US proposes a de-facto ban on Chinese cars
A radical proposal from The Biden Administration
I had to read the latest “Notice of Proposed Rulemaking” (NPRM), dated September 23, from The Biden Administration three times, before I accepted how radical this proposed policy is. Here is the document from The US Department of Commerce, with the full backing of the US Commerce Secretary and Biden’s National Security Advisor:
The Biden Administration policy proposal attempts to thread a fine line so as to not “technically” constitute a ban on Chinese cars, which could have international trade law (World Trade Organization, WTO) implications. However, as a practical matter, that is the practical outcome of what this policy proposal (“notice of proposed rulemaking”) does.
It does so in a couple of ways. First, and insignificant for any practical discussion, is that it includes both China and Russia. It is not targeted against a single country. But what are we really talking about here? Russia was neither exporting cars to the US, nor was it making significant hardware or software components to such cars either. So, this is really about China, with the inclusion of Russia only being a fig leaf.
Second, it does not technically ban Chinese cars. It bans cars that include software or other components that have a “nexus” to China. What does that mean? Well, it could mean that Chinese citizens have worked on such software or hardware that goes into vehicles that are offered for sale in the US. That means, as a practical matter, 100% of all cars made in China -- whether from “Chinese” companies or others that have factories there, such as Tesla (TSLA).
Could a company such as a “Chinese” automaker, or General Motors (GM), Ford (F) or Tesla remove all software and other components that have a “nexus” to China? Perhaps, with enough time and resources. It would be costly and take years. Ultimately, what defines a “nexus” to China? It would be up to the US government to decide. If the US government wants to keep you in business, it could interpret this generously -- but if the US government wants to make life difficult for you, the automaker (or Elon Musk personally, say), it now has a tool that provides a convenient fig leaf to do so without seeming to be overtly discriminatory.
But wait, there is more!
The Biden Administration’s proposed rulemaking effectively means that no cars made in China will make it to the US anytime soon, even before considering the tariffs that the Trump administration imposed, that the Biden administration continued after 2020, and that both the Trump and Biden administrations are now looking to raise even more as soon as they can get around to pressing the button. Yet, this new proposed Biden administration rule goes even further than that.
Specifically, it doesn’t matter where in the world this “Chinese” car is made. We think of Chinese cars as made in China, but the Chinese automakers are building new factories around the world as we speak, from Turkey to Europe to Mexico and beyond. The rule would apply there as well.
Let’s illustrate with an example. For those of you unfamiliar, Geely and its well-known brand Volvo and lesser-known brand Polestar are also majority-owned Chinese companies, with one particular person -- Li Shufu -- controlling all of them. The Geely Group also controls Lotus, Zeekr (ZK) and Lynk & Co, brands that are found in European countries but not so much in North America.
Therefore, under this rule, Volvo and Polestar presumably would be -- as a practical matter, because they use relevant components that have a “nexus” to China, obviously -- banned from being sold in the U.S. Why? Because there is no question that all of those cars contain components that have a “nexus” to China. Your local Volvo dealer will have to find some other product to sell, maybe Jeep or Volkswagen.
But wait! You might say “What if Volvo builds a factory in the U.S., then we’re good, right?” First of all, Volvo already built a factory in South Carolina and production has been underway since 2018. Yet, this new rule says that even if the car is manufactured in the U.S., it will be banned if it contains such software or hardware with a “nexus” to China. Here is the text from the proposed rulemaking:
“The rule would also prohibit manufacturers with a nexus to the PRC or Russia from selling connected vehicles that incorporate VCS hardware or software or ADS software in the United States, even if the vehicle was made in the United States.”
It could be interpreted as a total global ban
We have now established two things about the new proposed rulemaking from the U.S. Department of Commerce:
It doesn’t matter who the automaker is.
It doesn’t matter where the vehicle (car, truck or bus) is made.
All that matters is whether the vehicle in question contains these software or hardware components that have a “nexus” to China (and Russia). In other words, it could be any vehicle, made anywhere on Earth.
But “would” it be any car, made anywhere on Earth? Frankly, this is hard to tell at this point. Does a Ford made in Michigan contain a circuit board made in China? If so, you couldn’t sell it in the US after this proposed rulemaking has taken into effect.
It starts in about two years from now
The proposal has implementation and enforcement starting sometime in calendar year 2026 with the “model year 2027” vehicles and all categories covered by 2030. A 2027 model year vehicle is typically launched sometime in the calendar year leading up to 2027, so 2026. This gives automakers at least two years, and up to six, to get rid of covered software and hardware components that have a “nexus” to China or Russia. This may be extremely difficult and expensive to do, and it would be completely against China’s own wishes to develop these technologies using its own labor, which is essentially what this rulemaking bans.
Consider what this proposed rulemaking is effectively telling the Chinese automakers -- and the Chinese government: “You can go ahead and make cars in China to be sold in the US alright, but none of the engineers working on the critical software and hardware technologies can be Chinese people or people suspected of having loyalties to the Chinese government.” As you might understand, this would not go home well in China and especially in the Chinese government.
How realistic is it that this will happen?
There are numerous reasons why this proposed rulemaking may be softened or cancelled altogether. It really should be obvious, but this is ultimately a political decision, and it has been presented at the peak of the most political of US seasons.
For starters, is this simply a political play? Are they truly serious about this? Will this be quickly forgotten after the November 2024 election? Will it matter who wins the election, or would both candidates proceed with this proposed rulemaking no matter what?
These are questions I can’t answer, and I don’t think anyone else can either. The politicians themselves may not know their ultimate intention -- or lack thereof -- to move forward with it, as proposed. However, we can’t just simply dismiss the proposed rulemaking by saying that it will be withdrawn after the election is over. After all, The Biden Administration is trying hard to give the impression that they are indeed serious about this.
Furthermore, Trump has not come out and said that he disagrees one bit with this new Biden policy. Is the only issue on which Biden and Trump are in 100% agreement? Then, Canada quickly followed in the US footsteps by saying that it was considering a similar rule itself. If Biden, Trump and Canada all are in perfect agreement for once in a lifetime, maybe we should take this seriously: https://www.reuters.com/business/autos-transportation/canada-considering-banning-china-made-software-evs-says-freeland-2024-09-24/
The power of interpretation
Let’s say that this rulemaking moves forward as proposed. Given the technical and political nature of a technology having a “nexus” to China or Russia, every detail will have to be interpreted and fought over. Does a particular circuit board in a RAM pickup truck have a “nexus” to the Chinese Communist Party if it is made in a factory in China in which the Chinese government has any kind of influence? Does a piece of software have a “nexus” to China if a Chinese national -- current or former -- once worked on the code? You can see the billable hours by law firms being racked up already.
As with all things government enforcement of regulations, the government could either take an extremely strict position overall, or it could interpret the rules harsher against some automakers than others. Everyone would “cry politics” at every step of the game. Consider the possibility that a Harris regime would want to “get back” against Elon Musk for having thrown his and X’s (Twitter’s) weight behind Trump in the 2024 election. One could easily see how the Harris regime could say something like “China’s funding of the Tesla factory in Shanghai constitutes a significant nexus unlike any other automaker, and as a result Tesla will not be allowed to sell cars in the US.” Imagine the political circus that would ensue from such a (politicized) interpretation.
At the same time, would politically favored and unionized companies such as Ford and General Motors be given favorable interpretations about the status of their “nexus” to China, and therefore be exempt from sales bans in the US? Who knows? Again, in this example Tesla would cry foul, and other automakers would be thrilled to pick up the customers that would otherwise have been driving Teslas.
The next step: The car as a giant Hezbollah Pager
The automotive industry had a collective heart attack recently when a remote alert triggered an accelerated thermal runaway in pagers and walkie-talkies owned by Hezbollah. These devices, each containing a relatively tiny battery -- think cell phone, or even smaller -- blew up like a little bomb. Too small to severely injure people standing a few feet away in most cases, but powerful enough to severely injure or kill the person on whose body the pager was immediately resting.
The reason this is so scary for the automotive industry is that a battery-electric vehicle (BEV) includes all the same components to accomplish the same kind of remove-controlled de-facto bomb as one of those pagers. You need three “ingredients” in this equation:
A (big) battery
Software that controls the battery thermal performance
Connectivity between the car and the Internet, so the car can accept a command
The battery in a BEV could be around 1,000 lbs in a typical case. You have seen in the last decade how BEVs have exploded because of an accident or faulty battery. The fires are vicious and take a long time to extinguish. They are barely tolerable as isolated accidents, and remember a few years ago when some places in China started banning them from being parked in public parking garages.
Now imagine that a foreign power could remotely trigger all of these electric cars to simultaneously explode. It would mean societal devastation on an unimaginable scale. Depending on the density, it would hit with the impact of a distributed nuclear bomb.
Is a ban on electric cars coming next?
Whether Republican or Democrat, no US government wants to find itself in the position of “Hezbollah” -- multiplied by many thousands, if not millions, of times of explosive force -- and see the US blown to pieces by an adversary. As a result, this potential has to be dealt with just like the components identified in the Biden Administration’s proposed rulemaking of September 23. An investor may have to be prepared for the possibility that it would be next on the US national security agenda.
Self-driving: Adding insult to injury
Moving this scenario one chess move further into the future, what about self-driving cars? While a battery-electric vehicle with its 1,000 lbs battery would be a mighty effective bomb just sitting still in almost any random place, it would be even more devastating if this car could be ordered by its remote commander to drive itself to a particular location, and then explode there.
Then imagine millions of Internet-connected self-driving battery-electric vehicles (BEVs) driving themselves into optimal position for the triggering moment. Our infrastructure would be turned against us in a crippling “first strike” move.
I think you see where I am going here: It may be just as urgent for the US government to ban self-driving cars as well, not just connected cars and electric cars.
Summarizing the current and future government actions
The US government just moved against certain components having to do with communications and information-gathering to be used in cars sold in the US, for national security reasons.
The next logical step is to remove the national security threat of cars driving around with giant batteries. This would mean a ban on electric cars.
For similar reasons, self-driving cars would also have to be banned.
Investment implications
The three main investment themes in the automotive industry over the last 15 years have been:
Connected cars
Battery-electric vehicles
Self-driving vehicles
We have now started to move down the path of effectively banning all these, at least as far as allowing Chinese influence in critical connected car components, software and hardware. As a result, logically the new cars that will be made will be:
Disconnected
No large software-controlled batteries
No assisted or self-driving capabilities
In other words, the automotive world has to return to where it was in the 1990s, except the gasoline and diesel engines would be far cleaner than they were back then. We will be buying new cars that cannot be hacked, blown up or remote-control driven/crashed.
One side-benefit of this development would be that cars would become dramatically less expensive. What costs so much money in new cars today are:
Big batteries
Self-driving sensors and computer processing
All of that would go out the door. Instead of a new car in the US today being $46,000 on average, perhaps it would again fall below $30,000. This would open up a whole new market to sell many more cars to a broader layer of the consumer. It would actually be good for the automakers -- or at least the automakers who could execute on such a transformation the quickest.
Winners and losers
The winners in such a shift would, in my opinion, be component makers and automakers who could quickly engineer out any Chinese influence in their supply chain. US computer and sensor companies would benefit, as would US-centric automakers with as little reliance on electric and self-driving cars as possible, such as Ford and General Motors. Stellantis would also be a likely winner, especially since it has largely pulled out of China over the last year.
Losers would of course be the Chinese automotive industry and all of its supply chain. This was one of the crown jewels of the Chinese export boom, and now it looks like the US will shut its door to the entire Chinese tech food chain, not just the final car product. In the US, automakers who are focused on electric and self-driving cars may also be huge losers, to the extent that new regulations are interpreted against them. It is a key downside risk to Tesla, in my opinion.
Conclusion: This is a really big deal
I have been writing about the automotive industry for over a decade, and this is the most significant industry change that has been put to the table, and it has now landed on the table with a level of precision and urgency that is unprecedented. The Hezbollah pager situation really triggered the alarm clock of a century in the US government, and there seems to be immediate bipartisan support and even international support (Canada), so this could become “law” extremely quickly. Comments on the proposed rulemaking are due by October 23. The clock is ticking: https://www.news.com.au/technology/motoring/on-the-road/could-be-compromised-calls-to-ban-weaponised-chinese-evs/news-story/4e6ef579b49115ea46a57013b0c97332
More on Canada following in the US footsteps here: