The United States is facing a critical national security risk… all the way from across the globe.
Accusations that China is attempting to spy on Western democracies are nothing new. Last year, on Feb. 4, the U.S. military shot down a Chinese balloon flying over the Carolinas following reports of espionage. In the months since then, fear of such surveillance has grown throughout the States, manifesting in accusations like popular PDD Holdings (NASDAQ:PDD) e-commerce app Temu containing spyware. Most recently, though, a U.S. government official has voiced new concerns — and instead of sky-high balloons, the threat may be much closer to home.
Back in late January, U.S. Secretary of Commerce Gina Raimondo warned that Chinese electric vehicles (EVs) could be spying on U.S. drivers. More specifically, Raimondo alleged that these vehicles are “collecting a huge amount of information about the driver, the location of the vehicle [and] the surroundings of the vehicle.”
Most Chinese automakers haven’t started selling their vehicles in the U.S. due to a combination of high tariffs on imported vehicles and tax credit requirements. If Raimondo’s information is to be believed, however, it could severely impact these companies’ future plans to enter the lucrative U.S. market.
That may severely compromise Chinese EV stocks. It also clearly benefits automakers sporting the red, white and blue.
Chinese EV Stocks Face Geopolitical Tensions
It’s no secret that China has been working hard to keep pace with the U.S. as the EV revolution has transformed markets. Even Tesla (NASDAQ:TSLA) CEO Elon Musk has expressed concerns, stating that further trade barriers will be necessary to keep Chinese automakers from overpowering U.S. EV rivals.
However, that doesn’t mean that Chinese EV stocks are enjoying a smooth ride so far. In fact, it has been a complicated start to the year. Geopolitical tensions and escalating price wars have created a turbulent economic landscape. Industry leader BYD (OTCMKTS:BYDDY) recently announced significant price cuts and, according to reports, other automakers will soon follow suit.
These decisions can likely be chalked up to slipping domestic demand. Chinese new energy vehicle sales are down almost 40% since last month, a low not seen since August 2023. Of course, Chinese EV stocks have not reacted well as a result.
Plus, Elon Musk may be about to see his wish come true.
Indeed, President Joe Biden’s administration has been considering implementing further tariffs against China for months. According to the White House, this review of current tariff policies is part of a “strategic, thoughtful, deliberative approach to a bilateral economic and trade relationship with China.” This further tariff increase would be intended to help strengthen domestic clean energy efforts while simultaneously protecting the economy from cheap Chinese imports. Currently, Chinese EVs face an additional 25% tax “on top of a 2.5% tariff on auto imports.”
Now, Raimondo’s accusations may compel policymakers to take swift action, making it even harder for Chinese automakers to sell their vehicles in the United States.
Dr. Jonathan Ward, author of China’s Vision of Victory and The Decisive Decade, is an expert on U.S.-China global competition. Ward told InvestorPlace that investors must understand the context of “China’s grand strategy” — and the industries tied up in it:
“As we begin to secure our critical supply chains and diversify away from the People’s Republic of China — which is a military and strategic adversary of the United States — we are going to have to take certain actions to secure important technologies and ensure that strategic industries are not dominated by the Chinese Communist Party and that U.S. capital, technology and market access is not contributing to their strategic position in the world.”
Action Against China?
What would these actions look like? As Ward proposes, the U.S. must target specific industries and companies through a “wide range of economic measures” to ensure that the U.S. economy isn’t flooded with imports from China, thus rendering it overly dependent on products from a partner with which it has a presently tense relationship.
EV producers should be high on that list.
The Biden administration is currently preparing an executive order to protect Americans’ sensitive personal data from foreign governments. The order would allow government officials to impose new restrictions on digital transactions for personal data “that can often be easily and legally acquired online right now,” including mobile phone location and personal health information. Doing so would make it harder for foreign governments to obtain information on U.S. government staff.
Already cautious toward allowing Chinese EVs in the U.S. due to economic concerns, the White House likely won’t need much persuasion to enact measures to protect everyone’s data and help U.S. companies grow. Ward told InvestorPlace:
“Investment in China is increasingly risky […] We’re at the very beginning […] of the U.S. actually taking strategic action on this problem set […] I think investors are going to be caught in the middle of that because it depends on where they are on the genuine learning curve when it comes to U.S.-China strategic competition. Being invested in the wrong places could be a pretty big disaster for people that don’t understand this picture well enough.”
In this case, the “wrong places” seem to include competitive, technological industries such as the EV space. Raimondo’s comments aren’t the first time accusations regarding EVs and spying have been levied at China, either. U.K. lawmakers have raised similar concerns that imported Chinese EVs could be used to spy on the population.
In fact, experts have been raising suspicions around Chinese EVs posing a threat to national security interests since at least 2022. But now that government officials are starting to take notice, real action may be taken. As Bloomberg reports, the “extraordinary array of sensors and cameras” with which modern EVs are equipped could easily be used for “collating data and aiding espionage.” Measures taken against China-made EVs as a result would make it even harder for Chinese automakers to gain a foothold in the growing U.S. EV market.
Companies like BYD, Nio (NYSE:NIO) and Li Auto (NASDAQ:LI) aren’t just at risk in the U.S., either. This month, leading European automakers announced plans to raise 7 billion euros to build new EV “gigafactories” across the European Union as a means of curbing reliance on Chinese EVs.
Combined, all of these developments put Chinese EV producers at a significant risk in two of the world’s top EV markets.
What This Means for the U.S.
As of now, Chinese automakers haven’t issued any responses to Raimondo’s statements, nor has the Chinese government. The fact that most Chinese automakers have yet to sell EVs in the U.S. may also cause some investors to shrug this news off.
“Is it something that needs to be assessed on the U.S. side?” Sino Auto Insights Managing Director Tu Le asked, speaking to InvestorPlace about proposed U.S. regulatory action. “Yes. But right now […] there’s no Chinese EVs on the road.”
However, it’s important for investors to account for the zero-sum nature of financial markets.
When Chinese EV stocks lose, their rivals with a presence in the U.S. will stand to benefit. Companies with the largest shares of the U.S. EV market will be able to proceed without the threat of lower-priced Chinese EVs undercutting them.
And right now, top U.S. EV sellers are a better bet than Chinese EV stocks. Tesla is still the top seller of EVs in the U.S. with a 55% market share. Automakers like BMW (OTCMKTS:BMWYY) are also closing in. Companies with a sizable share of the U.S. and European markets represent the best EV stocks to buy right now.
With new incentive for the U.S. to double down on protectionist policies, the bottom line is this: Investors should be watching closely and proceeding carefully when it comes to Chinese EV stocks.
On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
