A response was inevitable. China couldn’t be expected to just stand by while its economy took a punishing bodyblow. It had to counterpunch. I’m a little surprised that it took almost five months. But China has made a move to solidify the position of EV makers and battery makers in its home market…
Back in October of 2022, the Biden administration issued new rules regarding China’s semiconductor industry. American companies have been banned from selling advanced semiconductors to China. The ban also covers the equipment needed to make and test semiconductors.
Americans working in China’s chip sector were given a choice: leave China or lose your American citizenship.
They packed up and left.
Japan, South Korea and the Netherlands have joined what can only be called a U.S. chip embargo on China.
Prior to this embargo, the annual cost for China to import the chips it needs had risen to around $300 billion – because China was only capable of meeting 30% of its needs with homegrown tech.
So, China’s tech industry is crippled by the Biden administration’s new rules on semiconductor sales to China. China doesn’t have the technical know-how to make and use advanced semiconductors without at least some imported equipment. And the Biden administration has made it nearly impossible for China to import any of this equipment.
Without U.S. technology, China’s ambitions for AI, hypersonic weapons, and automation will, as one expert put it, “…wither on the vine and go away.”
Simply put: the new semiconductor embargo on China is the most damaging and provocative move against China the U.S. government has ever made…
I’ve been waiting to see how China would respond. Any countermove by China would need to be somewhat substantial and grab headlines. But at the same time, China can’t afford to really escalate the tension between the two countries. Because the fact is, in a trade war, China has a lot more to lose than the U.S. does…
So I thought about the gambling mecca, Macau.
After all, Wynn Resorts (NASDAQ: WYNN) gets a massive amount of revenue from its casinos in Macau – a little over 70% of its total revenue. It’s only a little better for Las Vegas Sands (NYSE: LVS), who gets around 60% of revenue from its Chinese-based casinos.
So China could throw out some restrictions on Macau gambling and do some damage to American companies without really fanning any geopolitical flames…
The chip embargo has almost certainly pushed China to get a little more cozy with Russia – though it hasn’t done anything dramatic there, yet. And I guess we could say that the spy balloon that wandered through American airspace might qualify. But as responses go, that was pretty lame…
It’s not like a slow-moving balloon was going to see anything significant. We tracked before it even got to Alaska, there was plenty of time to close missile silo doors and drive any cool new tanks into a shed for cover.
If you get right down to it, It’s kind of embarrassing…
Master of Subsidy
China’s biggest economic weapon has always been subsidies. The Chinese government spends as much as $500 billion a year to subsidize the manufacturing of solar panels, steel, textiles, electronics, etc.
As a percentage of GDP, China’s subsidies are three times larger than the #2 country on the list, South Korea, and nearly 5 times larger than the U.S. China’s subsidies allow Chinese companies to undercut global pricing, take market share, increase production and create domestic jobs.
China’s electric vehicle market is also heavily subsidized. The effect of those subsidies has made China the biggest EV market in the world – $87 billion in revenue last year. And that is a simple reason why China has also become the biggest supplier of lithium batteries in the world.
Six of the world’s ten biggest battery makers in the world are in China and they account for nearly 80% of the world’s battery supply.
One company in particular – China’s Contemporary Amperex Technology Company, or CATL – dominates, with a 37% share of the global battery market. And it is the biggest maker of lithium iron phosphate batteries. Lithium iron phosphate batteries are cheaper and last longer than traditional lithium ion batteries, which is why this battery tech is found in 40% of EVs.
Ford (NYSE: F) for instance wants to use them in all of its electric F-150 Lightning trucks. And Ford’s trying to partner up with CATL to build a lithium iron phosphate factory here in the U.S. They tried to put that factory in Virginia, but the governor declined, citing CATL’s connection to the Chinese Communist Party. Rumor has it that Michigan is less concerned about the politics…
Now, China just ended its subsidies for EVs. Lithium prices have been dropping as Chinese demand for EVs falls (this is a big reason why, in January, Tesla started discounting its cars in China). But now, through CATL, China is kind of redirecting those subsidies.
Trouble for Tesla?
CATL has offered big discounts to Chinese EV makers like Nio (NASDAQ: NIO) and Geely, if they pledge to use CATL batteries for up to 80% of their future battery needs.
So far, this offer has not been extended to foreign companies that build EVs in China, like Tesla.
As I see it, this move serves two purposes. One: it will make Chinese made electric vehicles cheaper, helping to offset the subsidies that just expired. And two: since the discount battery offer is only for Chinese companies, foreign companies like Tesla will have to make a choice: either lose market share or lose profit margin due to extended discounting. ‘
China has always tried to tilt the playing field in favor of domestic companies. And . this particular move is clearly geared to maintain Chinese dominance in its EV market. I will not be surprised if there are more actions like this one, that take aim at U.S companies that do business in China.
I’ve said it before, but I am leery of U.S. companies that do a lot of business in China. I don’t think this trade war is anywhere close to over…
That’s it for me today, take care and I’ll talk to you Friday,
Chief Investment Strategist
Pro Trader Today