Why Chinese Car Imports Pose a Particular Threat to Europe

The steady success of Chinese e-cars poses a major threat to European automakers. Competition from Chinese imports is particularly high due to the comparatively open market in Europe.

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The shift to battery-powered electric vehicles is a game-changer for the European automotive industry, one that comes with numerous risks: a reshaping of the supply base, changing customer needs, competition from new entrants and the looming phase-out of the (fossil-fueled) internal combustion engine. But the biggest risk is China, as a study by credit insurer Allianz Trade makes clear. China recognized the potential of electric vehicles 15 years ago, it said, and has since invested enormous resources in building a competitive ecosystem for electric vehicles. Last year, China sold more than twice as many BEVs as Europe and the U.S. combined. 

What makes China such a threat to the European automotive industry can be summed up in two developments, according to the study: First, European manufacturers are increasingly being squeezed out in China and the dominance of Chinese brands in their own country is rising. On the other hand, more and more Chinese electric cars are pushing into Europe, so the import of Chinese cars into Europe is growing.

Europeans lose market share in China

China has "long since ceased to be the 'El Dorado' of European and, above all, German automakers," according to a press release on the study. They have lost significant market share in the world's largest automotive market in China in recent years and will have forfeited their market leadership by the end of 2022. Especially in the field of electric mobility, the Chinese prefer to rely on domestic brands. Chinese manufacturers account for 80% of newly registered electric vehicles. 

Aurélien Duthoit, industry expert at Allianz Trade, puts it in a nutshell: "Electric vehicles from Chinese manufacturers are becoming increasingly popular in China". And he predicts: "They will continue to expand their market share strongly until 2030, at the expense of European carmakers and their local subsidiaries and joint ventures. That's a bleak outlook for European and especially German carmakers, which exported EUR 24 billion worth of vehicles to China in 2022." If Chinese manufacturers were to increase their market share in China to 75 % by 2030, it would cost European automakers more than seven billion euros in annual net profits, the study calculated.

Import of Chinese cars to Europe grows

At the same time, Chinese manufacturers are already in the starting blocks to conquer the European market. The market share is still small, but it is likely to grow rapidly – in line with Korean and Japanese manufacturers in the past, according to the study. If Chinese imports were to capture a 10 % market share in Europe, the European automotive sector would lose around EUR24 billion in value added by 2030 – including suppliers, much more.

The economies of Germany, the Czech Republic and Slovakia, which are dependent on the automotive industry, would be hit hardest. In Germany, 0.36 % of gross domestic product (GDP) would be at risk, in Slovakia 0.4 % of GDP and in the Czech Republic 0.41 % of GDP.

Inflation Reduction Act makes Europe a target for Chinese exports 

An important reason for the increasing penetration of Chinese-made vehicles and Chinese brands in Europe is the comparatively greater openness to imported electric vehicles, the study said. Although the U.S. is the world's second-largest market for motor vehicles and has a large trade deficit in cars, it is a much more difficult market for Chinese vehicles to crack. According to the study, this is due to the U.S. Inflation Reduction Act (IRA), which will strongly encourage automobile production in North America through two key provisions:

• Tax credits for manufacturing a wide range of clean energy and critical raw material components ("New Advanced Manufacturing Production Tax Credits"), including battery cells and modules used in electric vehicles.
• Tax credits worth up to $7,500 for the purchase of a North American-assembled electric vehicle that meets certain domestic content requirements for battery raw materials and components. Beginning in 2024, an electric car's battery components may not come from Russia, China or any other "foreign entity of concern."

While the former provision is expected to take effect gradually as domestic and foreign companies invest in local manufacturing capacity, the study said, the latter provision creates a strong and immediate advantage for locally manufactured vehicles and an explicit barrier for Chinese suppliers and automakers. The IRA provisions would add to a significant import tariff gap, with Chinese vehicles subject to a 10 % import tariff rate in Europe, but a 27.5 % rate in the U.S. set by the Trump administration.

Adjustment of competitive conditions

Since both trends – the dominance of Chinese brands in China and the import of Chinese cars to Europe – can hardly be stopped at present, the study says, measures must be taken above all to mitigate the effects. Politicians, above all, are called upon to do this. "Adjusting the terms of competition to both China and the U.S. would be an important way to mitigate the impact on the automotive sector and thus the economy," Duthoit says. "But strengthening local production by Chinese manufacturers could also lead to positive effects. We've seen this in the past in China in reverse: If you can't beat them, maybe teaming up is an option."

In addition, investments in new battery technologies, a reduction in dependence on raw materials and imported components for electric drives, and the expansion of the charging infrastructure could be possible levers to compensate for the negative effects.