence on foreign automakers. Third, it protects the environment and promotes sustainable development. Having decided to develop electric vehicles, the priority is to foster globally competitive automakers. Support measures include policy support, financial subsidies, and so-called “IP theft.” In 2020, the U.S. National Counterintelligence and Security Center identified electric vehicles and aircraft as China’s priority areas for technology acquisition. The ITIF acknowledges that the competitiveness of Chinese automakers stems from unfair practices, as if the U.S. government could simply step in to resolve the issue—but this actually underestimates the real threat posed by China’s automotive industry. There are three driving forces behind electric vehicles: autonomous driving, software-defined vehicles, and electrification. The U.S. leads in the first, is on par in the second, and lags in the third. In any case, the U.S. automotive industry has already lost its absolute leadership in advanced automotive technology. The current situation facing the U.S. auto industry is somewhat similar to when it faced competition from Japan in the past, but the difference lies in the fact that Japan’s competitiveness stemmed from efficiency optimization. China’s electric vehicles, however, represent a comprehensive disruption, posing a higher risk and potentially causing the U.S. to miss out on an entire era. This era has already lasted five years.