Chinese companies move to bypass tariffs by building EVs in Europe

China’s electric carmakers are expanding in Europe to blunt the impact of tariffs meant to weaken their price advantage over the region’s ailing legacy manufacturers.

With the European Union hiking duties on Chinese electric vehicles to as much as 48%, China’s new generation of green car manufacturers is teaming up with local industry so their cars are considered homegrown. Without these measures, Chinese EVs could become thousands of euros more expensive for consumers, or else unprofitable. 

Barcelona will soon play host to the Omoda E5, made by China’s Chery Automobile Co., which has partnered with Spain’s Ebro-EV Motors. In Poland, Chinese maker Leapmotor’s T03 city cars are rolling off an assembly line owned by Stellantis. Meanwhile, BYD Co. has announced plans for its own factory in Hungary, with another on the horizon in Turkey, and Zeekr is weighing production sites owned by its parent Geely. 

The arrival of China’s EV makers is a risk for European auto giants, which have little choice but to strike partnerships and make space for their upstart rivals as they face shuttering some of their own sites to adjust to faltering global sales growth. 

By the end of the year, Chery hopes to start production at the former Nissan Motor Co. factory near Barcelona’s cargo port. It’s also scouting sites for a second European location.

“We’re determined to move ahead with our launch team, with our operation in Europe in the short term, medium, and long term,” said Charlie Zhang, president of Chery Europe. 

Chery and Ebro are targeting production of 150,000 cars a year at the Spanish facility by 2029. Zhang, speaking the day after the EU announced the extra tariffs, said Chery also aims to build up local research and development, manufacturing and distribution  “to become a truly European company.”

The Spanish plant will assemble cars from kits that have been partially “knocked down,” according to Chery. Typically, such vehicles are made in cheaper locations, taken apart and then reassembled closer to where they’re sold. The process, common in auto manufacturing, will allow Chery to avoid EU tariffs imposed on finished cars.

The European Commission is still sorting out how the new tariffs will apply to joint ventures that weren’t part of its anti-subsidy investigation. While talks could stave off the extra duties before they’re made permanent in November, China has already started a retaliatory probe into alleged dumping of pork products from the EU.

It’s just one strand of a wider global trade dispute. The US has imposed tariffs on Chinese EV imports that can top 100%, as the world’s two biggest economies spar over an industry that’s grown rapidly thanks partly to Beijing’s subsidies.

The EU has taken a softer stance. It needs cheap EVs to meet a 2035 goal to phase out combustion-car sales, but sales growth has sputtered, hit by the removal of some government support. Volkswagen’s ID.3, for example, retails at around €37,000 ($40,150), compared to BYD’s Dolphin hatchback that sells for about €33,000. 

While China’s EV makers have taken less then 10% of market share in Europe so far, the region is the most lucrative outlet for the likes of Nio Inc. and Xpeng Inc., which have gone from rapid expansion in their local markets to overcapacity.

Chinese firms need a workaround for European tariffs to avoid sacrificing profit or exposing customers to the pain. According to BloombergNEF, the estimated margin for state-owned SAIC’s MG4 EV could plunge from 25% to just 1%. Some of this could be avoided if the firm raises prices, or if battery costs continue to tumble — another area where Chinese firms are outpacing EU competitors.

“List prices of Chinese-brand models are unlikely to change, as they currently lack the brand equity to justify a price increase,” Matthias Schmidt of Schmidt Automotive Research wrote in a report. 

Building plants

Manufacturers aren’t waiting around for the full picture on tariffs to emerge. SAIC is in talks with the Spanish government about where to build its first production site in Europe, newspaper Expansion reported on July 12. 

Volvo Car AB, the Swedish carmaker owned by Geely, has accelerated plans to build its new EX30 model in an existing plant in Ghent, Belgium, in addition to its factory in China. 

This summer, Leapmotor began assembly of the all-electric T03 in Tychy, Poland, at a manufacturing site owned by Stellantis — just six months after they announced the partnership. Using semi-knocked down kits, Leapmotor will provide EVs that can be assembled at any Stellantis plant worldwide, the latter firm has said. 

Cars assembled from kits sent to Poland will generate gross profit of about €3,200 per car, Jefferies analysts led by Xiaoyi Lei said in a June 17 research note. That shrinks to about €1,000 for imported vehicles under the estimated impact of the new tariffs. 

In an added benefit to the region, localizing production in Europe “can attract car parts makers,” said Ganyi Zhang, market analyst with Upply, a digital logistics platform.

There’s plenty more scope for partnerships in the face of cost pressures including the EU tariffs, Citigroup analyst Harald Hendrikse said in an interview. “All the Europeans will be making some sort of Chinese car soon, whether in China or in Europe.”

Rebranding questions

In Italy, Giorgia Meloni’s government is courting Chinese manufacturers, though some of the biggest carmakers in the country have conflicted feelings about the possibility of increased competition in their home turf.

Industry Minister Adolfo Urso traveled to China recently, meeting with EV makers Anhui Jianghuai Automobile Group and Dongfeng Motor Group Co. 

Stellantis Chief Executive Officer Carlos Tavares, despite the firm’s tip-up with Leapmotor, has repeatedly raised concerns about Chinese firms expanding. “All European governments are dating Chinese car makers to come to assemble their vehicles in their countries,” Tavares said in a Bloomberg Television interview on Thursday. “Italy, France, Germany, Spain, they are all dating the Chinese. We are here for the fight.”

In June, Italy’s antitrust authority fined DR Automobiles €6 million after determining it had illegally labeled vehicles from Chinese manufacturers including Chery as Italian-made. DR has said it planned to appeal, and that vehicles are only 60-70% pre-assembled in China. 

“It’s logical that countries like Italy are worried about preserving jobs and monitoring closely what is happening in their home market,” said Alexandre Marian, partner and managing director at AlixPartners.

But Marian still expects Chinese firms to continue expanding in Europe, potentially by acquiring plants that local manufacturers want to close or sell.

“Chinese manufacturers are extremely determined,” he said. “They always find a way around a problem and once they’ve fixed a target, they find a way to make that target.”