* Chinese automakers are competing fiercely to sell EVs in

Canada, despite 49,000-vehicle cap on imports

* Auto executives, analysts say they're gearing up for the

US, which currently blocks Chinese-brand cars

* Future US expansion would be like 'flipping a switch'

because Canada has similar regulations, consumer demand

By Nick Carey and Divya Rajagopal

WUHU, China/TORONTO, June 25 - Just two weeks after Canadian

Prime Minister Mark Carney announced in January he would allow

limited electric-vehicle imports from China, that country's

biggest auto exporter, Chery, held its first meetings in Canada

with car dealers.

China's national champion BYD, now the world's largest EV

maker, is already planning to open six dealerships in Canada, an

advisory firm scouting locations for BYD told Reuters. BYD has

also started compliance procedures to import two passenger cars

to Canada, regulatory records show.

Lotus, a luxury-sports carmaker owned by China's auto giant

Geely, also plans to open a half dozen Canada dealerships this

year - just to sell a few hundred cars, Lotus CEO Qingfeng said

in an interview. And state-owned automaker Changan has a team

working on a Canada launch, according to design chief Klaus

Zyciora.

These automakers' aggressive moves into Canada, detailed

here for the first time, come despite the meager prospects for

sales and profits here anytime soon: Canada approved imports of

only 49,000 cars annually at a low tariff rate of 6.1%, rising

to just 70,000 cars over five years. So there's little money in

it - especially once that small pie is split many ways.

But Canada offers something far more valuable: The perfect

beachhead for what many industry experts view as the inevitable

invasion of Chinese cars into the United States, despite current

U.S. policies effectively banning them.

"We definitely have the idea of selling cars in the United

States," Chery International president Zhang Guibing told

reporters in May at the company's Wuhu headquarters. "Everyone

definitely has that idea."

Canada offers more than proximity to advance Chinese

automakers' U.S. ambitions. Unlike Mexico, where cheaper cars

rule, Canada's car market is almost identical to the United

States in consumer tastes and industry regulations. Shifting to

the United States later would be like "flipping a switch," said

Dan Hearsch, global co-leader of consultancy AlixPartners'

automotive practice.

"Canada is the practice run for the U.S.," says Robert

Kerwal, director of automotive solutions at JD Power Canada.

The only major difference is market size: 1.9 million cars

sold last year in Canada, compared to more than 16 million in

the United States.

Chinese competition terrifies automakers in the U.S. industry

who have seen their sales plunge in China, the world's largest

car market, in recent years as China's subsidized, innovative

industry exploded EV-and-hybrid sales. China has also emerged

from nowhere to become the world's largest auto exporter,

surpassing Germany, Japan, Mexico, South Korea and the United

States, largely on the strength of gasoline cars displaced from

China's rapidly electrifying market.

Chinese carmakers are currently blocked by steep U.S.

tariffs and a ban on Chinese connected-car hardware and

software. U.S. lawmakers are working to codify that ban, fearing

that U.S. President Donald Trump might strike a grand trade

bargain with China's government involving cars. Trump has

publicly suggested several times that he might allow Chinese

carmakers into the country if they build U.S. factories.

For now, as Chinese cars stream into Canada, Americans eager to

buy them will likely seek ways to bring one across the border

and put it in their driveway, said Hearsch, of AlixPartners:

"There will probably be an early run of people who want to buy

those cars."

The Alliance for Automotive Innovation, a U.S. industry group,

said the Canada-China trade arrangement "creates a potential

backdoor for Chinese brands to enter the U.S. market," where

they would pose economic and national-security risks. The group

also strongly opposes allowing U.S. factories for Chinese brand

cars.

"The market distortions and risks to the auto industry in

the U.S. are fundamentally the same whether these vehicles are

imported or produced domestically," the organization said in a

statement.

The White House did not respond to a request for comment.

THE DIPLOMATIC RIFT BEHIND CHINESE CARS IN CANADA

Canada's acceptance of Chinese cars reflects its growing

diplomatic rift with the United States, which has pressured

Canada and Mexico to erect trade barriers on Chinese cars.

Canada's Prime Minister Mark Carney has publicly distanced

his country from its formerly friendly neighbor as Trump hit

Canada with aggressive trade actions, public insults and threats

to annex the country.

But even as Carney pushes to reduce Canada's heavy economic

dependence on the United States, Canada still uses its proximity

and access to the U.S. market as a selling point to trading

partners.

Canada so far has opened cautiously, allowing Chinese cars only

in small volumes. But even an unrestricted Canadian market would

have far less appeal to Chinese carmakers without eventual

access to the United States, said Daniel Ross, director of

strategic market insights at Canadian Black Book, which works

with auto finance companies to estimate residual car values.

Canada's smaller car market and unfavorable exchange rate make

it "one of the least profitable markets for manufacturers to

sell into globally."

"It just doesn't make financial sense to do Canada without

the U.S.," Ross said.

Chinese brands also will have to share the limited market with

made-in-China cars from Tesla and possibly Geely unit

Volvo Car, which have established North American

brands.

In early May, Tesla started selling a Chinese-made Model 3

at about C$40,000 ($29,148), about half the price it charged in

Canada for U.S.-made version. The U.S. EV maker imported over

44,000 Chinese-made cars into Canada in 2023, the year before

tariffs were imposed.

Tesla did not comment. Volvo said it has not yet decided

whether to export Chinese-made EVs to Canada.

Records from Transport Canada show BYD, China's largest

automaker and EV seller, has started procedures to import two

passenger cars - one from Shenzhen, where the company makes

various plug-in hybrids and luxury Denza brand models, plus a

car from Xi'An. BYD plans to open the six Canada dealerships

this year, said Farid Ahmad, CEO of Dealer Solutions Mergers &

Acquisitions (DSMA), the advisory firm scouting locations for

BYD.

BYD's No. 2 executive, executive vice president Stelli Li,

told Reuters at a recent London event that the company is still

deciding which models to launch in Canada and would likely start

sales next year. She dismissed the notion that BYD is using

Canada as a training ground for the U.S. - saying it's already

well-prepared to launch there.

"I don't need to practice," said Li, who has a Los Angeles

home. "I lived in the U.S. for 15 years."

Before the Biden and Trump administrations cut off China's

access to the U.S. car market, both Chery and BYD had planned to

sell cars there.

In 2022, BYD studied setting up a U.S. distribution network,

engaging a Detroit-based consultancy. Now BYD aims to increase

its overseas sales to half of all vehicles, up from 23% of the

4.6 million cars it sold globally last year - a goal experts say

BYD will find hard to meet without U.S. market access.

CANADIAN CAR DEALERS IN WUHU

Among the crowd gathered in Wuhu in late April to admire the

Freelander 8, a freshly unveiled SUV from Chinese automaker

Chery and joint-venture partner Jaguar Land Rover,

were about 20 Canadian car dealers. Chery had invited them to

the Beijing car show that month and then to its Wuhu

headquarters to talk business and see its vehicle lineup.

Steve Alizadeh, CEO of Ontario-based Performance Auto Group,

which has 39 dealerships, was impressed.

"I could certainly see an opportunity in Canada for the

products we've seen here so far," he said.

Chery is road testing vehicles in Canada to assess how its

cold climate will impact warranty costs, and it plans to launch

sales there in the fourth quarter, company officials said.

Large Canadian dealer groups also own dealerships in the

United States, while U.S. groups like Lithia own

dealerships in Canada. So building dealer relationships now

should help once the U.S. market eventually opens up to Chinese

automakers.

That could take years, but Chinese firms are renowned for taking

a long view of business opportunities. Last month, Chery

International President Zhang Guibing told reporters the

automaker hopes to enter the U.S. market at a "suitable time."