European electric car import taxes inflict harm on China yet won't stall BYD's progress.
The recent decision placed a significant blow on the Chinese government's plans, particularly against the additional EV taxes. This comes after intense lobbying against these tariffs by the government itself and Chinese EV manufacturers. Some companies face extra tariffs ranging from 17.4% to 38.1%, on top of the 10% duty already imposed by the European Union (EU).
The extent of this impact on China's EV industry varies based on a company's cost structure. Those most affected may need to raise prices or even set up factories in Europe to avoid high tariff costs.
China's discontent with this decision is evident, but refraining from a full-scale trade war with its second-largest trading partner is expected due to various internal economic pressures.
The market leader, BYD, a fierce competitor with Tesla in global battery EV production, can still thrive in Europe despite the extra duty. According to Gregor Sebastian, a senior analyst at the Rhodium Group, BYD has an advantage with its relatively low additional levy of 17.4%. It could even benefit by cutting prices to gain a larger share of the European market. Sebastian commented, "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."
The Rhodium Group stated in April that BYD's European profits are 45% higher than its profits in China, indicating the continued attractiveness of the European market.
Europe's Key Role
This engagement with Europe is vital for China's EV ambitions. In 2021, it dethroned Asia as China's largest EV export market. This shift contributed significantly to propelling China into the position of the world's top car exporter.
"Europe accounts for 38% of China's EV exports in 2023. China will not be able to reroute exports to other countries as potential alternatives like Brazil, Turkey, and the US have also raised barriers," Sebastian said.
Last month, the Unites States increased tariffs on EVs from China from 25% to 100%, attempting to boost American jobs and manufacturing.
"The EU is the only market left that is both wealthy and large enough to absorb a significant amount of China's excess production of EVs," said Etienne Soula, a research analyst with the Alliance for Securing Democracy at the German Marshall Fund of the United States.
The Chinese government has grand visions for the nation's EV industry, part of their broader plan to surpass the United States in the global technological race. A low-carbon economy also figures prominently in Beijing's agenda, with EVs, photovoltaics, and lithium-ion batteries seen as the "new three" growth drivers.
In February, nine government agencies, including the Commerce Ministry and the central bank, promised their support to accelerate Chinese EV producers' global presence.
Rising Prices for Tesla
In contrast to BYD, state-owned automaker SAIC finds itself in a disastrous situation with a 38.1% additional tariff. Over 15% of SAIC's total sales in the EU stemmed from EVs in 2023 and early 2024. This Shanghai-based company, which was China's second-largest seller of battery EVs, plug-in hybrids, and fuel cell cars last year, may need to establish a factory in Europe to evade these imposed duties.
Geely, China's fourth-largest NEV retailer and the owner of Volvo, faces a 20% additional tariff. A situation that Sebastian views as a "mixed bag." Despite profitability issues, Geely could still export to the EU at a narrowing margin.
For Tesla, a global export exporter from China, the situation remains unsettled. The European Commission stated that the EV giant may receive an individually calculated tariff rate in the future following their request.
Tesla, in a message to several European countries, expected to raise prices for its Model 3 starting July 1 due to the new duties. Sebastian stated that tariffs over 21% would render Tesla's exports from China uncompetitive in the region.
Localization Push Intensifies
The EU's move is expected to fuel Chinese auto manufacturers' rush towards localizing their manufacturing. The announcement hastens the pace at which these companies establish production facilities in Europe.
Andrew Bergbaum, global co-head of AlixPartners' automotive & industrial practice, noted, "The announcement is more likely to accelerate the extent to which Chinese EV companies and suppliers manufacture their products within Europe."
BYD announced plans in December to build an EV factory in Hungary - the first major Chinese automaker to manufacture passenger cars in Europe.
"Although the tariffs may be bad news for consumers, cities with zero-emissions needs, and the environment, the establishment of new European-manufactured electric vehicles from Chinese companies would be welcomed," said Bergbaum.
But this also implies that there will be increased competition in a field that is already overcrowded, resulting in significant disruptions to current manufacturing sites as they adjust their resources, as he further stated.
On the other hand, UBS analysts projected that the number of Chinese manufacturers gaining access to the EU will become "more condensed."
Smaller companies might become disheartened and abandon the attempt, even as prominent Chinese firms proceed. Simultaneously, there was an anticipation of Chinese businesses speeding up the establishment of assembly plants in the EU, a measure that would be well-received by several EU member states such as Hungary, Italy, and Spain.
Birmingham Situation
Prior to the announcement, Beijing provided subtle indications that it might respond.
Its ministries of trade and foreign affairs each repeated on Wednesday that China would take "all feasible measures" to protect its interests.
However, analysts are of the opinion that the likelihood of an extensive escalation is low.
"The situation is unlikely to escalate into a full-fledged trade war," Sebastian stated. "Both sides have too much to lose."
Soula noted that China might respond by imposing tariffs on certain European goods, such as luxury cars, premium spirits, or aircraft parts.
Nevertheless, "China has limited scope when responding to the EU," he said. "There is also the possibility that (EU) nations that are doubtful of this investigation could come together to reduce the eventual tariff level."
As of now, the tariffs are provisionally set to be enforced on July 4 if discussions with Chinese officials don't yield a mutual understanding.
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Despite the negative impact of the additional EV taxes on Chinese car manufacturers, BYD's low additional levy of 17.4% allows it to continue thriving in Europe and potentially even lower its prices to increase its market share. On the other hand, companies like SAIC and Geely, facing higher tariffs, may need to consider establishing factories in Europe to avoid high costs.
