Detroit blinked on EVs, but the Iran war has handed Chinese automakers the opportunity of a lifetime

In December, Ford took one of the biggest write-downs in history with a $19.5 billion charge on its EV business. As part of the move, the company killed its all-electric F-150 pickup truck and will retool it as an extended-range hybrid amid a broader shift away from EVs. General Motors, for its part, announced total EV-related charges of $7.6 billion, abandoning plans to build EVs at a Michigan factory that will now make gas-powered SUVs and pickups. 

“We can’t allocate money for things that will not make money,” Ford CEO Jim Farley said in December when commenting on the EV pullback to Reuters. “As much as I love those products, the customers in the U.S. were not going to pay for ‌them. And that was the end of that.”

American automakers’ calculations initially seemed well-founded. EV sales collapsed by 36% year over year in the fourth quarter, just after President Donald Trump ended the EV tax credit, according to data from Cox Automotive. With inflation back on the rise and the labor market softening, U.S. consumers seemed hesitant to fork over $55,000 on average for a new EV without the tax credit.

Yet the Iran war, initiated by the U.S. and Israel in February, has complicated that reasoning. The national average for gas prices stood at $4.51 as of Sunday, according to AAA, up 50% from late February. Globally, the average gas price was even higher at about $5.34 per gallon.

This price shock, while inconvenient for U.S. automakers that have recently pivoted away from EVs, has handed Chinese carmakers like BYD the opportunity of a lifetime, experts say.  

“As tragic as it is—war is tragic for anyone involved—it is probably one of the best things that could have happened to the Chinese EV makers,” Tu Le, the founder and managing director of Sino Auto Insights, told Fortune.

Chinese automakers have spent decades preparing for such an opportunity, said Joern Buss, a partner at consulting firm Arthur D. Little and head of the Americas for its automotive and manufacturing group. Dating back to the early 2000s, when China was a non-player in the auto industry, automakers in the country were hiring consultants such as Buss to learn how to compete with the legacy players.

Buss, who helped advise Chinese companies in the early 2000s, said these carmakers approached the challenge with a three-pronged strategy. First, they learned how to build quality vehicles, partly thanks to learnings taken from Western joint venture partners. Second, they didn’t compete in the combustion engine space, instead opting for EVs where they could reinvent the category and be competitive. Third, the automakers figured out how to design and build vehicles faster than anyone else. 

The strategy has been a major success. After years of dominance by Western companies like Volkswagen in China, domestic car companies trumped them in sales for the first time in 2023. China is now the world’s largest exporter and has increased its influence in Europe and Latin America in recent years. In Europe, one out of every 10 vehicles is now made by a Chinese company, according to research platform DataForce.

Part of this increase is thanks to the affordability of Chinese vehicles. Ford’s cheapest vehicle, the hybrid Maverick XL pickup, starts at $28,000. BYD’s cheapest vehicle, a compact hatchback dubbed the Seagull, sells for $10,300 in China, though it’s higher in markets like Europe and Latin America.

Some have warned that these substantially lower prices are due to state support that artificially makes the cars cheaper. From 2009 to 2022, China’s government gave $29 billion in tax breaks and subsidies to domestic EV manufacturers, especially as it relates to batteries, the most expensive part of an EV, according to estimates by MIT Technology Review. Since last year, however, the government started to phase out its EV subsidies.

Some experts like Steve Christensen, the executive director of the Responsible Battery Coalition, said Chinese companies’ ultimate goal is to crowd out competitors. 

“The Chinese don’t care about making a profit, per se. They just want the market share, and they’ll do anything to get it. They’re playing to win,” he said. 

To be sure, Chinese automakers such as BYD, NIO, Xpeng, Zeekr, and Li Auto have rapidly advanced their technology by upgrading their advanced driver-assistance systems, introducing AI-powered features, and spearheading fast charging advances. 

But the U.S. sees China as a threat to the domestic auto industry. President Joe Biden introduced a 100% tariff on Chinese EVs that has been maintained by President Trump, effectively preventing them from being sold stateside. 

In addition, a bill introduced earlier this month by Senators Bernie Moreno (R-Ohio) and Elissa Slotkin (D-Mich.) aims to ban the vehicles from being sold in the U.S. for national security reasons.

“China is using automobiles as a weapon to infiltrate America, destroy our manufacturing base, & spy on us,” Moreno wrote in a post on X. 

The longer fuel prices stay elevated, though, the harder it may be for U.S. automakers to justify their EV pivot.

There’s some evidence that gas increases may be starting to change consumers’ minds about EVs. While new EV sales remained down in April, used EV sales increased by 16% year over year and 3% compared to March. Part of the reason may be price, as used EVs sell for some $20,00 less on average than new EVs, according to data by Cox Automotive.

For U.S. automakers, the market may be shifting just as they stepped back, and Chinese companies may be poised to benefit. 

“It’s almost a double hit, a double whammy, for the legacy automakers,” said Le. “It’s like pouring salt on a wound.”