[Global Focus] The Ultimately Imposed Tariff Bomb Against China... What Is the Fate of the EU Automotive Industry?

German Car Industry Faces Inevitable Impact Due to High Dependence on China
Chinese Electric Vehicle Makers Establish Factories in Europe to Avoid Tariffs
European Brand Loyalty May Counter China's Low-Cost Offensive

Europe has ultimately imposed a tariff bomb on Chinese electric vehicles. France welcomed the move as a measure to protect the regional automotive industry against China's low-price offensive, but the anguish in Germany, Europe's 'car capital,' is deepening. As the market share of the 'Big 3'?including Volkswagen, which faces existential threats?shrinks in China, any retaliation from China would inevitably cause damage. Amid this, Chinese companies are heading to Europe for production localization, while European companies are moving to China for technological cooperation, signaling changes in the global automotive industry's landscape. Experts are divided between optimism that tariffs and European brand loyalty will fend off China's low-price offensive and pessimism that the European automotive industry will face accelerated erosion.

European Union (EU) Drops 'Tariff Bomb' on China... Germany Also in Tears

The EU Commission has imposed definitive anti-subsidy tariffs on Chinese electric vehicle imports for five years. This measure aims to curb Chinese electric vehicle companies, backed by government subsidies, from engaging in low-price competition within the region. The final tariff rate ranges from 17.8% to 45.3%, adding an additional 7.8 to 35.3 percentage points on top of the existing 10% general tariff. China's largest electric vehicle manufacturer BYD faces a 27% tariff, while companies like Shanghai Automotive Industry Corporation (SAIC), which did not cooperate with the investigation, are subject to the highest rates. Even Tesla, which manufactures products at its Shanghai plant, must accept the minimum tariff rate. China's Ministry of Commerce has left room for further negotiations but warned that it will take "all necessary measures."

Considering the rapid pace at which Chinese electric vehicles are dominating the European market, this tariff bomb appears reasonable at first glance. According to the European Automobile Manufacturers Association (ACEA), the market share of Chinese electric vehicles in the EU rose more than tenfold from 2.9% in 2020 to 21.7% last year. Experts expect this share to exceed 25% by the end of the year. However, the problem is not limited to China alone. If China retaliates with tariffs, German automakers, which heavily depend on the Chinese market, will inevitably suffer. China has already conducted anti-dumping investigations on European brands and products such as dairy and pork this year.

Europe's 'Car Capital' Shaken

Cries of distress are already emerging throughout Germany's automotive industry. The sector has fallen behind in the electric vehicle transition race, and demand has decreased as its largest market, China, slips into recession. Volkswagen, which had set a cost-cutting target of 15 billion euros (about 22 trillion won) by 2026 due to worsening profitability, is now pushing to close three German factories for the first time in its 87-year history. Volkswagen's German plants, combining assembly and parts production, employ about 120,000 people, making it Europe's largest automaker. Local media estimate that workforce reductions due to factory closures could reach up to 30,000.

The situation in the Chinese market is also challenging. The Chinese sales of Germany's 'Big 3'?Mercedes-Benz, Volkswagen, and BMW?plummeted by 13%, 15%, and 30%, respectively, in the third quarter compared to the same period last year. Particularly, Porsche, a Volkswagen subsidiary, saw a 19% drop in sales as global demand for its electric model Taycan nearly halved. Porsche recorded its worst third-quarter performance in 10 years, and BMW in 4 years. Bloomberg noted, "Chinese consumers increasingly prefer the technological improvements offered by local electric vehicles over traditional German internal combustion engine cars' selling points such as horsepower and handling." Currently, German automakers' market share in China is about 15%, down significantly from 25% before the pandemic. Especially, their electric vehicle market share is below 10%, a low level.

As Germany's key industry faces crisis, the national economy is also deteriorating. According to the World Economic Outlook (WEO) updated last month by the International Monetary Fund (IMF), Germany's economic growth forecast for this year is 0% (down from 0.2% in July), the only downward revision among the Group of Seven (G7) countries. Earlier, Robert Habeck, Germany's Vice Chancellor and Minister for Economic Affairs and Climate Action, also lowered the country's GDP growth forecast from 0.3% to -0.2%, pointing out that "Germany's export pillar is shaking." This means Germany is facing two consecutive years of economic contraction for the first time in 20 years.

China to Europe, Europe to China: 'Each to Their Own Survival'

EU regulators say the tariff bomb is an unavoidable choice to protect the regional automotive industry, but industry leaders believe such protectionism will accelerate factory closures in Europe. If Chinese companies establish factories in Europe to bypass tariff barriers, traditional automotive powerhouses like Germany, France, and Italy, where labor costs are high, will suffer losses. Carlos Tavares, CEO of Stellantis, analyzed, "Chinese automakers like BYD are strengthening their production plans within Europe to avoid tariffs. They will expand into Eastern European countries like Hungary, where production costs are low, rendering the purpose of tariffs ineffective."

Chinese electric vehicle companies are already rapidly localizing production in Europe. BYD chose Hungary as the site for its first European electric vehicle factory and recently agreed with Turkey to build an electric vehicle plant with an annual capacity of 150,000 units, scheduled to start operations by the end of 2026. BYD plans to produce 100% of the electric vehicles exported to Europe locally. Global investment bank UBS predicts that Chinese electric vehicles produced in relatively China-friendly Eastern Europe will be sold at prices about 25% lower than Europe's major competitors. Geely Automobile, which acquired Volvo, is also considering building an electric vehicle factory in Poland.

Just as Chinese electric vehicle companies head to Europe to avoid tariffs, European automakers are adopting a 'Sinicization' strategy for survival. Stellantis, for example, has revised its business strategy by withdrawing from operations in China and directly introducing Chinese brands to Europe. Last year, Stellantis acquired a 20% stake in Chinese electric vehicle startup Leapmotor for 1.5 billion euros and currently sells Leapmotor's small electric car T03 through 200 dealerships in 13 European countries. France's Renault is upgrading combustion engine technology in cooperation with Geely Automobile, and BMW has established a joint venture with Great Wall Motors to target the Chinese electric vehicle market.

[Image source=Pixabay]

Need for Sinicization vs. Blocking Invasion... The Future of European Cars

Among experts, opinions are mixed between those who believe the European automotive industry must quickly collaborate with Chinese companies to drive innovation and those optimistic that tariff barriers will fend off China's low-price offensive. Christoph Weber of Swiss engineering software company AutoForm pointed out that bureaucratic European automakers typically take four years to develop new products, whereas Chinese companies launch new models in about one year. He emphasized, "CEOs of Chinese electric vehicle companies like Nio and Zhidu attend weekly design meetings and make decisions on the spot. Traditional European automakers must fundamentally change their workflows to keep pace with the speed at which Chinese competitors adopt new technologies and designs."

On the other hand, some forecasts suggest that due to Europe's tariff bomb, the market share of Chinese electric vehicles in Western Europe will not exceed 12% (compared to 8.3% last August). The average age of new car buyers in China is mid-30s, but in Europe, it is higher at 50 years old, and high brand loyalty is also cited as a factor that can curb the impact of Chinese electric vehicles' low-price offensive. Jose M. Asumendi, head of European automotive research at JP Morgan, said, "The biggest obstacles Chinese automakers will face in Europe are distribution networks and brand recognition," predicting that the scenario where Chinese electric vehicles dominated the domestic market will not work in Europe.