Elon Musk might be right. Chinese EV firms could 'demolish' their US rivals.

• Elon Musk warned Chinese EV firms could "demolish" rivals like Tesla without trade barriers.
• It comes after BYD overtook Tesla as the world's largest producer of electric cars.

A decade ago, Elon Musk laughed off the threat posed by Chinese electric carmaker BYD. He's not laughing now.

The Tesla CEO warned investors in a recent earnings call that Chinese EV firms will "demolish" their Western rivals if trade barriers aren't put in place to limit their expansion, after BYD finally overtook Tesla as the world's top seller of electric cars.

"The Chinese car companies are the most competitive car companies in the world," Musk told investors during Tesla's Q4 earnings call.

"If there are no trade barriers established, they will pretty much demolish most other car companies in the world," he added.

Chinese EVs are already subject to a 25% tariff in the US, which has largely kept them out of the US market.

But lawmakers have called on the Biden administration to hike those tariffs even further, and revisit trade rules with Mexico to prevent Chinese companies from using the US' southern neighbor as a "backdoor" into the American market.

Chinese automakers are quicker and more flexible in their designs

China's EV scene is booming, with the country accounting for nearly 60% of global EV sales in 2022.

Companies like BYD, Chery, and Geely have outcompeted Western rivals in China by offering a huge variety of electric models, often with very attractive prices — and they're now eyeing overseas expansion as the Chinese market becomes increasingly crowded.

One reason for their success is that Chinese automakers can design and produce electric cars faster than traditional players, industry insiders say.

"For the established, international automakers, normally they have six to eight years of lifetime for the product, and three to five years for development," Zhang Fan, head of design at state-owned Chinese automaker GAC, recently told Fortune.

"With the same amount of time, we've been evolving twice while the establishment only [does] once, so that's why we are growing so fast," he said.

John Helveston, professor of engineering at George Washington University, agreed and told Business Insider that Chinese car makers are also more flexible in their designs than their US and Japanese counterparts.

"Legacy auto has this long history of being very conservative and making sure there's no issues. I think the Chinese companies are more willing to take risks and gamble with something and see how it goes," he said.

Helveston said that this mentality has been assisted in part by China's lower safety standards, but this may make it challenging for these companies to export their cars overseas.

Something else that may stop Chinese EV companies from overrunning the US market with cheap models is range. Chinese EV drivers generally require far less range than their US counterparts, Helveston said, allowing automakers to build cheaper cars with smaller batteries.

"The vast majority of Americans want to have 300 or more miles of range, which adds tens of thousands of dollars onto your car," he said.

Tesla's China headache

If Chinese EV firms can overcome these challenges, Tesla may face a similar headache in Western markets to that which it faces in China, where it has been forced to cut vehicle prices to keep up with the cut-throat competition.

Amid brutal competition in China, some Chinese automakers are looking to expand overseas. BYD, MG, and Chery are all reportedly exploring building factories in Mexico, raising the prospect that Tesla's Chinese rivals could be about to set up shop closer to home.

Others are turning to innovations to stand out from the crowd. Tesla rival Nio has built a network of over 2,000 "battery swapping" stations across China, where drivers can replace dead EV batteries with fully charged ones in a process that can take less than five minutes.

It also recently demoed an electric battery with a range of 1,000km (620 miles).

The company has ambitious plans to expand its battery-swapping network and vehicle sales in Europe, one of Tesla's most important markets.

Nio's Senior Vice President Dr. Fei Shen told BI that the company's ability to innovate is rooted in the sheer competitiveness of the Chinese market.

"The competition here in China is high. The companies who want to survive in this market have to have some innovative technology or some innovative business ideas," Dr. Shen said.

"Fortunately, we are a startup company. We don't have a lot of limitations on us, so it's easy for us to make some innovations from the very beginning. We don't have the burden of history on us," he added.