Tesla’s stock price has been taking an absolute beating lately. Since July of last year the company has lost about $400 billion in market capitalization — a decline of over 40%. It’s now less than half as valuable as Meta, and only around a quarter as valuable as Google.

No one ever really knows exactly why a stock goes up or down, but we can hazard a few guesses. For one thing, people are just buying fewer Teslas these days:

As a result, Tesla’s revenue has stopped growing. Meanwhile, two executives, Drew Baglino and Rohan Patel, have recently quit — that could be a sign of internal turmoil or a reaction to the company’s dimming prospects, but either way it’s a bad sign. Tesla also recently laid off 10% of its global workforce, after a sustained hiring binge.

But stock prices don’t just depend on current revenues; they also depend on expectations about future revenue growth. And a massive shadow is looming over Tesla’s future growth: competition from Chinese companies.

China has been ramping up EV production enormously. That ramp-up includes Tesla itself, of course, which makes a bunch of cars in China. But it’s China’s own automakers that have been booming the most. BYD, the country’s leading car company, briefly overtook Tesla in EV sales last year. And plenty of other companies are entering the race, including Xiaomi, a mobile phone maker who recently started to make affordably priced, stylish, high-performance electric cars.

By JustAnotherCarDesigner - Own work, CC0

Chinese companies are beginning to squeeze Tesla out of the Chinese market, and providing stiff competition in Europe, the Middle East, Southeast Asia, and elsewhere (Chinese EVs aren’t sold in the U.S. yet). BYD and the rest make good-quality products, but more importantly, they’re able to offer them at unbeatable prices. A BYD Atto 3 sells for around $39k to $48k in Australia, while a Tesla Model 3 sells for $62k to $72k.

Tesla’s answer to this was supposed to be to go even cheaper. The company had promised to create a $25,000 electric car — a true mass-market vehicle that would bring EVs to the masses at last. But Elon Musk recently nixed the plan, choosing to focus on driverless taxis instead. When the $25,000 EV arrives, it will be a Chinese company who makes it.

Not everyone is upset about this, of course. Elon Musk’s detractors are prone to schadenfreude, viewing Tesla’s decline as karmic punishment for letting the antisemites and Russian propagandists back onto Twitter. But I think this reaction is shortsighted. To see a champion of U.S. industry and innovation go down to fast-following Chinese rivals shouldn’t make any American happy. And the same techniques that China is using to defeat Tesla will be used to defeat any other American competitor.

So we should be thinking very hard about how China did this, and what the U.S. and allied countries can do to prevent it from happening again, and again, and again.

The China Cycle: How Western innovations end up benefitting Chinese companies

There’s a fairly predictable cycle with regards to multinational companies and China. It goes like this:

A multinational company puts its factories in China, lured by some combination of cheap production, big contracts, and the dream of huge market opportunities.
China appropriates the multinational company’s technology, through some combination of joint ventures, acquisitions, reverse engineering, and espionage.
The appropriated technology makes its way into the hands of Chinese domestic companies.
The Chinese companies squeeze the multinational company out of the Chinese market.
The Chinese companies go overseas and outcompete the multinational company in world markets.