BYD may avoid America's outsourcing mistakes with knock-down kits for export assembly

When the US started outsourcing its manufacturing industry to China in the 80s, the move was sold as a clever business strategy that generated hefty returns for shareholders.

The short-term cost reductions, however, resulted not only in the loss of skills and jobs, but also in intellectual property and trade secret transfers. America is now trying to bring back the manufacturing base that went offshore, at least for up-and-coming industries like electric cars, via a combination of import tariffs and tax credits for localized production.

The Chinese government now faces a similar dilemma, as it gave local companies the marching orders to export after a real estate financial crisis softened domestic demand for goods and services.

Electric vehicle juggernauts like BYD, Tesla's main competitor, heard the call and started setting up shop in many countries, acquiring cargo ships, and dedicating a huge budget for a marketing blitz abroad.

The response in the US and Europe was to slap hefty tariffs on vehicles imported from China to encourage localized production. As a result, BYD is now planning or building a number of factories abroad, including in Europe and Latin America.

The forced expansion, however, has the Chinese government worried about the intellectual property of its automakers. It reportedly gathered all major car companies in the summer, and advised against manufacturing abroad from scratch.

Instead, it argued, Chinese EV makers should only ship knock-down kits and use foreign factories as mere assembly plants, rather than transfer their superior electric car technologies and create jobs elsewhere.

Beijing may have a point, as China is at the forefront of the electric vehicle and battery revolution, so it would like to avoid the mistake that American companies made when they outsourced the US industrial base.

The tariffs and incentives aimed at localizing EV production, however, are usually structured in a way that requires a complete manufacturing process and the jobs it creates, not just assembly.

If they go with the government's advice, BYD and other Chinese EV makers may incur additional costs and face backlash in the host countries, so it remains to be seen if and how they will respond to Beijing's plan to protect their trade secrets.

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