China/Hong Kong Market Pulse: EU Targets Chinese BEVs with New Tariffs

Key Points:

• EU imposes significant tariffs on Chinese BEVs to protect local industries
• Tariffs incentive Chinese BEV makers and their supply-chain to relocate production to the EU
• While Chinese FDI to Europe falls to multiyear lows, China's EV-related investments in Europe surge
• BYD and Geely are leading in building capacities in Europe

Introduction

As discussed in our article last month, the European Union (EU) is set to introduce substantial tariffs on Chinese battery electric vehicles (BEVs) to shield its domestic auto industry from rising competition. This action follows an investigation by the European Commission (EC), which concluded that Chinese automakers benefit significantly from government subsidies, posing a threat to European companies. These new tariffs aim to slow the growth of Chinese EV imports into the EU. For the time being, it maintains a welcoming stance towards Chinese manufacturers relocating their production to Europe.

EU's Additional Tariffs on Chinese BEVs

On June 12, the European Commission pre-disclosed its intention to impose additional tariffs on BEVs manufactured in China, effective from July 4, unless an agreement is reached with Chinese authorities to resolve the alleged unfair competitiveness of Chinese BEV makers due to government subsidies. The definitive measures of the implementation of the tariff will be finalized within four months from July 4, with the possibility of retroactive collection starting from April 5.

The EC's investigation into the Chinese BEV value chain focused on government subsidies and selected three major Chinese automakers—SAIC, Geely, and BYD—as sample companies in the investigation. Based on the findings, provisional tariff rates were set: SAIC at 38.1%, Geely at 20.0%, and BYD at 17.4%. Unlike the US tariffs on Chinese EVs, the EU's tariffs will vary by company.

The investigation revealed that SAIC, a state-owned enterprise, faces the highest tariff rate, while private companies Geely and BYD have lower rates. The higher tariff on SAIC suggests that its status as a state-owned entity and without any production capacity in Europe may have contributed to the elevated tariff rate. In the first four months of 2024, SAIC, Geely, and BYD sold 20,283, 6,804, and 7,555 units of BEVs, respectively, to the European Union.

Other BEV manufacturers that cooperated with the EC, such as NIO and XPENG, face a 21% tariff. Tesla China, being a US company operating in China, might receive an individually calculated duty rate, expected to be lower than those imposed on Chinese BEV makers. Currently, the EU imposes a 10% tariff on BEV imports from China. With the additional tariffs, the total rates will reach 48.1% for SAIC, 30% for Geely, and 27.4% for BYD. Most other manufacturers, except Tesla China, will face at least a 31% tariff.

Incentivizing Local Production and Supply Chain Relocation to the EU

In addition to slow import growth, the EU's move is seen as an incentive for Chinese BEV makers to relocate their production and supply chains to Europe. BYD and Geely have received more favorable tariff rates partly due to their existing or planned assembly plants in Hungary, Sweden, Belgium, the UK, and Slovakia. BYD has an assembly plant in Hungary and plans to open another one, while Geely, directly or through its subsidiaries, has production plants in Sweden, Belgium, and the UK, with plans to set up plants in Slovakia by 2026. These strategic investments in European production facilities likely contributed to the lower tariff rates imposed on these companies.

Over the past two years, Chinese EV manufacturers, battery makers, and other EV supply-chain companies have been building production capacities in Europe in anticipation of rising trade barriers. This move is strategic in positioning for a fast-growing European EV market, given the EU's requirement for all new cars sold to be zero-emission vehicles starting in 2035. By 2030, the number of EVs in Europe is expected to rise sharply to 40 million from around 8 million currently.

This strategic positioning serves multiple purposes. It allows Chinese automakers to circumvent impending tariffs, maintain competitiveness in the European market, and better understand and cater to local preferences and regulatory requirements. Additionally, creating local employment helps gain political support and reduces the pressure of trade restrictions against vehicles manufactured by Chinese EV makers.

Strategic Investments by Chinese EV and Battery Makers

While the overall level of Chinese Foreign Direct Investment (FDI) in Europe fell to EUR 6.8 billion in 2023—the lowest level since 2010—China's EV-related investments in Europe increased by 62% to EUR 4.7 billion in 2023, up from EUR 2.9 billion in 2022, according to data compiled in a report from Rhodium Group. This accounted for 69% of China's FDI into Europe during the year. Most of these investments were greenfield projects, involving the construction of production plants in EV assembly, EV batteries, or processing battery materials like cathodes and anodes.

Chinese automakers and battery makers have been actively setting up production plants across Europe. BYD is building an EV assembly plant in Hungary with an annual capacity of 150,000 vehicles, scheduled to be operational by 2026. Chery has production plants in Italy and Spain, with annual capacities of 60,000 and 115,000, respectively. Geely and its subsidiaries have production plants in Sweden, Belgium, and the UK, and are constructing an EV plant with an annual capacity of 250,000 in Slovakia, scheduled to be operational by 2026.

Moreover, battery makers such as CATL, Huayou Cobalt, and AESC (majority-owned by Envision) are building EV battery-related production plants in Hungary, France, and Germany. These investments are part of a broader strategy to establish a strong foothold in the European market and position for the anticipated growth in the European BEV market.

Investment Implications for Chinese EV Stocks

The imposition of additional tariffs on Chinese BEVs by the EU highlights the growing tension between major global economies over trade policies amidst geoeconomic fragmentation. The EU's new tariffs on the import of BEVs made in China have limited impacts on the current sales levels of Chinese EV companies but potentially significant implications for their future growth via exports.

Chinese automakers and battery manufacturers are strategically investing in Europe, building production plants, and creating jobs to maintain their competitiveness and market access in the European market. These investments not only help them circumvent the new tariffs but also position them to gain from the anticipated growth in the European EV market, in line with the EU's environmental goals of increasing the penetration of zero-emission vehicles on the roads.

Note: Geely Financials Denmark A/S, a subsidiary of Zhejiang Geely Holdings Co. Ltd., is a major shareholder of Saxo Bank A/S.

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