Europe’s autos have weak defences against China
LONDON/HONG KONG, Feb 1 (Reuters Breakingviews) - China has been a golden goose for western carmakers like Volkswagen (VOWG_p.DE) and BMW (BMWG.DE). But increasingly it is looking like a threat. Chinese groups like electric vehicle leader BYD (002594.SZ), (1211.HK) are targeting foreign markets. Europe looks particularly vulnerable.
In 2022, electric vehicles made by Chinese carmakers already had a 9% market share in Europe, nearly double the previous year’s figure, according to forecasts by consultancy Inovev. But the pace is picking up. Besides BYD, those looking to expand include MG, owned by state behemoth SAIC (600104.SS), electric vehicle specialist Xpeng (9868.HK), and Volvo owner Geely, which in January detailed plans to grow its Zeekr and London Electric Vehicle marques in Europe.
Chinese carmakers have numerous advantages. In recent years western brands have lost market share in China, handing domestic players greater economies of scale and efficiencies in areas like research costs. They benefit from a vast domestic supply chain, including the world’s largest battery maker, CATL (300750.SZ), which gives them access to innovative technologies, like battery swapping, or lithium iron phosphate batteries.
Some, like Xpeng, aim to compete with premium western brands on quality, touting long ranges or smart entertainment software. For many consumers the appeal will be lower prices. While western carmakers have ramped up the cost of battery rides, Chinese groups halved the average price of an electric vehicle in China between 2015 and the first half of 2022 to just 32,000 euros, according to consultancy JATO Dynamics. Their greater efficiency, and the higher cost of battery rides in Europe, means Middle Kingdom groups can export and compete aggressively. On average, Chinese manufacturers can make an electric vehicle for 10,000 euros less than their western rivals.
The fresh competition will exacerbate a looming price war in electric vehicles, which has already started in the United States, led by Tesla (TSLA.O) and Ford Motor (F.N). Europe, however, looks particularly exposed. U.S. carmakers benefit from drivers’ love of larger cars, and government subsidies for domestic production under President Joe Biden’s Inflation Reduction Act. With European manufacturing under threat, the continent could try to deter imports with extra tariffs, or more subsidies for local players.
Yet governments themselves are in a bind. If Europe wants to phase out combustion engine vehicles by 2035, it will need a large supply of cheaper electric vehicles. At JATO’s estimate of 56,000 euros, the average price of an electric vehicle in Europe is still too high for most punters.
Moreover, a trade war would be unpredictable. The lower cost of manufacturing in China may help Chinese carmakers absorb tariffs, while western groups could suffer from reprisals. The country accounted for nearly 40% of Volkswagen’s deliveries in 2022, for example. Groups like Renault (RENA.PA) or BMW manufacture in the Middle Kingdom and export overseas.
The result may be that western groups have to jostle for a smaller place in their home markets but also cut prices, hurting profitability. Inovev reckons that Chinese groups could grab 20% of Europe’s electric vehicle market by 2030, while European brands would see their share fall from 66% in 2021 to a mere 45%. The sector has had a good pandemic. Volkswagen, for example, pushed up prices by around 10% on average over the last three years, RBC analysts reckon. China’s growing threat means the lean years are starting.
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(The authors are Reuters Breakingviews columnists. The opinions expressed are their own.)
China exported 3.11 million vehicles in 2022, a 54.4% year-on-year rise, according to the China Association of Automobile Manufacturers.
Exports of new energy vehicles, such as battery electric cars, rose 120% versus 2021.
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