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Europe Weakens Its Own Auto Industry As China Sales Accelerate
Neil WintonMay 18, 2023,07:31am ED
Europe’s determination to force its citizens into electric cars will ravage its own traditional automotive industry as it becomes a trojan horse for Chinese manufacturers’ often superior and always cheaper battery-powered vehicles.
EU laws, which ban the sale of new vehicles with internal combustion engines (ICE) by 2035, have already made entry-level gasoline and diesel engines unaffordable. The EU has a target of overall net zero carbon dioxide (CO2) emissions by 2050.
The EU was aware China had a huge lead in making and selling battery electric vehicles (BEV) but still tightened CO2 emissions rules in the knowledge the likes of Zhejiang Geely Holding Group, Great Wall and BYD had an estimated 20% cost advantage over Europeans.
The Chinese are taking aim at a hugely important part of the European economy. According to the European Automobile Manufacturers Association, the industry employs 13 million people, generates €375 billion ($405 billion) in tax revenue and earns a €79.5 billion ($86 billion) annual trade surplus. Almost 8% of EU GDP is generated by the auto industry. Yet the EU is knowingly generating attractive and healthy conditions for this important sector to be vulnerable to attack from China, while making it more difficult for its own industry to compete.
A massive sales offensive from Chinese manufacturers has already begun. In Germany, Europe’s largest market, sales of Chinese BEV imports reached almost 30% of the market in the first quarter, up from just under 8% in the same period of 2022.
The EU has been a no-nonsense advocate for rapid adoption of net zero CO2 policies, apparently regardless of the economic damage it might cause. But recent comments by French President Emmanuel Macron that the EU should pause imposing environmental regulations because Europe already led the world, suggest some dilution might be on the cards.
The first evidence of this could be a delay of so-called Euro 7 regulations, set to tighten in 2025. Euro 7 regulations tightening emission limits for nitrogen oxides and carbon monoxide are due to start in July 2025. The automotive industry has said these rules will be too costly to implement, unnecessary and have been seeking a postponement. Italy is leading a rebellion in the EU to block implementation and says it already has enough support to succeed.
The impact of this Chinese incursion will be huge. A recent report from Allianz Trade said Chinese-built BEVs could cost European automakers €7 billion a year in lost profits by 2030 unless the EU takes action either to raise tariffs, boost battery and other technology, or persuade China to build cars in Europe. Allianz Trade is a subsidiary of German insurer Allianz. According to French component giant Faurecia, sales of Chinese BEVs will hit 1 million a year, although it didn’t say when.
Investment bank UBS expects Chinese manufacturers to set up in Europe to side-step trouble.
BYD Atto 3 at the Paris Motor Show in 2022. This car is aleady on sale in Europe. (Photo by Richard ... [+]
GETTY IMAGES
“Chinese EV makers are likely to establish local operations in western markets over the coming years, also to be better positioned for potential political pushback. We see BYD as the biggest threat to European mass market (manufacturers),” UBS said in a report.
Schmidt Automotive Research (SAR) said by 2030, sales of Chinese BEVs in Western Europe will hit 1.2 million or 9% of electric car sales, assuming some China production in Europe. Premium brands like NIO and Xpeng sales will still be a rarity. Sales will reach 360,000 or 3.4% in 2023 dominated by SAIC’s MG brand and few BYDs. This will rise to 610,000 in 2024 (5%) led by BYD and MG.
The forecasts are not as bad as they first appear because this includes electric vehicles made in China for Europeans.
“In the first quarter, 50,000 Western brand models were manufactured in China and shipped to Europe from the likes of BMW with the iX3, Tesla Model 3 and Y, and the Dacia Spring, meaning around 40% of all (electric)| cars being shipped from China to Europe are in fact Western brands,” SAR’s Matt Schmidt said.
Dacia is Renault’s value brand.
French automotive consultancy Inovev said Chinese efforts pose existential problems for European carmakers and require action.
“However, the ability to react of European carmakers and the European Union should not be underestimated. These have solid strengths. There is still time for them to adapt their strategies and take the necessary measures,” Inovev said in a report.
“European carmakers have the capacity to react by producing affordable cars, as they have done before, even if it is not profitable for them,” Inovev said in an email reply.
Inovev doesn’t expect any new tariffs. The current charge is 10% on Chinese sedan and SUV imports. The EU is unlikely to change the CO2 rules, although delays might be possible, Inovev said.
BYD Seagull (Photo by VCG/VCG via Getty Images)
VCG VIA GETTY IMAGES
Mass market giant Stellantis wants the tariff wall to be stiffened, and last year CEO Carlos Tavares urged EU action because Chinese competition was leading the way in electrification with superior range and lower prices.
Despite the strength of the Chinese threat, winning in Europe against the established brands won’t be easy, said Professor Stefan Bratzel, director of Germany's Center of Automotive Management.
“Chinese players are getting stronger and stronger in terms of innovation strength. Big players like BYD and its whole value chain from battery cells to manufacturing are very interesting. Geely is also very strong with its Polestar, Lynk & Co and Volvo in the attack in Europe, but it will be hard for them to establish themselves, to gain market share,” Bratzel said.
“I’m quite sure the Chinese will win market share, especially in the middle and lower segments. The Chinese have a very good cost base at home, and this will make it difficult for German manufacturers, who need to work very hard now on cost reduction,” Bratzel said.
The entry-level segment, served for years by models like the Ford Ka and Ford Fiesta, Citroen C1, Peugeot 108, SEAT Mii, and Renault Twingo, and eliminated by EU regulation, presents a tasty target for the Chinese.
“Cars like the BYD Seagull in the €15,000 to €25,000 ($16,225 to $27,000 after tax) bracket are needed. There are practically no models from Europe in this segment. That’s why it is important for Europeans to reduce costs,” Bratzel said.
Professor Peter Wells, Professor of Business and Sustainability at Cardiff Business School, said it is no surprise Chinese manufacturers want a piece of the European action because prices here are much higher and profit margins very attractive. The Chinese challenge was different from earlier ones from Japan and then South Korea, because they are also attempting an early attack on premium brands like BMW, Mercedes, Audi and Porsche.
“It will be interesting to see how far upmarket they can go. Europeans are very brand conscious. Branding based on heritage is not particularly relevant to sales today,” Wells said.
SAR’s Schmidt agrees the lower part of the market is the most open to Chinese competition and it will come in poorer markets.
“The main battleground (for small cars) is likely to be in Southern Europe. The Chinese stand to capitalize where pricing is most important and BEV penetration currently low. We see the Chinese making most ground in Europe from a bottom-up position with value brands to take on the likes of Peugeot, Renault, Citroen, Fiat rather than what is becoming a top-down operation that requires bags of brand equity,” Schmidt said.
Europe Weakens Its Own Auto Industry As China Sales Accelerate
Europe’s tightening net zero CO2 rules will hurt its own auto industry as China increases exports. EU rules have priced cheap new ICE vehicles out of the market.
www.forbes.com
