Why your first electric car might be Chinese

The threat to Western rivals is not just in pricing but quality and technology as well.

Chris Bryant and Anjani Trivedi

Chinese companies are now capitalizing on their economies of scale to ship competitively priced cars to Europe. PHOTO: REUTERS

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Tesla would have delivered more cars in the most recent quarter, but for a shortage of ships. It is having problems finding vessel capacity out of Shanghai. No wonder: China recently overtook Germany as the world’s second-largest car exporter.

China’s car exports rose more than 50 per cent in the first nine months of this year, shipping out more than two million vehicles. This is not just Western carmakers using China as an export hub – home-grown brands are also finding their footing on the world stage. And demand is being led by Europe, the birthplace of the car, where a supply-chain crunch, energy crisis and the war in Ukraine continue to hamstring manufacturers.

The threat is about more than price. Chinese-built cars are of far superior quality to those it tried to foist on European consumers more than a decade and a half ago. Europe’s carmakers are already losing market share in China due to a lack of competitive electric vehicles (EVs), and they risk doing so at home too, where Chinese carmakers already account for 5 per cent of the EV market.

European politicians must not be naive, but they should be wary of wielding a big stick – harsh new trade barriers on China would raise the cost of electric vehicles while lessening pressure on European carmakers to boost their competitiveness.

China’s carmakers are making inroads after spending years preparing to meet growing demand for electric vehicles and the batteries that power them. Carmakers globally are partnering with Chinese battery-makers to power their EV fleets.

Thanks in part to government largesse and an industrial policy that favoured domestic producers, Chinese EV brands dominate their rapidly growing local market, where they are looking to cut prices, which will further boost adoption.

They have also pulled ahead in the software and infotainment features Chinese consumers demand. Except for Tesla, Western carmakers have often failed to keep up.

The Chinese edge

The opportunity for China is clear: Brand loyalty has yet to become firmly established in electric vehicles, and current battery-powered models are often very expensive. Western carmakers have deliberately neglected the budget end of the European market, believing that high prices, not high sales volumes, will deliver superior profit margins.

Chinese companies are now capitalising on their economies of scale to ship competitively priced cars to Europe. The scale of China’s ambitions was on full display at the Paris Motor Show in October, where brands such as Berkshire Hathaway-backed BYD and Great Wall Motor touted several technically impressive models.

But there is still a lot of work to be done to better establish Chinese brands, dealer networks and service centres. Deals like the one BYD struck in October with German rental-car company Sixt to buy around 100,000 EVs will help build consumer awareness.

Not surprisingly, Chinese-acquired Western brands such as MG and Polestar have been the most successful (MG is owned by SAIC Motor, while Polestar is financially backed by Zhejiang Geely Holding Group).

China’s advance presents a thorny problem for European politicians, who are under pressure to ensure a level playing field. Currently, car imports into China face a 15 per cent tariff compared with 10 per cent when going into the European Union.

Stellantis chief executive officer Carlos Tavares wants Europe to raise tariffs on imported Chinese models. Meanwhile, French President Emmanuel Macron says purchase incentives should be contingent on local production, as they now are in the US after the Inflation Reduction Act. Germany, whose car industry has far more to lose if China retaliates, has so far been more reticent. German car industry executives are part of Chancellor Olaf Scholz’s delegation of business leaders visiting China this week.

Europe is already worried about de-industrialisation due to its sky-high energy costs. There is growing political concern too about the continent’s business dependence on China – a valuable trade partner but increasingly viewed as a strategic rival. The fate of industries like solar panels – where German consumers effectively subsidised the rise of Chinese manufacturers and domestic producers went bust – shows the dangers of complacency.

While Western carmakers overcame competitive challenges from Japanese and Korean producers in the past, the threat is bigger this time because EVs are a new technology and China is years ahead in batteries and associated supply chains.

The EU reached a deal last week to ban sales of combustion-engine cars from 2035, so the continent’s manufacturers are stuck between a rock and a hard place. It is reasonable to prod Chinese manufacturers to set up local production, as Beijing did with Western carmakers. That might help Europe become more competitive and create manufacturing jobs. Similar compromises have happened before (Chinese battery makers are already building factories in Europe).

Choking off Chinese car imports may be politically popular, but European consumers will end up paying through higher prices and inferior products. Ultimately, Europe can choose protectionism or affordability. But regrettably, it cannot have both. BLOOMBERG

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia.