Chinese Electric Vehicle Makers Counter EU Tariffs: Market Diversification and Localized Production

Chinese Electric Vehicle Makers Counter EU Tariffs: Market Diversification and Localized Production Chinese electric vehicle (EV) manufacturers may be unhappy with the new additional tariffs imposed by the European Union (EU), but they have multiple strategies to maintain their growth momentum, including shifting production to the European continent and leveraging their robust profit margins to partially offset the impact of tariffs. The European Commission formally notified carmakers including BYD, Geely Automobile, and SAIC Motor on Wednesday that it would impose temporary tariffs on EVs, up to 48%, starting next month

Chinese Electric Vehicle Makers Counter EU Tariffs: Market Diversification and Localized Production

Chinese electric vehicle (EV) manufacturers may be unhappy with the new additional tariffs imposed by the European Union (EU), but they have multiple strategies to maintain their growth momentum, including shifting production to the European continent and leveraging their robust profit margins to partially offset the impact of tariffs.

The European Commission formally notified carmakers including BYD, Geely Automobile, and SAIC Motor on Wednesday that it would impose temporary tariffs on EVs, up to 48%, starting next month.

Chinese EV makers have been actively entering the European market, fueled by years of technological leadership gained from fierce price wars in their domestic market. However, they are taking steps to mitigate potential risks and continue expanding globally in the face of trade barriers.

Market Diversification Strategy: Embracing Emerging Markets

Chinese EV makers are turning to emerging markets such as the Middle East, Latin America, and Southeast Asia to reduce their dependence on the European market. While the EV markets in these regions are relatively smaller, they offer significant growth potential.

The Middle East has emerged as a new market for Chinese EV makers, including Chery Automobile, XPeng, and Geely's premium brand Zeekr. William Li, CEO of NIO, said earlier this month that the EU's imposition of additional tariffs on Chinese EVs is "completely the wrong direction," and his company will begin expanding into the Middle East later this year.

A survey released earlier this month by research firm AlixPartners found that 71% of Saudi residents are "very" or "somewhat" likely to purchase an EV this year, and Chinese carmakers have a higher brand awareness than European, American, and Japanese brands in the region.

Latin America and Southeast Asia also present significant growth potential. BYD is investing about $550 million in building its first EV hub outside Asia in Brazil. The company has also chosen to build its first European car plant in Hungary to avoid new tariffs.

Localized Production: Reducing Tariff Risks

To reduce tariff risks, Chinese EV makers are actively seeking to localize production in overseas markets.

SAIC Motor told its dealers last year that it had begun looking for potential production sites in Europe. Chery Automobile has signed an agreement with EV Motors in Spain to manufacture cars in Barcelona. Geely, after acquiring Volvo in Sweden in 2010, has greater flexibility in adjusting its production strategy.

Under a partnership agreement reached last year, Leapmotor is expected to use Stellantis NV's global factories in the future.

Localized production allows Chinese EV makers to reduce tariff costs and better meet local market demands. Additionally, localized production can help them forge stronger partnerships and gain faster local market recognition.

Profit Margin Advantage: Withstanding Tariff Shocks

According to customs data, the average selling price of models like BYD's Dolphin compact SUV and MG4 by SAIC Motor's MG brand in the European market is twice their price in their home market, offering manufacturers some buffer in the face of new tariffs.

Joanna Chen, an analyst at Bloomberg Intelligence, said: "BYD is likely to be able to absorb most of the burden of the EU's additional tariffs, as its vehicles are more profitable than its peers." The EU is imposing tariffs of 17.4%, 20%, and 38.1% on BYD, Geely, and SAIC Motor, respectively, while other Chinese carmakers that have cooperated with the EU's investigation will be subject to an average tariff of 21%.

According to a report by Nick Lai, an analyst at JPMorgan, BYD's profit per vehicle in the European market could still be 1.5 times that of selling the same model in the Chinese market.

While tariffs will have some impact on profit margins, Chinese EV makers still enjoy strong profitability, which will help them withstand the tariff shock.

Industry Expert Opinions

Secretary general of the China Passenger Car Association, said that as Chinese carmakers continue to grow, they will inevitably face trade barriers such as increased tariffs. "Even if Chinese exported cars are suppressed, carmakers will not succumb to increased tariffs. Instead, it will make them stronger."

Kevin Lau, an analyst at Daiwa Securities, said that the impact of the EU's tariff increase on Chinese carmakers would be "minimal" as the European market only accounts for a small portion of their total sales. He estimates that the European market contributed between 1% and 3% to the sales of BY