Energy Musings - February 23, 2026

A new study of the Chinese EV industry offers insights for the Trump administration's efforts to revitalize our manufacturing sector. A major rethink of business strategies will be needed.

China’s EV Industry And U.S. Manufacturing Challenge

The Trump administration is working hard to revitalize the nation’s manufacturing economy. Their work began in his first term with selective tariffs to protect important industries ‒ aluminum and steel. For other industries, quotas were installed to limit foreign competition. More broadly, tax cuts helped improve businesses’ financials and accelerate depreciation for new capital investments. The Trump administration also sought to reduce regulations and red tape to improve business efficiency.

When Donald Trump was re-elected in November 2024, he moved quickly to select his cabinet, appointing individuals willing to push an aggressive deregulatory and stimulative agenda to restore the U.S. economy to past levels of productivity. Steps to make the U.S. self-sufficient in energy were taken with the understanding that this could lower energy costs, helping lift America’s manufacturing sector. The administration has targeted overhauling major economic sectors, including drugs, computer chips, and the maritime industry, but the challenges are significant.

The manufacturing revival is intended to strengthen the U.S. economy and limit adversaries’ ability to disrupt it. This will not be easy or low-cost. The current state of many of these sectors reflects decades of under-investment and neglect. These conditions started when the Cold War ended, the USSR crumbled, and America had no serious adversary. For example, with Russia’s economic collapse, U.S. defense spending was sharply reduced. Defense officials advised defense supplier executives that government spending would be reduced and that it made sense for them to consolidate, cut capital investments, and slow R&D.

In 1970, more than a quarter of American workers worked in manufacturing. Today, it is about 8%. Many of those jobs moved abroad, and many factories were shuttered or downsized. This was a key fallout from the ending of the Cold War and the embrace of globalization. The economic prospects of towns and cities in the country’s Rust Belt were devastated. The youths in those communities were left to find work in other regions or industries.

As the manufacturing sector was downsizing, workers were told to pursue college educations to work in white-collar jobs. Government social welfare programs were initiated and/or expanded, eliminating the pressure for workers to adapt their careers. Decades of economic policies that promoted rot left many industries uncompetitive and woefully short of skilled workers.

What Donald Trump is articulating is the reality that the U.S. has been economically weakened by following this strategy. It goes beyond economic weakness to increased national security vulnerability. We have become dependent on foreign suppliers, including many hosted by our primary adversary, China.

Americans clamored for cheap products that could only be purchased from foreign manufacturers. This resulted in the hollowing out of many domestic industries. Many companies shifted their supply chains from domestic producers to foreign suppliers, sapping our industrial capabilities. The rapid growth of international transportation systems enabled “just-in-time” delivery of raw materials and parts. This strategy offset the need for domestic supply chains.

Today, China is our primary economic adversary and a political foe. With the opening of the new century, China was on the cusp of joining the World Trade Organization. Admission required several economic policy changes and restructurings, as China became an equal party on the global trade stage. It was forced to reduce its tariffs from 32.2% in 1992 to 7.7% by 2002. China agreed to market reforms by allowing markets to set prices and reducing government intervention in the economy. It also amended its laws to comply with WTO standards, enhancing protections for intellectual property. The record since then raises doubts about how well China’s economy complies with WTO rules, at the behest of its government’s industrial strategies.

The assumption is that China’s economic advantages over Western economies stem from its access to cheap labor and energy. However, the Rhodium Group, an independent research firm that analyzes China’s economy and policy dynamics, as well as global climate change and energy systems, examined the structural advantages Chinese electric vehicle manufacturers have over Western automakers. Their study challenged the assumption that abundant, cheap labor and energy make Chinese businesses successful. Understanding the structural issues in the automobile industry may provide lessons for the U.S.’s effort to revitalize its manufacturing sector.

The study, “Why Are Chinese EVs So Cheap?” concluded that BYD, China’s leading EV manufacturer, had a $4.700 cost advantage versus Tesla. Other Chinese EV manufacturers, Geely ($2,700) and Leapmotor ($2,000), also had lower costs than Tesla. For BYD, the difference is about 15% of a Tesla Model 3’s sales price.

BYD’s cost advantage will help it expand its global market share.

The study focused on sedan models offered by both BYD and Tesla. The Model 3 outsells the Seal because Tesla has only two competing models, whereas BYD offers multiple competing sedans. The BYD Seal and the Tesla Model 3 are broadly comparable because they are similar in size and have similar LFP batteries. The Seal is equipped with a Qualcomm chip, and the Model 3 has Tesla’s in-house chip.

Between late 2022 and late 2025, BYD reduced the Seal’s sticker price from $30,198 to $24,190. At the same time, the Model 3 price was barely changed, going from $32,909 to $32,688. The Rhodium Group wanted to understand how BYD was able to cut the price of its Seal model while maintaining a higher profit margin than Tesla.

The initial view was that China’s subsidies were a major factor in the cost reduction. However, BYD found that subsidies accounted for roughly 5% of the $4,700 difference in cost relative to Tesla. The primary drivers in reducing the Seal’s cost are vertical integration and significantly lower overheads. They are estimated to account for at least three-quarters of the cost advantage of all three Chinese EV manufacturers.

The Chinese companies benefit from a lower cost structure. It comes from tighter control over supply chains and a stronger focus on the Chinese auto market. They also use supplier-backed financing, something the Chinese government is trying to end.

Surprisingly, the data show that Chinese EV manufacturers have more workers but produce fewer units—the difference between Tesla’s and BYD’s global revenue per employee demonstrates that reality. The Rhodium Group noted that the data are not split by geography; therefore, they reflect lower prices and revenues in China. However, when the researchers examined Volkswagen’s China operations in isolation, the pattern holds that Western manufacturers are more productive than the Chinese manufacturers.

BYD has many more workers; therefore, it has lower output per employee.

Western automakers have been reducing vertical integration by outsourcing major components to specialized suppliers for decades. This shift is exemplified by GM and Ford’s spin-offs of Delphi and Visteon in the 1990s. The spin-offs enabled in-house parts divisions to become independent suppliers serving multiple auto manufacturers. The decision to reduce vertical integration was driven by cost pressure, capital discipline, and the belief that these independent suppliers could deliver greater efficiency and innovation.

The study found that BYD manufactures about 80% of Tier 1 components and roughly 36% of Tier 2 components in-house. These integration levels are more than twice Tesla’s in-house share of Tier 1 components (37%). The Rhodium Group noted that a UBS study found that 75% of a Seal model is produced in-house, compared to 46% for a Model 3.

Vertical integration is the single most important factor behind BYD’s cost advantage. It helps explain why BYD has been among the companies most consistently leading price decreases over 2024 and 2025. While vertical integration requires higher upfront capital expenditures and R&D, it eliminates supplier markups across a much larger share of the vehicle.

To estimate these savings, the Rhodium Group used detailed bill-of-materials (BOM) data for BYD’s Seal and Tesla’s Model 3—both produced in China and, except for some chips, largely sourced from Chinese suppliers. They identify the share of externally purchased Tier 1 components and assume an average gross margin of 22% for China-based auto suppliers, based on reported margins at firms such as CATL, Bosch, Desay SV, Valeo, and Ningbo Joyson. Based on this analysis, the study estimated that BYD avoided roughly $2,369 per vehicle in supplier markups relative to Tesla in the Seal–Model 3 comparison.

A disadvantage of vertical integration is higher fixed costs per vehicle, a reason why many Western automakers abandoned this strategy. However, an analysis of depreciation per vehicle concluded that this concern does not hold in practice. The study found that, averaged over 2023–24, BYD’s depreciation and amortization totaled roughly $2,076 per vehicle, compared with $2,789 for Tesla. The spread widened in 2024–25, with BYD at $2,268 and Tesla rising to $3,361.

Nearly all of BYD’s long-term assets—about $343 billion out of $350 billion—are located in China, where construction and manufacturing costs are lower. Tesla, however, has only around $3 billion of its $57 billion in long-term assets in China. To show the advantage of locating assets in China, the study noted that Tesla’s Shanghai facility initially cost around $2 billion (later expanding to $3.5–4 billion). In comparison, Tesla’s smaller Berlin plant cost more than $5.5 billion. Such a cost difference can impact financial returns.

Another cost advantage for Chinese EV manufacturers is lower overhead costs. The advantage comes partly from the local manufacturers concentrating on a single market, China. This advantage is largely a function of the stage of maturity of Chinese companies rather than an explicit strategy. As Chinese EV manufacturers globalize, this cost advantage will narrow.

Single market focus helps Chinese EV manufacturers.

Chinese EV manufacturers have a substantially lower R&D and selling, general, and administrative (SG&A) spending per vehicle than Western competitors. This is not because Chinese companies are deemphasizing product development. BYD actually spends more on R&D, but it can spread those costs across many more vehicles than Western companies, lowering the cost per vehicle.

The Rhodium Group found that adjusted for automotive revenue, BYD spends roughly $930 per vehicle on administrative expenses and $1,373 on R&D, for a combined $2,302 per vehicle. Tesla spends around $4,021 per vehicle on administration and R&D, implying an overhead advantage of approximately $1,719 per vehicle for BYD. The lower cost is driven by cheaper China-based R&D, where large engineering teams can be maintained at far lower cost than in the US or Europe, and by closer collaboration with local suppliers to secure more competitive bids for subcomponents.

Chinese EV manufacturers appear more aggressive in seeking financial support from their suppliers. By delaying payments to suppliers, they are effectively taking an interest-free loan, which can reduce the amount of working capital the company needs. Interest-free loans boost financial returns, offsetting lower operating margins resulting from reduced sales prices.

Chinese EV manufacturers benefit from delaying paying their suppliers.

The Rhodium Group study is focused on understanding the Chinese EV market and the strategic adjustments Western EV manufacturers must make to their business models to compete more effectively. Between 2020 and 2025, Western carmakers have seen their Chinese market share fall from 62% to 35%. The immediate problem for these Western carmakers is that they lack competitive New Energy Vehicle (NEV) models in key segments. Western companies must also address the price gap with their Chinese peers.

The study concluded:

“Our estimated cost gaps suggest this would require a fundamental shift in operating models. To compete, Western OEMs would need to treat China as a largely self-contained business, with dedicated R&D and SG&A rather than relying on globally integrated operations. Vehicles developed mainly in high-cost home markets struggle to be profitable at the prices required in China. Said differently, the old approach—global models with limited localization for China—no longer works.”

Since our focus is on lessons from this study for revitalizing U.S. manufacturing sectors, the conclusion is similar. The old model of globalization will not work. Greater vertical integration will be required. That means a rethink of business models and strategies is needed, suggesting that revitalizing our manufacturing sectors will take longer than many expect.