Ain't no duty high enough for Chinese car makers

the eu plans to impose tariffs on chinese made elecric cars, but that’s unlikely to solve the real problem.

"Europe will do whatever it takes to keep its competitive edge," said EU Commission chief Ursula von Der Leyen in her annual state of the union in the fall. In the speech she announced an anti-subsidy probe into Chinese electric vehicles, and the Commission is currently investigating whether to impose punitive tariffs to protect European Union producers against cheaper Chinese electric vehicle imports it says are benefiting from excessive state subsidies.

Unfortunately, it’s unlikely to solve the real problem: Many European companies are no longer competitive. They can’t charge 30-40 percent higher than their Chinese competitors as they did in the good old days when Chinese companies were still copycats. On the contrary, they have been forced to lower their prices over the past 10 years to be able to compete in the Chinese market as local companies have been catching up.

The problem today is that Chinese companies are leaders in many new green technologies, including electric vehicles. Yet, their products are still much cheaper than their European counterparts, and they are increasingly being exported to Europe and other markets due to excess capacity and a fierce price war.

China, now the largest car exporter in the world, made a lot of headlines in the beginning of this year with the homegrown brand BYD overtaking Tesla as the world’s best-selling brand of electric vehicles in the last quarter of 2023.

Why are Chinese electric vehicles so cheap?

According to the EU, the prices of Chinese electric vehicles are “kept artificially low” owing to “huge state subsidies”. However, this is too simple. Basically, all EV manufacturers in China, including Tesla and Volkswagen, received subsidies over the past years as the Chinese government wanted to promote the green transition of the auto industry. Both producers and consumers enjoyed the subsidies, until one day they suddenly disappeared in 2022.

Since then, the world’s largest car market has become a red ocean, forcing all companies to cut prices. But more importantly, the answer lies in a sophisticated supply chain and innovation, especially in battery technology. This is important for EU leaders to understand as they venture into a potential trade war with China over cheap high-tech goods flooding the European markets. (Next in line could be Chinese solar panels, wind turbines, heat pumps and batteries).

Wall of patents in BYD’s headquarter in Shenzhen. The company employs 100.000 engineers and claims to apply for 19 patents per day. 15 patents are granted per day, and it holds 40.000 patents.

secret sauce is innovation and supply chain

The secret sauce of Chinese companies is that they are born in the world’s largest and most competitive market with a very strong ecosystem of science and technology and a unique supply chain. Chinese companies produce one third of global manufactured goods which makes China an uncontested manufacturing powerhouse.

China is the largest auto market in the world and sets the tone for the rest of the world, including the price war. This is arguably one of the main reasons for Tesla’s new price structure which was born in China. The price of Volkswagen’s ID4 is 50 percent lower in China than in Europe. The Chinese competitor BYD (Build Your Dream) earns 13.000 euro more per SEAL U Model sold in the EU compared to China.

40-50% duty might not be enough

The question is how much duty is needed to slow market share gains for Chinese automakers and protect European car industry? According to a new analysis from thinktank Rhodium Group, “there ain’t no duty high enough”. Rhodium Group expects the EU Commission to impose duties in the 15-30 % range. But even if the come in at the higher of this range, some China-based producers will still be able to generate comfortable profit margins on the cars they export to Europe.

Duties in the 40-50 % range would be necessary to make the European market unattractive for Chinese EV exporters, probably even higher for BYD which sits on a vertically integrated supply chain. The US has a 27,5 % import duty on EVs, and it’s not realistic that the EU import duty could jump from the current 10 % to more than 50 %.

Stratas Advisors has analyzed OEM strategies in all segments of the electric vehicle (EV) supply chain to provide a competitive assessment which delves into five key elements: upstream investments (mining and refining of battery raw materials), long-term raw material supply agreements with third parties, investments in cell manufacturing, the development of branded EV charging infrastructure in key demand markets, and global expansion efforts.

A serious dilemma is facing EU leaders. If they choose to impose high tariffs on cheap Chinese EVs and other Chinese made products needed for the green transition of Europe, it will make the green transition more expensive, and it could slow down carbon reduction. On the other hand, if they do nothing, there is no doubt that European industry will suffer and lose thousands of jobs to China.

The experts from the Rhodium Group suggest that it would be more efficient to turn to non-traditional tools to shield the European auto industry, including restrictions based on environmental or national security-related factors.

need to be much faster and cheaper

However, for European car makers and other companies, the safest bet would be to start launching innovation projects aiming to develop new products much faster and cheaper to be better positioned for future competition. Because even if the EU succeeds to limit competition from Chinese EV makers in Europe, European companies will still have to face them in other markets around the world. Especially in emerging markets, where governments are less likely to impose trade restrictions.

Volkswagen has indeed taken such steps with its new China Strategy, launched during Beijing Auto Show. The German giant wants to bring new EVs to market 30% more quickly and 40% more cheaply. The company will invest 2,5 billion euros in a new innovation hub and enhance cooperation with its local partner Xpeng.

Sooner or later, Volkswagen’s China strategy could be their global strategy. This happened before in other industries where European companies were forced to create cheaper “made in China for China” products that proved to be successful in many other markets.