GLOBALIZATION AND POST-FORDISM

Europe’s electric car tariffs sting China but won’t halt BYD’s advance

Analysis by Laura He, CNN
Thu, 13 June 2024 

China Daily/Reuters

After months of investigation, the European Union has announced additional tariffs on electric vehicles (EV) imported from China, because of what it sees as Beijing’s unfair support for companies that undercut European carmakers.

The decision deals a blow to the Chinese government, which had been lobbying hard against the taxes, and EV producers in the country. Most companies are facing hefty extra tariffs of between 17.4% and 38.1%, on top of the 10% duty already levied by the bloc.

The impact on China’s EV makers will vary depending on the level of tariff and each company’s cost structure. Those hardest hit may be forced to raise prices or set up factories in Europe.

And while Beijing is clearly unhappy, analysts say it’s unlikely to want to rush into a full-blown trade war with its second biggest trading partner, not least because of economic pressures at home.

For market leader BYD, which vies with Tesla as the world’s top producer of battery electric vehicles, there’s still space for it to grow in Europe, even with the additional duty, according to Gregor Sebastian, a senior analyst with the Rhodium Group.

Facing the lowest additional levy of 17.4%, BYD could emerge as a relative “winner,” he said. Duties at this level could even allow BYD to cut its already competitive prices to gain market share in Europe.

“BYD is already building a factory in Europe, is likely to still profitably export to the EU even with 17% duties, and can export plug-in hybrids without additional duties,” Sebastian said. The new tariffs only target battery EVs.

Rhodium said in April that BYD’s European profits are 45% higher than in China, meaning that market will still remain highly attractive even after the new tariffs are imposed.

China’s top market

Europe is key to Beijing’s EV ambitions. It overtook Asia as China’s largest EV export market in 2021. That helped propel China into pole position as the world’s No 1 car exporter.

“One critical issue for China is that the EU accounted for 38% of China’s EV exports in 2023,” Sebastian said. “China will not be able to reroute exports to other countries as potential alternatives like Brazil, Turkey and the US have also pulled up drawbridges.”

Last month, the United States quadrupled tariffs on EVs from China, from 25% to 100%, aiming to boost American jobs and manufacturing.

“The EU is the only market left that is both wealthy and large enough to absorb a meaningful amount of China’s excess production of EVs,” said Etienne Soula, a research analyst with Alliance for Securing Democracy at the German Marshall Fund of the United States.

The Chinese government has big dreams for the country’s EV industry, part of a broader strategy to surpass America in the global tech race.

It’s also trying to counter a property-induced economic slowdown and promote a low-carbon economy. EVs, along with photovoltaics and lithium-ion batteries, are seen by the government as the “new three” growth drivers that will play a pivotal role in shaping the country’s economic landscape.

In February, nine government agencies, including the Commerce Ministry and the central bank, vowed to provide support to accelerate Chinese EV makers’ global push.

Tesla prices to rise

In contrast to BYD, state-owned carmaker SAIC is in a “disastrous” situation facing 38.1% in additional tariffs, according to Sebastian.

EV sales in the EU accounted for 15% of the company’s total sales in 2023 and early 2024. The Shanghai-based automaker, which was China’s second largest seller of battery EVs, pug-in hybrids and fuel cell cars (NEVs) last year, will likely need to build a factory in Europe to bypass these duties.

Geely, China’s fourth largest NEV retailer and the owner of Volvo, faces 20% in additional duties, a penalty which is likely to be a “mixed bag,” Sebastian said. His analysis suggests Geely could still profitably export to the EU, but margins will narrow severely.

For Tesla (TSLA), which uses China as its base for global exports including to Europe, the situation is also tricky.

The European Commission said Wednesday that the EV giant may receive an individually calculated duty rate at a future stage following a request by the carmaker.

In a message posted to its website in several European countries Thursday, Tesla said it expected to have to raise prices for its Model 3 from July 1 because of the new tariffs.

Sebastian said additional duties above 21% would likely render Tesla’s exports from China to the EU uncompetitive.

Localization coming

The EU’s move is likely to hasten efforts by Chinese carmakers to set up factories in the region.

The “announcement is more likely to accelerate the extent to which Chinese [EV companies] and suppliers manufacture their products within Europe, something that we have already started to see,” said Andrew Bergbaum, global co-head of AlixPartners’ automotive & industrial practice.

BYD announced in December that it would build an EV factory in Hungary, becoming the first major Chinese automaker to build passenger cars in Europe.

While the tariffs would not be good news for consumers and cities with zero emission needs, “the establishment of new European-manufactured electric vehicles by Chinese companies would certainly be welcomed,” said Bergbaum.

However, it also means there will be more competition in a sector that already has too much capacity, leading to large scale disruptions of existing manufacturing sites as they “rebalance their resources”, he added.

UBS analysts, meanwhile, predicted on Wednesday that the number of Chinese manufacturers making inroads in the EU would become “more concentrated.”

Smaller players may become discouraged and give up, even as Chinese industry leaders press ahead. But they also expected Chinese companies to accelerate the location of assembly plants in the EU, a move which would be welcomed by EU member states like Hungry, Italy, and Spain.

Too much to lose

Ahead of the announcement, Beijing had dropped hints that it could retaliate.

Its ministries of commerce and foreign ministries each reiterated Wednesday that China would take “all necessary measures” to defend its interests.

Analysts, though, don’t believe there is a high chance of serious escalation.

“The situation is unlikely to develop into a full-blown trade war, both sides have too much to lose,” Sebastian said.

Soula said China could retaliate by imposing tariffs on some European goods such as luxury cars, premium brandies or airplane parts.

But given the economic pressures that China is already under, it has “limited room” for maneuver when responding to the EU.

Also, “there is still the possibility of (EU) countries who are skeptical of this investigation coming together to diminish the final level of the tariffs,” he said. “In this context, China may want to wait before going all out to avoid hardening attitudes in those member states.”

Currently provisional, the tariffs are due to be introduced on July 4 if discussions with Chinese authorities don’t lead to a mutual agreement.

CNN’s Hanna Ziady and Fred He contributed to reporting.

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