Why Europe’s automotive disaster is usually made in China

In its 87-year historical past, Volkswagen has by no means closed a manufacturing unit in its German heartland. It’s now contemplating shutting three and chopping employees’ pay by 10 per cent.

The plans had been disclosed at an worker assembly by the pinnacle of VW’s highly effective works council and haven’t been confirmed by the corporate, which is because of report third-quarter outcomes on Wednesday.

However the world’s second-biggest automotive producer, which additionally owns Audi, Škoda and Seat, has already warned on earnings twice this yr and flagged the beforehand unthinkable step of closing factories in Germany.

It isn’t the one European carmaker considering deep and controversial retrenchment. Stellantis, proprietor of Opel, Fiat and Peugeot in Europe, is beneath intense stress from Italian politicians and unions to maintain its oldest Fiat manufacturing unit in Turin operating regardless of a hunch in gross sales.

Meeting strains in France are already being shifted to lower-cost places corresponding to Morocco and Turkey. Earlier this month, a number of hundred French employees, together with from suppliers like Bosch, protested outdoors the Paris Motor Present.

Europe’s automotive business, which employs almost 14mn folks and accounts for 7 per cent of the EU’s GDP, is confronting an ideal storm. Demand for vehicles is falling at residence and overseas, whereas carmakers are navigating a dangerous and costly multiyear transition from combustion engines to electrical propulsion.

All these issues are being exacerbated by China — the place competitors for gross sales within the once-lucrative home market is ferocious, and whose high-quality, lower-cost EVs are actually being exported to Europe in better numbers.

There aren’t any straightforward options. The EU has adopted the US in elevating tariffs on autos imported from China, however business leaders corresponding to Carlos Tavares, chief govt of Stellantis, and BMW chief govt Oliver Zipse, say protectionism will solely make vehicles dearer for shoppers and speed up plant closures in Europe.

“We don’t need protection,” Zipse stated lately on the sidelines of the Paris Motor Present, including that European carmakers “shouldn’t be over-afraid” of Chinese language competitors.

Producers have urged governments to roll out charging infrastructure and introduce or reinstate monetary incentives for electrical autos — however this is not going to assist sluggish exports outdoors the continent.

Working with Chinese language carmakers, who’ve learnt learn how to make high-quality EVs at decrease price, might present formidable present and future opponents with a ready-made distribution community in Europe, accelerating their growth.

Roberto Vavassori, who heads the Italian Affiliation of the Automotive Trade, describes China as “the elephant in the room” and the issue that makes this downturn completely different from earlier ones. “For many suppliers in the automotive industry, [the Chinese] are both the biggest threat and biggest customer.”  

Tavares has a easy query for Europe’s carmakers and politicians: “Do you want to race or not?” The end result for many who select to not step up, he warns, is that “you disappear”.

The issues of European carmakers start at residence. Car gross sales in Europe haven’t recovered to pre-pandemic ranges and better rates of interest are hurting demand. 

This stress comes at a time when producers are grappling with the inexperienced transition. Below present laws, it will likely be inconceivable to promote a petroleum or diesel automotive within the EU, and in different markets such because the UK, after 2035.

Electrical vehicles are nonetheless costly to supply in Europe, largely due to the excessive price of batteries, making them costly to purchase. Customers need cheaper EVs and extra charging stations, and plenty of are holding off shopping for till they get them. Because of this, gross sales are slowing simply as harder EU emissions guidelines from subsequent yr mandate a quicker shift to cleaner autos.

Vavassori factors out that Europe’s carmakers can now not export their approach out of bother both. Final yr, China changed Japan because the world’s largest exporter of recent vehicles as its personal producers regarded to diversify away from their overcrowded home market.

China is an issue for European carmakers in different methods. Chinese language producers corresponding to BYD, Nio, MG-owner SAIC, Nice Wall and Chery are constructing extra superior electrical vehicles with prices 30 per cent decrease than these of European carmakers, in accordance with Tavares and others. On Chinese language showrooms, EVs are nearing value parity with petrol vehicles.

The rise of homegrown manufacturers has sharply decreased the gross sales of European, US and Japanese carmakers in China, which in recent times has been the largest and most profitable marketplace for manufacturers corresponding to Volkswagen, Mercedes-Benz and BMW.

International manufacturers’ market share of Chinese language auto gross sales is trending at a document low of 37 per cent within the first eight months of 2024, down from 64 per cent in 2020, in accordance with information from Shanghai consultancy Automobility.

That has additionally put stress on the joint ventures that western carmakers shaped with native companions after they first entered the Chinese language market. Two years in the past, Beijing permitted overseas corporations to function independently; in September, Mercedes-Benz withdrew from a 13-year EV three way partnership with BYD. Volkswagen, one of many first to enter the Chinese language market, is contemplating closing a Nanjing manufacturing unit operated with its oldest three way partnership associate, SAIC. 

If Chinese language carmakers decide to bypass EU import tariffs by opening manufacturing websites in Europe, as their Japanese friends did within the Eighties and Nineteen Nineties, the overcapacity in European carmaking will worsen. 

New arrivals are additionally extra doubtless to decide on low-cost places in jap Europe to supply their autos, particularly nations corresponding to Hungary with comparatively China-friendly governments. That may put extra stress on producers in high-cost international locations and undermine the effectiveness of tariffs for German and French carmakers.

As China’s advances in EVs, battery expertise and software program proceed to ripple by means of the worldwide business, some European automotive corporations are pursuing a distinct technique for survival — changing into extra Chinese language.

“What did the Chinese do, what did the Japanese do and what did the Koreans do when they were behind on technology? They collaborated,” says Andy Palmer, a marketing consultant who was beforehand chief govt of luxurious marque Aston Martin. 

“The European industry needs to get the Chinese to localise in Europe and it needs to collaborate with them, particularly around battery technology, in order to catch up,” he provides.

VW is already partnering with Chinese language start-up Xpeng to develop EVs at a quicker pace and decrease price. France’s Renault, which has largely minimize its publicity to the Chinese language market, has partnered with Volvo Vehicles proprietor Geely to construct extra superior combustion engine applied sciences.

After winding down its ventures in China, Stellantis is now playing on a brand new technique that breaks with that of its rivals: bringing a Chinese language model to Europe itself. Final yr it took a 20 per cent stake in Chinese language start-up Leapmotor for €1.5bn, giving it unique rights to construct and promote Leapmotor vehicles outdoors China by means of a three way partnership. Because of this, the model already sells by means of 200 sellers in 13 European markets.

Its T03 compact electrical automotive is without doubt one of the most cost-effective choices within the UK, with a price ticket beneath £16,000. On the latest Paris Motor Present, Leapmotor additionally unveiled its first international mannequin for an electrical compact sport utility car.

Entry to the huge distribution and aftersales community of Stellantis will enable Leapmotor to develop quicker outdoors China. The T03 is produced in China and at a Stellantis plant in Poland that used to construct the Fiat 500, so the corporate can keep away from the EU’s tariffs.

“We have the agility, the flexibility and capacity to localise the models outside of China if we want as business needs grow,” stated Tianshu Xin, who heads the three way partnership between Leapmotor and Stellantis. “There is a lot of opportunity to be further explored.”

For Stellantis, the weird tie-up offers it a much-needed reasonably priced addition to its personal EV providing, permitting it to higher compete with different Chinese language imports. If Leapmotor gross sales develop in Europe, Stellantis might utilise extra spare capability at its personal factories and keep away from politically controversial closures.

“The Chinese carmakers will have 10 per cent of the European market in a few years,” Tavares says. “So if the Chinese sell 1.5mn cars, it means the equivalent of seven plants.”

China’s management in electrical propulsion isn’t just a matter of price. One other main hole that’s rising is in expertise.

Christoph Weber, who leads the China enterprise for Swiss engineering software program group AutoForm and relies in Shanghai, says conventional European and US carmakers want to transform the best way they work if they’re to match the pace at which their Chinese language rivals are embracing new applied sciences and designs.

He factors out that William Li, the founder and chief govt of Nio, and Joe Xia, the chief govt of Geely-Baidu joint-venture Jidu Auto, each attend weekly design conferences and make selections “on the spot”. The end result, Weber says, is that Chinese language corporations are creating new vehicles in round one yr, in comparison with the four-year timeframes typical of extra bureaucratic European teams.

The entry of telecoms and tech giants Xiaomi and Huawei into the auto sector presents a brand new menace to overseas teams, Weber provides. “When consumers see what Xiaomi and Huawei are offering, they are very quick to expect that of everyone, and it puts everyone else under even more time pressure,” he says.

Huawei has been attempting to find new progress drivers after the Shenzhen-based group was shut out of many telecoms markets over safety fears (which it says are unfounded). It’s co-developing autos with Seres, Chery, BAIC, JAC and Changan, and manufacturing elements for a lot of different teams. 

It’s an strategy that highlights how Chinese language tech manufacturers with no prior auto business presence are quickly gaining a foothold within the business.

Tang Jin, a senior analysis officer at Mizuho Financial institution in Tokyo, says carmakers corresponding to Toyota are already transferring to handle the menace by actively partnering with Huawei in China. “Due to political issues, there are certain areas where Chinese cars cannot enter. So by partnering with Huawei in China, companies can absorb the technology knowhow and use them in other parts of the world such as the US,” he provides — a reversal of what occurred when western carmakers entered China.

The following large battleground in automotive expertise is more likely to be automation and self-driving expertise, an space the place even Elon Musk’s Tesla might battle to compete towards BYD, Huawei and different Chinese language rivals.

Invoice Russo, the previous head of Chrysler in China and founding father of consulting agency Automobility, believes the nation is coming into a brand new interval of auto business disruption, with the motion of individuals and items more and more automated as carmakers and others leverage its enormous digital economic system.

However even when China’s product-centric automotive business can change into a service-orientated “mobility” sector, it’s unsure whether or not such expertise is exportable to some western international locations. Client behaviour in Europe is completely different and there could be regulatory obstacles round information switch, privateness and insurance coverage.

“The portability of these solutions outside of China is going to be much more challenging to the Chinese companies, because the ecosystems for autonomy are built locally,” Russo says. “But that doesn’t take away from the accumulated experience of learning and training the algorithms and building the solution sets, which will commercialise much faster in China.”

Brian Gu, co-president of Xpeng, says he desires to introduce the most recent applied sciences developed in China to worldwide markets, arguing that they’ll warrant premium pricing of its autos after they arrive in Europe.

“The world should enjoy the best technology that has been developed,” Gu says, whereas acknowledging the problem of assembly European requirements. “We’re not going to overthrow anybody who’s developed over 100 years. We can help them.” 

Renault’s chief govt Luca De Meo admits the European automotive business and its suppliers “need some help” from the Chinese language, particularly within the essential battery provide chain.

“The centre of gravity of the automotive system has drifted towards China,” he says. “It doesn’t mean that the Chinese are going to wipe us out. We can fight. We are going to compete.”

Others should not so positive. In a 400-page report issued final month, former European Central Financial institution president Mario Draghi referred to as for a “new industrial strategy for Europe”, urging the EU to boost investments by €800bn a yr to spice up its competitiveness in order that the bloc doesn’t fall behind the US and China.

BMW’s Zipse has additionally demanded a extra coherent industrial framework. “The basis of our success and prosperity are under increasing pressure,” he says. “What is happening to us here?”

Many automobile executives are nonetheless hopeful that it’ll not be so easy for Chinese language carmakers to copy their home success in Europe. Customers are typically older — the typical age of a brand new automotive purchaser is over 50 in Europe in comparison with mid-thirties in China — and have constructed up real loyalty to explicit manufacturers. As so many new gamers enter the market, a interval of consolidation might effectively observe the preliminary aggressive growth.

“The biggest hurdles for Chinese carmakers are not the products themselves, but the distribution network and brand recognition,” stated José Asumendi, JPMorgan’s head of European automotive analysis.

Matthias Schmidt, an impartial analyst, estimates that the share of Chinese language carmakers in west European markets is unlikely to surpass 12 per cent as a result of introduction of import tariffs and the rollout of recent European EV choices. Chinese language producers had an 8.3 per cent share in August.

However Palmer, who was additionally beforehand chief working officer at Nissan, warns towards complacency and wishful pondering. He says carmakers corresponding to Nissan, Renault and BMW had been pioneers in EV expertise however didn’t observe by means of on their early management attributable to poor strategic planning.

“It’s not that the European industry has been beaten by the Chinese,” he says. “It’s that the European industry has lost because of itself.”

Extra reporting by Gloria Li in Hong Kong and Amy Kazmin in Turin