French Desire For EU Protection From China’s Electric Cars Irks Germany

France and Germany are at loggerheads over China’s ambitious plan to sell more than a million electric cars in Europe by 2030.

The European Union (EU) sees this as an existential threat to its electric car makers. China is a big danger because of its early start, leading to its lead in battery technology and a price advantage of about 20%. Europe’s car industry is in jeopardy because EU lawmakers mandated early electric car adoption for its citizens without realizing its own manufacturers lagged well behind China’s.

French President Emmanuel Macron has been pressing his EU partners to protect Europe’s electric car-makers, and the German industry has lined up against this.

Without an increase in the current EU tariff of 10%, China will make huge inroads into the local market. Countries like France, with only a relatively small interest in the Chinese market, see this as a big threat and want action. German manufacturers like VW, Mercedes and BMW, reckon any action to curb China in Europe might jeopardize their massively profitable operations in China. European vehicles sold in China carry a 15 to 25% import tariff.

Politico, a U.S.-based publication specializing in politics, reported from Brussels in mid-June that this imminent flood of Chinese electric cars has sounded alarm bells because it threatens the viability of the European electric car industry. Politico quoted Internal Market Commissioner Thierry Breton of France saying he favored an early dumping investigation into Chinese electric cars. Breton’s office declined to comment on the likely date of a probe, or its details. China has paid huge subsidies to its citizens to persuade them to buy into the electric car revolution.

European fears were whipped up by a report in May from Allianz Trade, a subsidiary of German insurance company Allianz, which said Chinese battery electric vehicles (BEVs) will cost European automakers €7 billion ($7.6 billion) a year in lost profits by 2030 unless the EU takes action, including tariffs.

Investment bank Morgan Stanley agrees German and French interests may clash.

“German (manufacturers) and industry (are) heavily exposed to the Chinese domestic market versus French (manufacturers) with limited direct China exposure and are more sensitive to the threat of cheap Chinese BEVs in Europe,“ Morgan Stanley said in a report.

The bank expects Chinese manufacturers will ultimately set up factories in Europe. Mass-market players Renault of France and Stellantis are most exposed to direct Chinese sales, according to Morgan Stanley. German premium carmakers are exposed to “tit-for-tat” Chinese retaliation. Volkswagen, with its Audi and Porsche units, and its value brands VW brand, Skoda and SEAT, is vulnerable at both extremes.

According to Schmidt Automotive Research (SAR) by 2030, sales of Chinese BEVs in Western Europe will hit 1.2 million or 9% of electric car sales. This assumes some Chinese manufacturers set up factories in Europe. Sales will reach 360,000 or 3.4% in 2023 dominated by SAIC’s MG brand and few BYDs. This will rise to 610,000 in 2024 (5%) led by BYD and MG.

“After 4-months Chinese (manufacturers) accounted for 94,400 electric vehicles or a 2.5% market share,” SAR’s Matt Schmidt said.

The sales include Western brand models manufactured in China and shipped to Europe from the likes of BMW with the iX3, Tesla Model 3 and Y, and the Dacia Spring (Renault’s value brand), meaning around 40% of electric cars being shipped from China to Europe are Western brands, Schmidt said.

Some analysts hope that some middle-ground can be established by negotiations with the Chinese, likely to include the setting up of its own factories in Europe.

Professor Ferdinand Dudenhoeffer, director of Germany’s Center for Automotive Research (CAR) said protectionist measures always fail in the long-term.

“If the EU takes action against China, it would be a big mistake – in Germany they would call it an own goal. The China market is more than 20 million new vehicles and the EU is closer to 15 million. So we’re losing a big China market by saving maybe 5%, say 750,000 new cars a year. These new cars are also Japanese, U.S. and Korean cars, not just European,” Dudenhoeffer said.

He said the EU is divided on the issue. And protectionist action against China using tariffs or so-called non-tariff barriers will be counter-productive, not least because China is the leader in BEV technology.

“How did protectionism in the USA 30 years ago work against the Japanese? Transplants have come and Toyota is dominating the U.S. market. Protectionism has never been successful. It has only weakened. And the weakening becomes very dramatic. Everything that is state of the art in battery know-how comes from China and autonomous driving is the same. So we seal ourselves off from technical innovations. You can’t do anything worse. We will lose a lot internationally as a result,” Dudenhoeffer said.

Bernstein Research said it’s not surprising Chinese companies are aiming a full-barrel onslaught at Europe because it is the only affluent and developed global automotive market left open to them.

“The USA’s Inflation Reduction Act has closed the American market to Chinese (manufacturers). They will now turn to Europe, which offers relatively low import tariffs, to help relieve domestic overcapacity issues. This has led to the expectation that Chinese (manufacturers) will embark on an export-driven growth strategy in Europe,” Bernstein said in report.

Notwithstanding the Schmidt forecasts for 2030, Bernstein reckons China’s weak branding power will inhibit attacks on premium brands like Audi, Mercedes, BMW and Porsche.

“Premium Chinese EV models such as the BYD Han and Tang, and the Nio EL7 are clearly over-specified to compensate for the lack of brand equity. They offer more range and more power at price points sometimes 20% below comparable European ICE vehicles. We don’t think this guarantees success,” Bernstein said.

Bernstein said even though mass-market brands in Europe are vulnerable, they aren’t standing still.

“New platforms will improve the relative competitiveness of European products. Brands do matter, even in the mass market. New entrants will be unable to match the incumbents’ sales and service capabilities. Political support for European manufacturing over imports may also slow down new entrants. The key risk is that the sector continues to underestimate the strategic rationale and speed of competitive entry,” Bernstein said.

Some European manufacturers have remained calm about the possibility of the Chinese threat requiring retaliation, while others want action.

Carlos Tavares, CEO of Stellantis which owns mass market brands like Peugeot (France), Fiat (Italy), Citroen (France), Vauxhall (U.K.) and Opel (Germany), recently urged Europe’s leaders to aid local carmakers, not least because EU regulation had favored Chinese imports over European marques.

Volkswagen welcomed competition.

“A challenging competitive environment drives innovation. Competition is part of our daily business,” VW was quoted as saying.

Mercedes COE Ola Kallenius said something very similar.

CAR’s Dudenhoeffer says action to curb China will provoke retaliation.

“A backlash from China? Absolutely. We are going into confrontation and China will of course fight back. The share prices of the European car manufacturers – in particular the German car manufacturers – will suffer. VW, BMW Mercedes make a good 40% of their profits in China today. If they are missing, the shareholders will not be happy,” Dudenhoeffer said.