Chinese electric car take up and production could threaten European manufacturers. Tzoulianna Leventi, investment manager, abrdn looks at the challenges and potential investment opportunities.
Luxurious Chinese electric cars are appearing in showroom forecourts all over the world. Models like the Build Your Dreams (BYD) Atto 3 aim to offer all the luxury electric experience of cars like the Tesla Y but at a lower cost. For Chinese manufacturers, the focus has been on breaking into the huge mid-price and budget sections of the global consumer market, ahead of homegrown carmakers, to tap the demand for electric vehicles.
Why does this matter to investors?
European domestic car manufacturers, European original equipment manufacturers (OEMs), suppliers and their investors are feeling the price pressures of competing with Chinese manufacturers, who benefit from economies of scale, lower wages and Chinese government support. Although certainly, the better-placed geographically agnostic suppliers to OEMs in Europe should be able to benefit from the Chinese expansion in the continent and expand their market share.
Long-term planning by the Chinese government has concentrated on building battery capacity and capability for the lowest possible cost to consumers. This has created a price-war around car leasing deals, where Chinese cars are undercutting their peers in Europe and the US to build brand awareness.
Although Europe has a target to sell only electric cars by 2035, uptake of all-electric, battery electric vehicles (BEVs) in the region has been slow. Despite government incentives, BEVs are currently only 15% of sales, with the main issue the high price of going electric. According to research from JP Morgan*, the percentage of Chinese cars in Europe’s electric vehicle market is 8.4% this year, up from 6.2% in 2022. The research suggests that the Chinese share of this market could be over 10% by next year. By contrast, over the past ten years, key European and American car manufacturers have lost 20% of their market share in China to BYD, Geely and Tesla.
The EU Commission has recently launched an investigation into the Chinese government’s subsidy regime, as there is no appetite to repeat what happened with solar panels when Chinese-made panels flooded European markets causing European manufacturers to collapse, as consumers used generous subsidies from their own governments to buy cheaper Chinese panels.
Currently, there are variations in how different regions apply import duties on Chinese vehicles to protect their internal markets. The UK has a lower import regime for China and there is concern that the UK will become a route for Chinese cars and batteries to enter the EU.
Another consideration is the UK’s imminent Zero Emission Vehicle mandate – if companies miss the 22% electric sales target, they will be fined £15,000 per vehicle, or must buy credits from manufacturers with surplus**. So, they could end up subsidising Chinese electric imports.
Car manufacturers in both Europe and the US are doing everything they can to rise to the challenge posed by Chinese electric vehicles, which can provide some attractive investment opportunities. These huge homegrown car industries support millions of manufacturing jobs and fund vast research and development budgets. Electric vehicle development has been scaled up and partnerships have been formed between European, US and Chinese companies. Although not all manufacturers are in favour of raising import duties on Chinese cars, this would certainly slow down the erosion of market share for traditional European manufacturers, giving them more time to catch up.
Both European and US manufacturers are already making all-electric and plug-in hybrid electric cars, but generally only at the higher 40,000-euro and upwards price-points, so China is currently providing plausible competition. EU and US brands are responding with a full range of cheaper vehicles coming to showrooms in 2024 and 2025. It is likely that a ‘middle ground’ can be found in the international trading arena to allow China to compete fairly and to invest in building cars in Europe, where there is strong ‘homegrown’ loyalty. In Europe, most of the bestselling car models are all European brands, reflecting the excellent quality and heritage of European automotive OEMs. In the US too, there is also strong loyalty to US brands.
Whatever the outcome of the European Commission’s investigation, restoring car production, towards 2017 levels is possible, but with a different geographic mix. Demand will come from emerging markets, where car penetration is still very low, but it will be challenging to up production without Europe incentivising consumers further to switch to an EV car, especially with Europe’s 2035 target date for all new cars to be electric.
The response from US and European manufacturers to the challenge from China might bring with it some interesting investment opportunities. This is where active management becomes crucial – having the ability to scrutinise company supply chains and manufacturing processes may unearth some potential for long term returns. And importantly, more competition and investment in research and development can only be a good thing for consumers.
*JP Morgan, European Equity Research, Sept 2023, EU Commission Probe into Chinese BEV subsidies
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