China’s EV makers saw Europe tariffs coming, and many already have a plan

BYD electric cars waiting to be loaded onto a ship are seen stacked at the international container terminal of Taicang Port in Suzhou, in China's eastern Jiangsu province. The European Union has said this week it would slap additional tariffs of up to 38% on Chinese electric car imports from next month after an anti-subsidy probe. (Photo by AFP) / China Out
BYD electric cars waiting to be loaded onto a ship are seen stacked at the international container terminal of Taicang Port in Suzhou, in China's eastern Jiangsu province. The European Union has said this week it would slap additional tariffs of up to 38% on Chinese electric car imports from next month after an anti-subsidy probe. (Photo by AFP) / China Out

Summary

Some manufacturers have already started building factories in Europe, and others are looking to export there from other countries.

HONG KONG—Chinese electric-vehicle makers, increasingly a global force, have been bracing for months for the prospect of hefty tariffs in Europe, one of their most promising markets. When that day arrived on Wednesday, many were prepared.

Some have already started building factories on the continent, while others have set up joint ventures with companies in the bloc. Still others are looking at exporting to Europe from third countries, such as Thailand, while some are throwing in the towel on Europe altogether, directing their attention to other markets where they have a better shot at displacing incumbents.

The European Union said late last year that it would launch an investigation into whether subsidies have given China’s EV makers an unfair advantage. On Wednesday, the bloc told carmakers that EV imports could be subject to additional tariffs of as much as 38%, on top of an existing levy of 10%, presuming it moves forward with its plan in early July.

While the outcome had long been expected, the EU announcement nonetheless snarls plans for many Chinese EV makers, who had hoped to parlay their success at home into global dominance.

After years of benefiting from government support in fostering the world’s most highly developed electric-car supply chain back home, many Chinese players harbored ambitions of becoming the next Tesla or Toyota. Securing a foothold in developed markets such as Europe and North America was indispensable to these plans.

Now, many are rethinking that road map. Last month, the Biden administration said it was planning to raise tariffs on Chinese EVs to 100%. Now, Europe is looking more daunting, too.

Several leading Chinese EV makers, including Warren Buffett-backed BYD and U.S.-listed NIO, have already poured millions of dollars of investment into Europe, where they could sell their vehicles at a higher markup than they could back home.

That is critical as EV sales slow within China, thanks to the phasing out last year of nationwide EV purchase subsidies and a slowdown in China’s broader economy, all of which has cooled Chinese consumers’ enthusiasm for big-ticket items and sparked a brutal price war.

He Yadong, a spokesperson for China’s Commerce Ministry, derided the EU’s move as “blatant protectionism," saying Thursday that it might also have violated World Trade Organization rules.

Ding Weishun, another official at the ministry, had acknowledged the use of subsidies during a press conference a day earlier, but described them as commonplace and in compliance with international law, rejecting Europe’s investigation as “a new trick of double standards and trade protection."

Europe’s decision on tariffs on Wednesday arguably vindicates decisions by Chinese EV makers BYD, Chery and Leapmotor to boost manufacturing in Europe, where they are more likely to avoid import duties.

For others such as Great Wall Motor, which hasn’t made major inroads in Europe, the prospect of increased tariffs has prompted a tactical retreat. Great Wall, which has a joint venture in China with BMW, said last month that it would close its European headquarters in Germany, three years after opening it. Europe’s EV market has become “increasingly challenging," and the prospect of what it described as “numerous uncertainties in the future" means that Great Wall will stick to supporting its existing distributors and customers on the continent while turning its focus to exploring new markets, it said.

Still, while Europe’s actions are complicating or upending some Chinese EV makers’ plans in the short term, analysts say the tariffs are likely to only temporarily slow Chinese EV sales more broadly on the continent and won’t derail their longer-term trajectory, especially in countries without their own local players to protect.

“This is not a black swan event," said Yichao Zhang, a Hong Kong-based automotive consultant at AlixPartners. “The overall direction for Chinese carmakers in the new automobile era is still unchanged."

Top-tier Chinese EV makers such as BYD will continue to remain in Europe, in part because of the large investments they have already made there, he said. One or two will eventually grow into global brands that manufacture in the same countries where they sell, just as the incumbent giants do, Zhang added.

BYD, which has long operated electric-bus factories in the U.S. and Europe, was among the first to announce plans to build a plant in Europe to manufacture electric passenger cars. It began exploring options early last year and in December announced that its first passenger EV plant in Europe would open in Hungary. Chinese companies have enjoyed a warm welcome in the Eastern European country, where BYD already operates a plant that has been supplying electric buses to European countries since 2017.

Under the new EU move, BYD cars are set to face roughly 17% in additional tariffs. Even so, its Atto 3 SUV—currently priced at around $41,000 at a dealership in Germany—would still be roughly 4% cheaper than Volkswagen’s comparable ID.4 Pro after the proposed tariffs kick in.

Analysts say BYD could also introduce more plug-in hybrid EVs, another category in which it is particularly strong, in Europe, where they wouldn’t be subject to the additional tariffs.

Leapmotor and Chery, two Chinese car companies which have held off on selling cars in Europe, are now pushing ahead with the help of local partners.

Hong Kong-listed Leapmotor, a startup that sells lower-priced EVs, has tied up with Chrysler parent Stellantis, which is based in the Netherlands. The firms said last month that their newly formed joint venture will start selling in nine European countries by September.

Through the joint venture, Leapmotor will produce EVs for Europe using Stellantis’s excess manufacturing capacity there, a Leapmotor executive told The Wall Street Journal. The deal was structured with Stellantis holding a 51% stake, in an effort to have the joint venture recognized as an European entity, the executive said.

Chery, based in the eastern Chinese province of Anhui, has joined up with a Spanish partner, Ebro-EV Motors, to assemble cars in Barcelona. The brand didn’t sell any EVs in the EU last year, but has enjoyed rising sales in markets including Mexico and Australia.

The biggest Chinese EV maker exporting to Europe isn’t BYD, but Shanghai Automotive Industry (Group) Corp., known as SAIC and fully owned by the Shanghai government. The company, which owns historically British brands MG and Maxus, would face up to 38.1% in additional tariffs, putting it at the top end of the new tariffs regime.

Last year, SAIC’s MG4, a compact electric car, was the fourth-bestselling EV model in the pan-Europe region, which includes the United Kingdom and Russia, after Tesla’s Model Y and Model 3 and Skoda’s Enyaq, according to London-based research firm GlobalData. More than 80,000 MG-branded passenger EVs were sold in the EU last year, GlobalData says.

MG has also been manufacturing EVs in Thailand, which is emerging as a major offshore manufacturing hub for Chinese carmakers. SAIC executives say that MG’s Thailand factory will be capable of supplying the European market, which could help it bypass the tariffs.

In response to the tariffs announcement, SAIC reiterated earlier plans to one day build a factory in Europe, although it hasn’t yet announced any concrete plans or a prospective location. The company rejected the suggestion that its success was a result of government support, saying Thursday that it has invested more than $20 billion in research and development over the past decade and provided quality products to consumers worldwide “through technological innovation and not government subsidies."

Write to Selina Cheng at selina.cheng@wsj.com

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