(Bloomberg) -- Help is on the way for European carmakers struggling to deal with an influx of cheap Chinese electric vehicles. The European Union voted on Oct. 4 to impose tariffs as high as 45% on EVs imported from China after an investigation into subsidies that Beijing doles out to its car industry.
The duties are expected to hurt companies including BYD Co., SAIC Motor Corp. and Geely, but also risk affecting Western manufacturers that ship cars made at their Chinese factories to Europe — for example Tesla Inc.
While the levies may help Europe’s domestic brands to defend their home turf, they’re likely to spur retaliation from Beijing, harming their business in China.
What’s happening?
The European Commission notified carmakers in June that it would raise duties from the current level of 10%, and also set provisional levies for individual Chinese car brands. The final duties were signed off by member states on Oct. 4, despite misgivings among some major automaking nations including Germany. They were due to go into effect by November.
Brussels says it is responding more assertively to what it sees as unfair trade and market-distorting practices, which have seen Beijing subsidize exports and aggressively favor domestic firms in key sectors.
EU countries did €739 billion ($815 billion) in trade with China last year, and the bloc has opened other investigations in areas ranging from China’s procurement of medical devices to bids by Chinese firms for energy projects in the EU.
Why now?
The bloc is keen to prevent a replay of what happened to Europe’s solar industry a decade ago, when local manufacturers failed to keep up with state-backed Chinese rivals and were priced out of their own market. EU nations would struggle to match the scale of subsidies and tax breaks for EVs and other green technologies handed out by China. Europe isn’t alone in imposing tariffs on imports of goods produced using those incentives while local manufacturers try to adapt. The US in May unveiled sweeping tariff hikes on a range of Chinese imports, including EVs.
What are the Chinese EV brands?
- The industry leader is BYD, which started as a battery maker but invested large sums in researching EV and plug-in hybrid technology. Its Seal sedan, which costs around €45,000 in Germany, competes with Tesla’s Model 3 and several VW cars. The manufacturer plans to build a factory in Hungary and has said it’ll bring its $10,000 Seagull hatchback to the region in 2025.
- Nio Inc. has established sales and service networks in markets including Norway, Germany, the Netherlands, Sweden and Denmark. The brand’s ET5 sedan and EL7 sport utility vehicle won the maximum five-star safety ratings in the 2023 Euro NCAP safety tests.
- Xpeng Inc. this year started selling electric models including its flagship G9 SUV in Germany, Spain and France and has plans to expand to the UK and Italy. In Germany, unlike some of its Chinese peers, the company is selling via a local dealer network.
- Other Chinese companies have bought European brands to facilitate their entry into the market. SAIC has had success in the region with the British-origin MG badge, while Geely controls Norfolk, England-based sports-car maker Lotus and Swedish-origin Volvo Car AB.
Why are Chinese EVs coming to Europe?
China produces more electric cars than anywhere else and makes most of the world’s EV batteries — the most expensive part of an electric car and the biggest determinant of its performance. Its automakers are now expanding overseas to sidestep a price war and a slowing economy at home. Selling to customers in Berlin or Paris, where they can command higher prices, will require big initial investments but may eventually produce good returns. With the EU planning to gradually phase out combustion engines, the market is potentially huge. UBS AG analysts warned in a September 2023 research note that Western automakers were set to lose a fifth of their market share because of the rise of more affordable Chinese EVs. But like Europe’s homegrown manufacturers, the Chinese brands have to contend with slowing sales growth for EVs in Europe, where governments in several countries havae pulled subsidies and inflation sapped consumer spending.
What’s the situation for non-Chinese car brands?
For many years, China’s booming auto market was a money spinner for the world’s top carmakers. The rise of EVs is changing the dynamic, with BYD having dethroned VW as the top-selling auto brand in China. Some carmakers are shrinking their exposure, with Stellantis NV shuttering its only Jeep factory in the country. Others are overhauling their products and striking partnerships with local players — VW, for example, is introducing a new EV brand in China and has teamed up with Xpeng — to defend sales or get access to technology.
Closer to home, manufacturers are racing to offer more affordable EVs to defend against the cheap Chinese competition, while also tweaking their electrifcation strategies to account for cooling demand:
- Volkswagen, which has been struggling with its EV shift, is introducing more than 30 new products this year including the all-electric Porsche Macan and the ID.7 sedan, which comes with a display that beams information into the driver’s field of vision. The German manufacturer also has plans for a €20,000 EV developed and produced in Europe, but that won’t arrive until 2027. Meanwhile, the company is considering job cuts and unprecedented plant closures in Germany to become more competitive.
- Stellantis — owner of the Fiat and Peugeot brands — earlier this year introduced the €23,300 electric Citroën ë-C3 and has started sales of cars co-developed with China’s Zhejiang Leapmotor Technologies Ltd. in Europe.
- France’s Renault SA said in May it will develop much of its sub-€20,000 EV in China, part of a push to speed up time to market. It plans to start deliveries of the R5 E-Tech city car — which is assembled in France — this year, with a price tag of around €25,000.
- Mercedes-Benz Group AG and BMW last year unveiled prototypes for their next-generation EVs, but those models won’t be available until around mid-decade. BMW has had a strong run of growth recently, and in July pulled ahead of Tesla to lead Europe’s electric-vehicle market for the first time.
How does China subsidize its electric car sector?
- Consumer subsidies: A national program that ran for a decade before ending in 2022 discounted EV prices by as much as 60,000 yuan ($8,549). Many local governments continue to dole out rebates of up to 10,000 yuan.
- Manufacturer subsidies: Direct government support helped launch more than 500 EV makers. That led to explosive growth and falling prices followed by significant consolidation.
- Infrastructure: Widely accessible, government-subsidized charging stations using standardized plugs reduce drivers’ costs and ease range anxiety. China has added millions of EV chargers, including some 827,500 ultra-fast connectors, compared with around 64,000 in Europe. Car companies in China have also opened hundreds of stations where spent batteries can be quickly swapped for charged ones.
The European Commission in March said it had found “sufficient evidence” that the imports of new EVs from China received subsidies including direct transfer of funds, tax breaks, or public provision of good or services below market prices.
Are Chinese cars really so much cheaper?
In China, yes, but not so much in Europe. Renault has for several years marketed the Dacia Spring as Europe’s most affordable electric car, with a base price of €16,900. However, this is a poor indicator of European manufacturing competitiveness as the car is built in China’s Hubei province. It’s still far cheaper to make a car in China than it is in Europe, given the country’s low cost of land, energy and labor, and the vast economies of scale derived from being a first mover in mass-production of EVs. That’s reflected in the contrast in EV sticker prices between China and Europe. In Germany, SAIC’s MG4 costs €34,990. In China, it’s 109,800 yuan (€14,184).
Are European companies happy with the tariffs?
Europe’s carmakers don’t see eye to eye on how Brussels is dealing with China. While Stellantis Chief Executive Officer Carlos Tavares has said the EU should come to the aid of homegrown manufacturers, he’s also recently called tariffs a “big trap” that will drive inflation. The companies that rely heavily on sales in China — mainly Volkswagen, Porsche, BMW and Mercedes — have much more to lose if trade relations continue to deteriorate. Mercedes CEO Ola Källenius in June said Europe should resist the urge to take protectionist measures, repeating a mantra he’s been championing ever since the EU opened its probe. Slapping tariffs on Chinese EVs will delay the transition to a cleaner economy, with an escalating trade conflict poised to hurt “the whole world,” former Volkswagen CEO Herbert Diess — now chairman of chipmaker Infineon Technologies AG — said during a BloombergNEF conference in Munich that same month.
How could Beijing retaliate?
China’s Ministry of Commerce responded swiftly to the EU’s tariff move in June, urging the bloc to “immediately” correct its decision and to handle economic and trade frictions through dialogue and consultation. Beijing has signaled it’s ready to unleash retaliatory tariffs as high as 25% on imports of cars made in the EU with large engines — which would affect Mercedes-Benz, Porsche and BMW the most. Beijing has also hinted at possible tit-for-tat levies on European aviation, agricultural and dairy goods and wine, and has begun an investigation into European exports of brandy. It could also restrict exports of goods that are vital for EV production, such as rare earths or battery metals like lithium. The EU mines only a small fraction of the lithium it consumes, and relies on China to process it. Another retaliatory tool China has used in the past is to restrict tourism to inflict economic punishment.
So are the EU tariffs final now?
A negotiated solution is still a possibility.
Brussels and Beijing have been holding talks to explore whether an alternative can be found. One avenue they are exploring is a potential mechanism to control prices and volumes of exports in place of the duties.
The EU has said any arrangement needs to comply with World Trade Organization rules and address the underlying issue of subsidies.
--With assistance from Alberto Nardelli, Albertina Torsoli and Jorge Valero.
©2024 Bloomberg L.P.