Why Volvo Can Keep Selling Cars in the U.S. and Polestar Can't

0:01Hi, I'm Kelly Barner and this is the Art of Supply Podcast. Every business story has a supply chain angle, and those stories deserve to be told. This show digs deep into news headlines and interviews thought leaders, executives, and newsmakers to capture their perspective in their own words. With no agenda to lead us in any particular direction, we'll offer you objective coverage of geopolitics, innovation, and competition. Facts will always take precedence over hype. The rest is up to you. Let's say you have two cars that come off the same assembly line in South Carolina. They're built on the same platform and with the same software stack.

0:51Starting with the model year 2027, one of those cars can be sold in the United States, but the other can't. And months after the government decision to that effect, the company that got turned away says it still doesn't know why. We're talking about the Volvo EX90 and the Polestar 3. This is a story about a supply chain that is deeply tied to China and a government that's trying to regulate it out of that dependency with a rule that judges who a company is owned by, not just by what's inside of the car or where it's made. In this episode of Art of Supply, I'll cover why the automotive supply chain's dependence on China is proving so hard to unwind and what Washington, D.C.

1:38is trying to do about it. We'll look at how two companies under the same Chinese parents' roof got opposite answers from the U.S. Commerce Department. We'll also look at what happened to Ford's China-built Lincoln Nautilus in the same situation and why Congress isn't done with any of this. Now, let's start with what the rule actually says. Under the Commerce Department's Connected Vehicle Rule, a connected vehicle is a car, SUV, pickup truck, or motorcycle with built-in hardware and software that let it talk wirelessly to outside networks like cellular, satellite radio, Wi-Fi, Bluetooth, those kinds of things.

2:21Realistically speaking, that's almost every new passenger vehicle sold in the United States. Now, interesting from a supply chain standpoint, vehicles over 10 ,000 pounds, which means most trucks and buses are left out for now, but there's a separate commercial vehicle rule that's been promised for later. The current rule targets two systems, the connectivity hardware and then the connectivity software that sends and receives signals as well as automated driving software. Software restrictions start with model year 2027 and hardware restrictions follow with the model year 2030. Now in almost every single article about this rule, we read about a quote sufficient nexus to China or Russia.

3:08That phrase comes from the Commerce Department's January 2014, the 2025 press release, but it's not in the rule itself. The legal test is based on whether a company or a component is owned by, controlled by, or subject to the jurisdiction or direction of China or Russia. So that's clear. There's no ownership percentage guideline. Control can come from a majority stake, a quote, dominant minority stake, board seats, special shares, or even contracts. One provision matters more than any other for this story. A carmaker that is itself owned or controlled by China can't sell connected vehicles in the United States at all, no matter where the parts and software come from.

3:59So how did we end up with a supply chain that needs a federal rule to untangle it. President Joe Biden ordered commerce to investigate Chinese vehicle technology in February of 2024. Three months later, his administration quadrupled tariffs on Chinese EVs to 100%. Then the connected vehicle software ban was announced that September. At the time, National Security Advisor Jake Sullivan said these systems collect huge volumes of driver data and connect constantly to phones, other cars, and critical U.S. infrastructure. At the time, Commerce Secretary Gina Raimondo acknowledged that there were very few Chinese or Russian vehicles on U.S.

4:46roads, and she framed this as getting ahead of a future threat. She said the action was strictly about national security, not trade. Now, four months later, the Biden administration put a 100 % tariff on Chinese EVs. So it's not exactly a contradiction, but it did create two policies that do the same thing to the same companies, and we'll come back to that. John Bozzella of the Alliance for Automotive Innovation said U.S. automakers use very little Chinese software or hardware and do support the rule. But he also warned, quote, quote, you can't just flip a switch and remake the world's most complex supply chain overnight.

5:30That's something this audience knows very well. There's also other trade-offs. One example is that China is a major supplier of LiDAR, or light detection and ranging. It's how your car knows what's around it without actually having eyes, whether it's self-driving or not. They have some of the most advanced autonomous driving systems in the world. So cutting off all of those supplies risks leaving the United States automakers behind. Now, on the other side, the New York Times noted that the rules plus the 100 % tariff could prove an insurmountable obstacle for Chinese automakers like BYD that have been eyeing the US market.

6:15To say the least, this is complicated and the hardware isn't even the hardest part. As the Wall Street Journal reported this February, it's one thing to confirm a part didn't come from China. It's another thing entirely to make sure none of the data that the car collects ever ends up there. In some cases, that requirement would force electronic suppliers to reveal where their source code comes from. And no shock, suppliers don't like that. The rule requires documentation identifying the author, timestamp component, and supplier for proprietary additions to covered software. And suppliers have warned that globally distributed development teams make it really hard to tell whether a given piece of code falls under the restrictions.

7:06In June, in an attempt to help, Commerce added a trusted supplier program. This lets suppliers apply directly for approval so that automakers don't need a case-by-case permission for every part. Now, here's where we come back to the heart of this story. We've got two connected companies that got two different answers about making connected vehicles and selling them in the United States, Polestar and Volvo. Now, Polestar was actually spun out of Volvo in 2017. Both companies are owned by China's Geely Holding, and Volvo holds a 20 % stake in Polestar, so there's a little bit of a circular historical relationship.

7:51The Polestar 3 is built at Volvo's South Carolina plant on the same platform as the Volvo EX90. Interestingly, the China-built Polestar 2 already departed from the United States. It was discontinued because of that 100 % tariff on Chinese EVs. So that tariff already did part of the connected vehicle rules job before it even took effect. In May of this year, Volvo announced that it had received an authorization to continue selling cars in the United States. But on June 25th, the Commerce Department told Polestar it would not grant them an authorization to sell model year 2027 and later vehicles in the United States.

8:38Polestar's U.S. Head of Government Affairs, Peter Wexler, called the Volvo EX90, quote, essentially the same as the Polestar 3 and said that the two vehicles share the same software stack. He also wrote that Polestar is still working to understand the basis for the Commerce Department's denial. So why the split ruling between these two vehicles? Here's what we know, and sorry up front, it is not that much. Commerce declined to comment on the two different outcomes, and it doesn't have to. The actual connected vehicle rule says, quote, decisions regarding specific authorizations will not be made publicly available.

9:21Ulrika Swanson, a Washington, D.C. export controls attorney that works for Cassidy Levy Kent, told the Wall Street Journal that the process is, quote, sort of a black box. Seems like a fair description. And Volvo CEO Håkon Samuelsson said that U.S. authorities are scrutinizing how connected cars handle and secure data and that Volvo proactively demonstrated how it will do that. Now, Electrek's read on the judgment is this. Volvo is separately listed. It is more established and has a bigger U.S. footprint, while Polestar is more tightly tied to Chinese parent Geely and shares platforms and software with the Geely brands.

10:05Sweden's Minister for Foreign Trade, Benjamin Dosa, said he worked closely with Volvo to make sure the company could meet the rules requirements. Polestar did not ask for similar help. But we still can't completely separate the two sides of this. Polestar could have asked Commerce to reconsider, or they could have gone to court. It did neither of those things. Alan Haig of Haig Partners, a dealership M &A firm, suggests that the ban may have given Polestar cover to exit a US EV market that it saw as having turned against it. That refers back to the Polestar 2 decision in response to that 100 % EV tariff.

10:50Polestar has 32 U.S. dealers, most of whom also sell Volvo. And they've booked about$130 million in negative adjustments from the decision. They've said more are coming. This situation is so weird. a company or a car can be built in South Carolina, assembled in South Korea, sell no Chinese-made vehicles in the United States, and still fail to pass the rule while its Geeling sibling passes. If the rule is unpredictable to the companies that are subject to it, compliance isn't really a strategy that you need to worry about. Then, of course, there's the Lincoln Nautilus, an American automaker's experience with the same rule.

11:36Very different experience, I might add. So the Nautilus is built in China. Ford develops its software in the United States, but installs it in the vehicle in China. And that installation step is what makes it subject to the connected vehicle rule. In June, Ford confirmed that it had asked commerce for authorization, starting with the 2027 model year. Then in August, a Ford spokesperson said basically, never mind. After discussions with commerce, Ford realized that the Nautilus no longer needed an authorization after all. That same week, Ford said it will move production of some of Lincoln's models from China to the United States starting in 2030, that year that the hardware rule takes effect.

12:24The U.S. tariff on the Nautilus is 52.5%. Ford CEO Jim Farley said both the tariffs and the connected vehicle rule drove the decision, but the tariffs were the main factor. Now, remember, Secretary Raimondo said that this was about national security, not trade. But it's the tariff that finally moved the factory, not concerns about data. Now, what's Congress doing while all this plays out? Well, Senator Bernie Moreno, a Republican from Ohio, and Senator Alyssa Slotkin, a Democrat from Michigan, want to take the Commerce Department's rule and turn it into law by passing the Connected Vehicle Security Act.

13:07They propose expanding it to include Iran and North Korea in addition to China and Russia. Unlike the rule, the bill uses a flat number. No automaker worth more than 15 % Chinese ownership is allowed. And I presume that would also apply to Russia, Iran, and North Korea. Not that companies in those countries own a lot of U.S. automaker percentages. Now, the hitch is that this rule would catch Mercedes-Benz up in it. BAIC Motor and Geely founder Lee Shufu each hold nearly 10 % of the company. Committee chair Senator Tan Cruz said the bill can't become law with that threshold. And he actually described it as a maneuver to benefit GM's Cadillac by blocking Mercedes-Benz from the United States.

14:01On September 30th, that bill stalled when Senator Rand Paul objected over the Mercedes issue. Senator Moreno, one of the two senators putting the law forward, said no president would sign a bill banning Mercedes and named Volvo as another company that lawmakers have to manage. So there you go, just Congress being Congress. Now, the current approach under the rule judges control on a case-by-case basis and won't explain itself. The other, the law, draws a very clear line that would unfortunately sweep in a German luxury brand that lots of people drive. Just to sum all of this up, the automotive supply chain is tied to China in ways that go well beyond where a car is assembled.

14:49As we've seen, it reaches into who writes the code, where it gets installed, who owns the company, and where the data associated with the software might travel over the lifetime of that car. Washington's answer was a rule that judges ownership and control, decides case by case, and keeps the reasoning private. That produced a Volvo yes and a Polestar no from the same factory, and then a Nautilus that went from needing permission to not needing it with no public explanation either way. Ultimately, I think this is a test of whether a supply chain this tangled can be regulated by a process nobody outside the government can clearly understand.

15:34So where do we go from here? Polestar will report their third quarter results on November 5th. I think we can imagine that those are not going to be terribly happy, at least in the United States. The Connected Vehicle Security Act, not the rule, this is the law, will no doubt rear its head again after the midterms. And the hardware restrictions that start with model year 2030, which is where the parts themselves get involved, not just the code, may have to change. But if we go back to those two cars we started with on that same South Carolina production line, you've got the same plan, the same platform, and the same software stack, at least by Polestar's account.

16:18What separated them wasn't anything you could find on the vehicle. Polestar built the right car. It just had the wrong parent. And it made the mistake of not asking for help. Then again, maybe the opportunity to leave the US EV market was what it has wanted all along. And this is a happy ending for that company.

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