We’re down to the wire for the 2024 presidential election. It’s pretty obvious that voters don’t agree on very much. If there is one point of consensus it is that nobody wants Chinese EVs to have free rein in the US auto market.
GM, Ford and Tesla sell cars in China. Is it fair that the US (and Europe) is slapping tariffs on Chinese cars to keep them out of our market? Aren’t we Americans supposed to be a beacon of free market capitalism?
Well yeah, but…
It’s not as though China plays by free market rules. It doesn’t. The Chinese government heavily subsidizes its EV makers because its people need the jobs and it wants to expand its economic reach. It’s a playbook China has used for 25 years, with steel, solar panels, low-end electronics, and all manner of cheap crap at Walmart.
There is a benefit to inviting as much cheap Chinese stuff into the U.S. – lower inflation. Why not offshore inflation to China and let the Chinese government subsidize lower inflation for U.S. consumers?
Well, that was one of the big arguments for globalization. Turns out we didn’t like losing the amount of jobs to China that we did, and we really didn’t like it when COVID destabilized supply chains that were dependent on China.
Call it a national security issue if you want – it makes sense to bring supply chains back to the U.S. and boost domestic manufacturing. But, those things mean higher prices, simply because American workers make more money.
Just so we’re all on the same page – this is why tariffs are inflationary. Whether it’s higher prices on imports or higher prices to pay the wages for Made in America workers. Personally, I’m ok with that trade-off. If I have to pay $5 more for a Made in America t-shirt so the factory worker can make a living wage, that’s fine.
Protecting American Industry
Google says that:
Overall, the auto industry employs about 1.3% of the U.S. population and 1.7% of the U.S. workforce. The auto industry is a vital part of the U.S. economy, contributing $702 billion in paychecks to workers. Each job at an auto manufacturer creates nearly 10.5 other jobs in other industries.
These are significant numbers, worth protecting against China’s unfair trade practices for sure.
But you know, most countries do not have robust automotive sectors to protect. Chinese EV sales in Brazil account for 76% of all EV sales. The numbers are similar for Thailand.
The International Energy Agency says that Chinese EVs account for 60% of global EV sales.
Wouldn’t it be great to find an American stock that is benefitting from the proliferation of Chinese EV sales around the world?
The Case for On Semiconductor (NASDAQ: ON)
On Semiconductor makes a variety of chips for the automotive market. With U.S. auto sales treading water lately, ON Semi’s share price hasn’t done much over the last year:
That’s about to change. Because ON Semi is one of the biggest Silicon Carbide (SiC) chip makers in the world.
Silicon carbide chips work fine at temperatures up to 200 degrees Celsius, eliminating all those problems. They can handle 10 times the voltage that regular silicon chips can. Plus, silicon carbide chips are faster than regular silicon chips. So they can be smaller, which means less weight and also lower cost, because you can get more chips out of one wafer.
Silicon Carbide are perfect for EVs. And because these chips are not the high-end AI chips that the U.S. government is restricting, they can be sold to China.
On Semi has around 50% of the Chinese EV market. It’s sales will grow as Chinese EV makers continue to grow sales in under-served auto markets.
On Semi is pretty cheap, forward P/E is 15 and its PEG ratio is just under 2. You can own the stock for the upside of China’s EV market, without feeling guilty about taking a job from an American auto worker.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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