Europe Faces A Flood Of Chinese Electric Cars. How Should It Respond?

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The market for electric cars in China is red hot. In a sense, the Chinese car industry is like a bees’ nest that is ready to swarm. It wants to branch out and establish new markets elsewhere. The US market is definitely cool to the idea of Chinese-made electric cars, but lots of European countries are only too glad to see lower priced vehicles from China land on their shores.

In the US, the Inflation Reduction Act has created a situation in which only electric cars that have their final assembly point in America are eligible for EV incentives. Even then, a significant percentage of the battery materials and components have to be sourced in the US or from friendly nations in order to qualify for those incentives.

The reason that’s a problem is because China dominates not only the manufacturing sector, but also the supply of battery components and materials as well. It will be a cold day in hell before Chinese companies establish the relationships with America that will enable them to compete with domestic brands.

German and South Korean companies are manufacturing conventional and electric cars in the US, but China? Not yet, and given the blowback over the CATL and Gotion battery factories in Virginia and Michigan lately, it will be a while before we see China investing in American factories the way Japan and South Korea did previously.

Chinese Electric Cars In Europe

This week, Stellantis CEO Carlos Tavares attended a ceremony to celebrate his company’s first battery factory in France. In his remarks, Tavares warned that competition from Chinese manufacturers will be fierce, given the headstart China has in building batteries and affordable electric vehicles. He told his audience that Europe’s political leaders must come to the aid of homegrown manufacturers in much the same way the United States has done.

“Whether the European car industry must be protected during the catch-up period, that’s a question that should be asked,” Tavares said. “I think it would be reasonable to do so, at least in a progressive manner, so that we are on a real equal footing, given that the imbalance has been caused by the fact that the European regulation has been set exactly on the strongest skills of our Asian rivals.”

Mercedes CEO Ola Källenius disagrees. In an interview with Stefan Nicola of Bloomberg, he said German automakers could be the big losers if trade relations between Europe and China deteriorate. 40% of the cars Mercedes sells each year go to customers in China. Stellantis, on the other hand, has closed its Jeep factory in China and has no plans to continue doing business there. The difference in opinion between the two executives is of particular interest because that battery factory in France is owned jointly by Stellantis and Mercedes.

Take Care Of Business & Business Will Take Care Of You

Källenius told Nicola, “If we look at the success of the World Trade Organization over the last 30 years — even if it’s not been perfect in terms of execution — globalization, reducing trade barriers and promoting free trade has driven an enormous amount of economic growth and wealth generation. So whatever we do, we need to protect that framework and not turn back to what in some cases looks like an easy solution toward protectionism.”

“In Europe, and especially in Germany, as it relies on exports as part of its successful business model, we should not increase protectionism. On the contrary, we should try to build on free trade. If you look at what we have done in China over the last 20 years, we’ve significantly built up our position there and took advantage of a growing market.

“We also believe in investing there in the future and taking advantage of growth to come. So it’s not surprising that Chinese car companies try to make their luck on the world markets, as well. I think it’s important to carefully protect the market economy and free trade, and not to overreact.”

Nicola then asked if Källenius was concerned about having to compete with electric cars from Chinese companies if there is an uneven playing field in the marketplace. “My concern is to do the job that we’ve done for more than 100 years — to invest in innovation and new technology, and to make sure our products are the most desirable in the market, wherever we are — in Europe, North America and China.

“In the very intense competitive environment of the auto industry, I don’t think that it will be primarily protectionism that will help us protect our competitive position. I think that will, on a worldwide basis, harm our competitive position. What will protect us is innovation, investing into new technologies, and making sure that we delight and surprise the customer. That competitive factor is by far the most important.”

Europe is rapidly switching over to renewable energy, and in some cases, the pace of the transition — hastened by the war on Ukraine — is causing the cost of electricity to rise. Is Källenius worried about that? He said he was not.

“In the mid to long term, that must be possible. Many of the Asian players are also dependent on energy imports. But I think we have to massively build up our renewable energy capacity in Europe. If you look at the wind projects with the best return on investment in terms of power generation, you can get down to the low single digit cents per kilowatt-hour. So as we continue to scale in wind rich and offshore areas, it must be possible for Europe to do that.”

Price Cuts & Electric Cars

Tesla has sparked price-cutting in the world of electric cars, which has led several Chinese EV makers to lower prices on their own products as well. Is Mercedes worried about the effect of price wars?

“There’s no doubt that when an industry goes through a transformation and new entrants come in that the competitive intensity is higher. That’s what we’re seeing in the automotive market today, mainly in the volume segment. It’s not so much in our premium-luxury segment, even though the complete competitiveness of the market is felt by all players, us as well,” Källenius said.

“I’d rather look at the upper end of the segments we’re in, and not venture into competition with the volume players. So we’ll be very careful not to get sucked into a price war there.”

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The Takeaway

There is a dark side to Källenius’ comments. Mercedes does not play in the “value” end of the market, whereas Stellantis definitely does. Perhaps that explains why the two executives see the coming competition from China in very different terms. Mercedes is high above the fray, secure in the belief that its market niche is secure.

But what if it’s not? What if the electric cars arriving from China begin to challenge Mercedes and BMW and Audi and Porsche? What then? What Ola Källenius has to say about innovation is all well and good, but the upshot is that the flotillas of Peugeots, Fiats,Dacias, SEATs, Vauxhalls, and other affordable electric cars plying the highways and byways of Europe today may one day be supplanted by less expensive alternatives made in China. Once they have conquered the lower end of the market, they will want to move up to where the profits are. It’s inevitable.

Carlos Tavares is a sour apple, always talking down the EV revolution and wringing his hands about how hard it is to manufacture electric cars and make money doing it. But that’s probably because most of the vehicles his company sells are not premium automobiles that command a premium price.

The real question is what will the impact of globalization be when China becomes a dominant market player? The western world always assumed China would be just a new market with a billion or more customers for its products. What happens when the servant becomes the master? Stay tuned. This could get interesting.