China’s rapid emergence as a market leader in electric vehicles (EVs) has sparked significant concerns throughout the European Union. Are the expansions of Chinese automakers into Europe a modern-day Trojan horse? And what exactly is driving this phenomenon?
Suppliers from China like Xpeng, BYD and Geely now have the EU firmly in their sights for selling their products, threatening to undermine the EU›s strategic autonomy. This has prompted Brussels to impose tough import tariffs effective from 5 July.
The Euro Stoxx Automobiles & Parts index closed 2023 in style. The annual return was 23 per cent, compared to 20 per cent for the overall Euro Stoxx 600 - a clear outperformance. Over the past five years, the automotive sector accounted for an equity return of 74 per cent, compared with 67 per cent for the main European index. This long-term outperformance of the sector was partly driven by investors› high expectations of the global transformation to electric vehicles.
Just before Christmas 2023, an event shook the German car industry: the coalition parties in Berlin reached a compromise on the federal budget for 2024 after lengthy negotiations. Part of their success came from prematurely ending the purchase subsidy for electric cars. As a result, EV providers suffered significantly: sales fell by 30 per cent in the 12 months to May, and by 16 per cent in the first five months of 2024. Consequently, the Euro Stoxx Automobiles & Parts index has been lagging behind the Euro Stoxx 600 index this year.
Steep rise in EV exports from China
Dutchman Lex Kerssemakers, who was a board member of Swedish Volvo until 2022 - for 17 years - is highly critical of the retreat he sees in the European Union. “The whole transformation process is slowed down by the policies of governments like Germany’s. Everyone knows that electrification is the future. But with so much uncertainty being created, with subsidies being discontinued and with charging station infrastructure not being ready in time, consumer behaviour is also turning around. And that will delay the electrification process by two to three years.”
“The Chinese are just going ahead with electric and buying the market.”
Lex Kerssemakers, board member at Volvo until 2022.
Kerssemakers, who frequently collaborated with the Chinese during his tenure at Volvo, expresses his concern about the delay, describing it as his «personal fear.» He explains, «Knowing the Chinese, they are very long-term oriented. They remain competitive in exporting electric cars to Europe.» Kerssemakers believes that a temporary return of European market players to internal combustion engines will be severely punished. «The Chinese will just go ahead with electric and buy the market.» Volvo, owned by China’s Geely, has already set a strict deadline: by 2030, it plans to switch completely to electric car production.
Increasing tension between the EU and China
Amid these long-term goals, tensions between the European Union and China could rise sharply in the coming weeks. The trigger is Brussels› announcement that import tariffs on electric cars produced in China will be imposed starting this month. These tariffs could be as high as 50 per cent. In response, China has hinted at countermeasures, including import tariffs on European luxury goods, agricultural products, and dairy products.
The three major EV markets have different players
Nevertheless, Chinese electric car suppliers will not be deterred by European import duties on EVs, says Yanmei Xie, an analyst at Hong Kong-based Gavekal Research. She confirms Kerssemakers› assertion that China has been striving for years to develop a robust car industry. While they failed to dominate the market with classic internal combustion engines—where the Germans excelled with their long track record—EVs present a different «ball game.»
Yanmei Xie, on the development of China’s NEV (New Energy Vehicles) strategy since 2009.
Xie explains that since 2009, Chinese authorities have focused on leading the EV market. Before this shift, both central and local governments provided substantial subsidies to combat air pollution in major cities. Large-scale tenders were issued for public transport EVs and the development of charging stations. Additionally, the government offered various concessions and privileges to encourage EV use, such as subsidies for private buyers, expedited driving licences for EV drivers, and the cessation of subsidies for EVs with inadequate range.
Then, in 2019, Tesla was allowed into the Chinese market without the usual restrictions on foreign providers, an exceptional move aimed at forcing Chinese companies to compete with the world’s best. This intense competition quickly filtered out the weaker players. BYD emerged victorious, with its cars offering the largest range, the fastest-charging batteries, and highly competitive consumer prices. This success is partly due to BYD›s status as the most vertically integrated car company in the world, allowing it to bring products to market faster than its competitors, according to Xie’s analysis.
China’s ‘NEV’ ambitions vastly underestimated
All sources consulted by Investment Officer for this analysis agree that both EU policymakers and European auto industry leaders have greatly underestimated China’s determination and capacity for innovation. «Due to the corona crisis, China was out of the picture for several years, until the first auto expo in China took place in April 2024, where top executives of Western car companies were shocked by the performance, features, and price competitiveness of these Chinese models,» says Xie. Evidence of this is the increased sales in Europe: from 60,000 EVs in 2020 to 490,000 in 2023, meaning that one in five EVs sold in the EU came from China. More than half of these were Chinese-built electric cars from Western brands such as Tesla, Renault, and BMW.
“Top executives from Western car companies were shocked by the performance, features and price competition of these Chinese models.”
Yanmei Xie, analyst at GaveKal
The EU focuses its import restrictions on these Chinese-built models, regardless of whether the firm is a Chinese, European, or US market player. As a result of these punitive measures, these imported EVs are no longer competitive in Europe. In response, companies are attempting to increase their production within the EU. For instance, Tesla is ramping up its EV production at its factory in Germany to over a million units per year, while BMW and Renault, through Dacia, are also increasing their EV production within the EU. Geely and Volvo have announced the opening of a factory in Slovakia. Meanwhile, there are reports that other Chinese suppliers are seeking locations to start production within the union. BYD has already announced plans to begin operations in Hungary. These developments are driven by the European Commission’s competition investigation, which allegedly highlighted that the EU is suffering economic damage from EVs supplied from China with state subsidies.
Chinese influence in EU growing
While the US has opted for 100 per cent import tariffs on Chinese EVs, the European Union is effectively demanding that only electric cars manufactured within the union can be sold here. This mirrors Beijing’s longstanding policy, which has forced Western car companies to build their cars destined for China within the country itself, thus providing knowledge, experience, jobs, and tax revenue. At the same time, Gavekal analyst Xie warns that this approach will increase the influence of China and its businesses within the union. She does not expect Chinese carmakers in the EU to cut prices to increase their market share, as this could make them targets of anti-dumping investigations by the EU, further cornering the Chinese state and potentially triggering damaging World Trade Organisation (WTO) proceedings.
Aubrey Capital Management, whose Emerging Markets Fund invests in the Chinese automotive sector, believes the last word on electric cars has yet to be said. Mark Martyrossian, a member of the Scottish fund house’s investment committee, argues that China has been working like an invisible stealth bomber for at least 15 years to build the electric car market. «It is pursuing global dominance at this point. Back then with the Belt & Road initiative, China built infrastructure in other countries in exchange for raw materials. Now, Chinese EV providers are buying up old car factories in countries like Brazil, Indonesia, and Mexico to start building electric cars for the local market,» says Martyrossian.
Mark Martyrossian, member of the investment committee at Aubrey Capital Management, on investing in the Chinese EV sector:
According to him, this does not replace the US market closed to Chinese EVs, but it is a strong alternative approach. In addition, the focus is on Europe, which is the most developed consumer market accessible to its Chinese EVs.
Omnipotent BYD eats its Chinese competitors alive
Video by BYD, showing its production line. Via Youtube.
But Aubrey Capital Management, whose Emerging Markets Fund has outperformed by as much as 173 per cent over the past decade, argues that China’s focus on electric cars has had a detrimental side effect - being a worrying overcapacity. In 2020, Beijing concluded that while 35 per cent of the country’s car production is focused on EVs, the remaining 65 per cent is still focused on combustion engine cars that would be phased out at some point. These were mostly state-owned automakers, «eaten alive by BYD›s omnipotence,» Martyrossian says. They were forced, as well as helped, by Beijing to make the turn to EV production - partly with the aim of preserving jobs in those factories.
“There are more than enough sectors in China where margins are improving and profitability is growing. In the EV market, however, that is not the prevailing dynamic at the moment.”
Mark Martyrossian, Aubrey Capital Management
The answer to overcapacity includes price cuts, with market leader BYD, for example, trying to force its competitors out of the market. As a result, BYD›s profitability has halved in the past nine months. According to Aubrey Capital Management, these under-fire Chinese car brands, which are state-owned enterprises, receive certain state support from Beijing.
BYD studying Jack Ma’s costly lessons
Martyrossian sees a possible parallel in BYD›s dominance with Jack Ma, the CEO of Tencent. Tencent, being a near-monopolist, was viewed as a potential threat to the state and was subsequently curbed by Beijing—a risk that BYD also faces in the coming years. For Aubrey CM, overcapacity in the Chinese car market, as well as the threat of punitive measures against BYD, has been a reason to exit this segment altogether.
“There are more than enough sectors in China where margins are improving and profitability is growing. However, in the EV market, that is not the prevailing dynamic at the moment,” says Martyrossian.
Yanmei Xie of GaveKal endorses Aubrey CM›s view that there is overcapacity and that this will substantially impact the market. In her view, the European market may be a major lifeline for sales of Chinese EV brands. However, Martyrossian of Aubrey CM doubts Brussels will accept letting the EU market provide such a lifeline.
Former Volvo executive Kerssemakers agrees but wonders if European automakers will use the leeway the EU creates through tariffs to catch up with Chinese EV companies. «That requires a certain drive, as well as the ability to do so with the necessary speed at the right cost. I have my doubts about that,» he concludes.
Cees van Lotringen is a writer, journalist and entrepreneur. He is the former editor in chief of Investment Officer.
This article was originally published in Dutch on investmentofficer.nl.
Previous articles published in this series:
- An autonomous EU would create a new framework for investors (7 June)
- Europe’s rude awakening: Geopolitics is back (21 May)