How Chinese EVs are shaking up the global auto industry

Electric vehicles (EVs) are viewed, by many, as the future of transportation due to their environmental benefits. However, demand has been slower than expected, partly due to the heavier price point in comparison to traditional internal combustion engine (ICE) cars. The rise of affordable Chinese EV models offers a solution to affordability but threatens legacy automakers in the EU and US. In response, both regions are imposing tariffs to protect their domestic industries from being undercut by cheaper imports.

Third Bridge Analysts have interviewed automotive industry experts across the US, UK, and China to gain further insight into the implications of these developments. Their insights are based primarily on Third Bridge Forum interviews.

1. The emerging presence of Chinese EV manufacturers in Europe’s competitive auto market

Chinese automakers are shaking up Europe’s entry and mid-market car segments, putting pressure on established players like Volkswagen, Stellantis, and Renault. While premium brands such as BMW and Mercedes still hold strong thanks to loyal customers, Chinese companies are steadily making inroads despite the challenges of brand awareness, limited dealership networks, and after-sales support.

Chinese EVs are becoming increasingly attractive, not only for their competitive pricing but also for their advanced technological features and the ability of manufacturers to develop new models significantly faster than their European counterparts. Rosalie Chen, a senior analyst at Third Bridge in China, notes, “Chinese automakers have a major edge in developed markets thanks to their high value-for-money offerings. They’ve also raced ahead in the development of new energy vehicles (NEVs) and intelligent vehicle technology, with homegrown research and development (R&D) for core components. In contrast, many legacy automakers must integrate parts from multiple suppliers, which increases costs and complicates production. A prime example is BYD, which maintains absolute pricing power for vehicles priced under 150,000 RMB because it manufactures nearly everything in-house, with the exception of glass and tires.”

Chinese automakers are yet to establish a strong foothold in Europe due to weak brand recognition among European consumers and a limited dealership network. However, our experts are optimistic that in 2-3 years, as quality improves and support networks grow, Chinese automakers will pose a greater threat, particularly in the mass market.

EU tariffs on Chinese EVs: encouraging local production amidst competition

The European Union (EU) has imposed tariffs on Chinese EVs to protect its car industry from, what it considers, unfair state subsidies. The tariffs have increased from the previous 10% to up to 45%, taking effect on October 31, 2024, and are set to last for five years.

The general consensus in the market views this tariff strategy as a way of encouraging Chinese companies to establish factories in Europe, rather than a ban on Chinese EVs. Our experts are of the opinion that the tariffs are designed to enable Chinese EVs to compete by matching prices with European counterparts or by offering a slight discount of 5% to 10%. Rosalie Chen, a senior analyst at Third Bridge in China, explains the rationale: “The primary aim of the EU’s temporary anti-subsidy tariffs on EVs from China is to safeguard the European automotive sector. This is just the beginning; the EU will closely monitor how Chinese automakers respond. If they choose to set up factories in Europe, it would be a significant victory for the EU. Looking ahead, our experts predict that a combination of subsidies, carbon taxes, and battery passports will be introduced to attract the upstream battery supply chain to Europe.”

The impact of these tariffs is yet to be realised. In the short to medium term, Third Bridge experts anticipate that Chinese automakers may adjust their pricing strategies or delay the launch of NEVs in Europe to cushion the impact of these tariffs. However, in the long run, establishing factories in Europe seems to be the inevitable trend.

Investments in European manufacturing by Chinese companies like Chery and BYD are underway, though some have been delayed by the slowing EV market. Once they start producing in Europe, they will lose their Chinese production cost advantages and face lower margins and sales due to tariffs.

European automakers may take longer than expected to fully detach from Chinese influence, as about 80% of EV battery production currently comes from China. Key battery technologies, including those from CATL and other Chinese brands, are vital to the NEV sector. The upstream battery industry, which covers lithium mining, processing, cell manufacturing, and electronic control technology, primarily resides in China, with minimal equivalent presence in Europe. Our experts predict that it will take at least 3-5 years for European original equipment manufacturers (OEMs) to catch up in battery production, but even then, Europe is unlikely to be self-reliant and will still depend on imports from China. This shift is more about reducing risk than complete detachment.

Orwa Mohamad, a senior analyst at Third Bridge in the UK highlights that China dominates the rare earths market, controlling about 90% of the global resources which are crucial for electric motors. This dominance gives China significant pricing leverage, creating additional challenges for the European auto industry.

2. Chinese automakers in the U.S.: Market penetration, tariffs, and the road ahead

Chinese OEMs have yet to significantly impact the U.S. market, holding less than 1% of market share, unlike their rapid growth in Europe and the Middle East. Despite their cost advantage, they face a tough challenge in winning over American consumers and lack a strong dealer network. The penetration of Chinese OEMs in the U.S. market is expected to be a long-tail trend compared to the rapid advancements seen in Europe and the Middle East, where their presence is already pronounced and anticipated to grow even faster.

The entrance of Chinese automakers presents a formidable competitive threat, especially as they offer EVs at lower prices—often half that of their U.S. counterparts, which average around $55,000. This expansion could intensify competition for established North American players like Ford, GM, and Tesla and suppliers like Aptiv and Visteon, who are reorganising their supply chains to localise production and meet the 75% regional content required by the US-Mexico-Canada Agreement (USMCA).

Chinese automakers like BYD, Geely, and Chery are making a significant push into North America by establishing manufacturing operations in Mexico. This strategic move allows them to leverage lower labor costs and favorable trade conditions under the USMCA. Notably, BYD surpassed Tesla in global EV sales in 2023 and is considering building a factory in Mexico to export vehicles to the U.S., effectively bypassing tariffs that can reach up to 27.5%, a figure expected to increase by 100% in Q3 2024, for Chinese imports.

China’s strategy to expand supply chains in Mexico is unlikely to change under the Trump administration. Chinese companies, with backing from partners like Tesla, are already heavily invested in Mexican infrastructure to support U.S. and global automakers. Experts highlight that Chinese suppliers are now deeply woven into the supply chains of international OEMs outside China, so any disruptions could backfire and significantly damage both U.S. and European automakers. However, Chinese OEMs may struggle to outperform their competitors in Mexico due to labor, cost, and logistics challenges, which differ from the regulatory advantages they enjoy in China.

US tariffs on Chinese EVs

The Biden administration has already implemented significant tariff increases on Chinese imports, starting on September 27. These include a 100% tax on electric vehicles (EVs) from China, along with a 50% tariff on solar cells and a 25% tariff on steel, aluminum, EV batteries, and key minerals. 

Shoggi Ezeizat, an analyst at Third Bridge in the US, comments on the tariff increases, stating, “President Biden’s decision to raise tariffs on Chinese imports, including critical components like semiconductors and EV batteries, aims to bolster domestic manufacturing and maintain a competitive edge in key industries.” He notes that “Chinese EV OEMs have not yet significantly penetrated the North American market due to strict homologation standards and tariffs that diminish their price competitiveness compared to domestic offerings.”

Furthermore, the Biden administration’s measures address concerns that a surge in Chinese imports could pose significant challenges to North American EV startups, like Rivian, and hinder legacy automakers still working on vertically integrating their EV manufacturing infrastructure to compete effectively with their Chinese counterparts.

“Our experts have previously indicated that if tariffs on Chinese imports rise to levels like 50%, as threatened by Trump, it could severely impact the battery storage industry, which heavily relies on Chinese imports until domestic manufacturing capabilities ramp up by 2025.”

Ezeizat also emphasises a critical point: “The general public perception in America is that Chinese vehicles are inferior, which could make it challenging for Chinese EV brands to gain a foothold, even without tariffs.”

Policies under the Biden administration, such as the National Supply Chain Security Act, aim to reduce reliance on foreign suppliers. In the context of EVs, this includes diversifying the supply chain for critical minerals used in EV batteries. The administration has introduced slightly extended timelines for tariffs on specific materials like lithium iron phosphate and artificial graphite, acknowledging the challenge for U.S. manufacturers like GM, Tesla, and Ford to source these materials outside of China while complying with the Inflation Reduction Act (IRA) and avoiding “Foreign Entities of Concern” (FIAC) restrictions. However, some battery materials are still challenging to refine outside of China, making total independence difficult.

Our experts believe that the tariffs primarily focus on developing a U.S. battery industry, not just targeting Chinese vehicles. The real goal is to shift battery production and key components like cells, anodes, and cathodes to North America. This also includes building a local supply chain for refining minerals. It’s about creating jobs and securing long-term competitiveness in the global battery market, where the U.S. lags behind China. 

The tariffs on Chinese batteries are intended to prevent them from becoming part of the North American ecosystem. However, CATL has found a workaround by licensing its technology, including battery chemistry, manufacturing processes, and equipment, to U.S. automakers including Tesla and Ford. These licensing deals benefit the U.S., offering advanced battery technology that doesn’t yet exist domestically. CATL is also creating a licensing subsidiary in Hong Kong to pursue more deals with North American automakers, ensuring Lithium iron phosphate (LFP) battery technology remains accessible. This approach helps avoid decoupling from the low-cost LFP batteries needed for affordable EVs, keeping the global battery industry connected despite different ownership across countries.

The Trump administration’s approach to this strategy remains uncertain, raising questions about whether they might implement policies that could hinder the EV sector. However, given Elon Musk’s influence and close ties to decision-makers, a more balanced approach could be expected.

3. Legacy automakers struggle in China’s EV market

The rise of local automakers is increasing pressure on legacy brands, as seen with BYD Co.’s overtaking of Volkswagen AG as the best-selling car brand in 2023. Western automotive giants have, in recent years, been losing their decades-old market dominance in China.

The shift in the BEV market towards Chinese OEMs can be attributed to three main factors. First and foremost is pricing; Chinese customers are highly price-sensitive. Second, brand image and reliability historically favoured international OEMs, particularly German brands like Volkswagen, which were seen as dependable. However, this perception is changing in the EV market. Customers now view the BEV market differently from the traditional ICE market. They recognise that Chinese OEMs offer both lower prices and more advanced technology. As a result, the brand equity that international manufacturers once had does not carry over to the BEV market. Lastly, there’s a sense of pride among Chinese consumers in supporting domestic brands. 

Our experts highlight that to compete with Chinese EV manufacturers, global OEMs like Volkswagen must drastically cut costs while boosting product appeal. This involves tailoring features to Chinese consumer preferences, such as better digital integration, faster feature releases, and more interactive elements. While adapting product features is within reach, keeping pace with Chinese manufacturers’ speed and cost-efficiency is the real hurdle. In response, legacy brands are partnering with Chinese OEMs to enhance their software and save costs. For example, Volkswagen is collaborating with Xpeng, targeting a 40% reduction in BEV costs by 2026, partly through the platform that it is developing with Xpeng.

Orwa Mohamad, a senior automotive analyst at Third Bridge in the UK, notes that legacy automakers are falling behind in innovation and software development compared to domestic Chinese brands, which offer more affordable and technologically advanced vehicles. Furthermore, Chinese consumers display low brand loyalty, frequently switching brands for better prices and cutting-edge features, making it difficult for foreign automakers to stay competitive.