US policy makers have two choices: strategic engagement or a spiral into irrelevancy
Just three years after entering the auto market, the Chinese tech company Xiaomi has made no effort to temper expectations. Best known for challenging Apple and Samsung on smartphones, Xiaomi is now positioning its new-generation SU7 electric sedan against the Tesla Model 3, with its CEO, Lei Jun, quipping at the unveiling: “Isn’t it time for Model 3 users to upgrade?”
Provocative, sure, but not unfounded. Starting at roughly $30,300 in China, the SU7 undercuts the Chinese version of Tesla’s Model 3 by about 10%, while featuring substantially more technology: LiDAR, ultra-fast charging, and an operating system that seamlessly integrates the EV with a user’s Xiaomi phone, smart home, calendar, and even fitness tracker. The response? Nearly 90,000 confirmed orders in just 24 hours.
The SU7 is not a one-off. Across China’s EV market, the same pattern is repeating with a consistency that should alarm American automakers: faster product cycles, lower prices, and levels of integrated technology that have yet to appear at scale in the United States. Xiaomi’s YU7 pushes the same playbook into Tesla’s Model Y territory, XPeng’s P7+ brings 800V charging and AI-driven systems into a roughly $26,000 sedan, and BYD’s Seagull, priced as low as $9,700, is effectively creating a segment that does not exist in the U.S., where entry-level electric cars still start above $30,000.
These are cars that many American consumers would be happy to buy if they were available. For now, American consumers are largely insulated from this reality. A 100% tariff on Chinese electric vehicles imposed by Biden was further increased by Trump, effectively closing off the market. The result is a policy that was intended to buy time for domestic manufacturers, but does little to address the underlying competitive gap.
Outside the walled garden erected by American tariffs, sales of U.S. auto manufacturers are imploding. The share of the former “big three” globally fell from 21.4% in 2019 to 15.7% in 2025. GM was forced to abandon selling cars in Europe. Ford shuttered its manufacturing operations in Brazil in 2021, leaving the market wide open for Chinese to set up factories. The rest of the world has little interest in what Detroit has to offer these days.
The automotive industry is simply too important to America’s economy to fade into irrelevancy, accounting for $1.2 trillion, or nearly 5% of GDP. The industry’s supply chain has significant implications for the U.S.’s ability to scale up production of military goods in the event of a conflict, as a key driver of capacity in steel and specialty alloys, rare earths and magnets, battery cells, LiDAR, radar, ultrasonic sensors, and electric motors. The current approach of blocking Chinese players from the market is itself creating a national security risk, by hollowing out capabilities in batteries, motors, and power electronics that could be decisive in any extended military conflict.
The Catfish Effect in China
When Tesla broke ground on its Gigafactory Shanghai in 2019, it marked a sharp break from long-standing policy. For the first time, China waived its joint venture requirement for a foreign automaker, granting Tesla full ownership while backing the project with low-cost financing, tax incentives, and expedited approvals that enabled cars to roll off the line in less than a year. In return, Tesla committed billions in capital investment and local tax revenue, ultimately scaling the facility into its largest global production hub.
For China, the technology spillover from that deal has raised the sophistication of its EV ecosystem. What started as a single foreign-owned factory quickly became a live training ground for the country’s auto supply chain. Today, roughly 95% of the components used in Tesla’s Shanghai operations are sourced within China, effectively binding the plant into a domestic supplier network that now meets world-class manufacturing standards. [Space added] Chinese firms now account for roughly half of Tesla’s global battery supply chain, a position that helped accelerate CATL’s rise to the world’s largest battery producer, with a 38% global market share built in part on servicing Tesla’s scale.
Then there’s the transfer of manufacturing knowledge. After working with Tesla to develop gigacasting machines, LK Group sold its equivalents to at least half a dozen other Chinese automakers. The broader effect was what industry executives call a “catfish effect” in which throwing a new competitor into the tank, a catfish, causes the sluggish sardines to swim and compete harder to survive. China did not require any formal technology licensing from Tesla to reap the benefits of the catfish effect. It was all organic spillover.
So why is the United States so afraid to inject some competition into the market?
The Widening Scale Gap
The gap between the United States and China in electric vehicles is staggering. In 2025, U.S. manufacturers sold roughly 1.28 million EVs, slipping by 2% from the prior year. China sold 12.9 million units, or 10X the scale, accounting for 63% of global volume. One single company, BYD, outsold the entire U.S. market by 3.5X.
This scale gap means that Chinese EV giants, including BYD, Geely, SAIC, Nio, and Xpeng, can collectively spend an estimated $20 billion per year on EV R&D, whereas total U.S. spending is approximately $10-12 billion. That’s how BYD developed an announced Super-e battery that can be recharged in just 5 minutes, roughly the same time it takes to fill a tank with gas.
That gap extends beyond volume into speed of execution. American automakers typically operate on EV development cycles of roughly 40 months, about twice as long as their Chinese counterparts. But the most consequential divide sits beneath the vehicles themselves: batteries. China accounts for 75%-80% of global supply, and prices fell roughly 30% in 2024, compared with 10–15% in the U.S. and Europe. When it comes to chemistry, China’s LFP batteries are now roughly 30% cheaper per kilowatt-hour than the nickel-based systems still widely used in American EVs. Even optimistic forecasts put the U.S. at only a small share of global battery capacity this decade, leaving China’s lead in the core inputs of EV production firmly intact.
Tesla as the Distracted Champion
When it comes to electric vehicles, the U.S. may have too many eggs in Elon Musk’s basket. Tesla essentially pioneered the EV segment at scale, and in some areas, such as self-driving is arguably still a market leader. But Musk appears to have lost interest in the prosaic auto segment some years ago as dreams of humanoid robots, data centers in space, and mass drivers on the moon capture an increasing share of his attention. His last major vehicle launch, the Cybertruck in November of 2023, was more of a broish vanity project than a mass market vehicle. He repeatedly delayed and then abandoned plans for an entry-level, affordable sedan. And he has never made an effort with a traditional SUV, one of the most popular formats in the U.S., accounting for 52% of new vehicle sales in 2025.
Elon first promised an affordable Model 2 $25,000 EV in 2020, with a 2022 delivery date. Fast forward six years, and the Tesla Model Q is rumored to be a $25,000 smaller version of the Model Y to be produced in a new factory in Mexico, with no launch date yet confirmed. In that period of time his Chinese competitors would have already gone through four completely new product cycles.
The Race Isn’t Over
For all these bleak statistics, the U.S. has not yet definitively lost the opportunity to be competitive in EVs, which are destined to dominate the auto market as internal combustion fades away in the global market. The most credible near-term U.S. advantage lies in next-generation battery chemistry and autonomous systems.
Solid-state batteries, led by firms like Factorial Energy, QuantumScape, and Solid Power, promise major gains in energy density, charging speed, and safety, with pilot-scale production now underway. These companies are aspiring to reach initial commercial production in a 2027-28 timeframe, while Toyota expects to reach scaled production in a similar time frame. The U.S. is also ahead for now in self driving, with Tesla now having 5 million vehicles on the road using an end-to-end neural network that does not require the complex mapping data of Chinese systems. Waymo operates a fully driverless commercial service across multiple U.S. cities, with 250,000 weekly rides and fleets already at scale.
As self-driving crosses the adoption curve it could justify some price premium for American EVs. And if robotaxis truly take off, the whole car ownership paradigm could change providing U.S. players like Tesla and Waymo with a strategic advantage. And across the stack, U.S. firms still dominate the core software and AI chips powering global EVs, an advantage that remains strategically significant, even as hardware leadership shifts east.
Opening the Door, on American Terms
It wasn’t generosity that made China strike a deal with Tesla back in 2018. Now is the time for the U.S. to think just as strategically. Opening the door on American terms would mean treating Chinese EV entrants as a lever for domestic capability-building.
Approved companies such as BYD or CATL could be required to manufacture in the United States, with at least 50% domestic content phased in over time. U.S. J.V. partners would be required to hold 50% equity stakes, anchoring governance under American corporate law. The critical constraint is knowledge transfer. Market access would be tied to licensing battery chemistry, manufacturing processes, and production tooling into the U.S. venture. Vehicle software and data systems would operate under U.S. jurisdiction, with all telematics and sensor data stored in domestic data centers and over-the-air updates subject to U.S.-approved authorization.
Given that the U.S. offers the industry’s best profit margins, it is highly likely that some Chinese players would accept these arduous conditions. The logic is straightforward industrial leverage. China used Tesla as a catalyst for deepening its supply chain, scaling battery production, and accelerating manufacturing speed. A U.S. framework would aim to reverse that effect by using Chinese scale leaders as accelerants for domestic learning and competitive pressure. Elements of this model are already visible in Europe, where Chinese EV makers have gained meaningful market share despite tariffs, and where joint ventures with Stellantis and Renault are already reshaping production footprints. In Washington, though, the political hurdles are significant.
Security concerns, labor opposition, and trade hawks all carry weight. The last remaining U.S. auto manufacturers, along with their suppliers and dealer networks, have powerful allies in both parties. But the choice is clear. The U.S. can continue to build ever higher walls to protect inefficient companies producing obsolete products that no one in the rest of the world wants to buy. This state of stagnation will last for some time until the disparity of innovation and price causes the market to be flooded with Chinese products. Or the government can open the market on its own terms, allow the catfish to remind the sardines how to swim, and hope that U.S. leading edge technology can combine with China’s scale and manufacturing expertise to create the next generation of mobility products that will redefine the market.
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