If Higher Tariffs Can’t Stop Chinese EVs in Europe, What Will?

European imports of Chinese electric vehicles (EVs) are soaring. Sales jumped from $1.6 billion in 2020 to north of $11 billion last year, and today, they amount to nearly 40% of EV imports to the EU. Brussels wants to protect homegrown automakers, and provisional duties of 15-30% on some Chinese EV brands are set to be enacted in early July, but will they be enough?

A recent study suggests that low Chinese manufacturing costs and high margins on European sales will require duties of up to 40-50 percent to level the playing field — high enough to provoke a trade war.

Is it worth the risk? We look at the challenges facing Europe’s domestic EV industry, how it’s adjusting to competition, and consider what other measures policymakers could take to stem the flow of low-cost foreign imports.

Table of Contents Table of Contents

1. Key Takeaways
2. Europe’s EV Disadvantage
3. Short-Term Thinking?
4. How Did China Jump to the Front?
5. How Europe’s Auto Industry Can Defend Its Territory
6. The Bottom Line: Marshall Plan for Europe's EV Industry
7. FAQs
8. References

Show Full Guide

Table of Contents

1. Key Takeaways
2. Europe’s EV Disadvantage
3. Short-Term Thinking?
Show Full Guide
4. How Did China Jump to the Front?
5. How Europe’s Auto Industry Can Defend Its Territory
6. The Bottom Line: Marshall Plan for Europe's EV Industry
7. FAQs
8. References

Europe’s EV Disadvantage

From the outset, Europeans have been the most enthusiastic early adopters of EVs, boasting four of the top five countries with the highest share of EV sales: Norway at 80% of passenger vehicle sales, Iceland at 41%, Sweden at 32%, and the Netherlands at 24%.

Hot on their heels at fifth place is China. With 1.4 billion people and the world’s largest domestic auto market, it’s a Very Big five.

Beijing has made domination of the global EV sector an industrial policy goal. Innovation, entrepreneurship and state support have created a hot domestic market with at least 15 Chinese companies fighting it out for consumer and corporate share.

The ongoing price war and intense competitive environment have made the country’s EV manufacturers particularly lean and mean.

A study by Rhodium says that Chinese electric car companies like BYD, which overtook Tesla last year to become the world’s biggest EV maker, can reap much higher margins in the EU compared to domestic manufacturers — even after paying the current EU import duty of 10%.

BYD’s Seal U model, for example, sells for around €42,000 in the EU versus €20,500 in China, with an estimated profit of €14,000 per car in Europe against €1,300 per car at home. Even if Brussels levies a 30% tariff in July — the high end of Rhodium’s estimate —  a company like BYD could still be profitable in Europe.

BYD’s 2024 Seagull Compact

That edge is significant because analysts say the EV market’s early adopter phase is over. We’ve now entered the more price-sensitive ‘early majority’ phase.

Who is best placed to address it?

Short-Term Thinking?

An issue that comes up repeatedly in discussions about European EV production is the emphasis on high-end models.

An analysis by the Brussels-based Transport & Environment (T&E) campaign group suggests that local car makers may have taken their collective foot off the gas in terms of EV production, prioritizing the most profitable premium segments while capping production at the bare minimum needed to meet the EU’s waning CO2 targets. The result has been a lack of affordable, entry-level European models coming to market in sufficient volumes.

“(European) carmakers have focused on selling larger, more premium EVs which have more than double the market share (28%) of premium ICE’s (13%),” T&E says. “By prioritizing new EV models in the more premium sizes, carmakers are slowing down the EV mass market to maximize their short-term profits.”

More than half the EV models launched since 2018 (54%) have been SUVs, T&E adds, impacting affordability since SUVs are pricier than compacts.

While some European carmakers have announced that cheaper EV models like the Renault 5 and VW ID.2 are in the pipeline for 2024-2027, T&E expects fewer than 50,000 will be produced for Europe this year, a figure unlikely to satisfy real demand.

“This leaves the European mass market wide open to Chinese competition.”

How Did China Jump to the Front?

Despite ready access to a homegrown market of EV early adopters, Europe’s auto industry now faces stiff competition from Chinese imports. How did it happen?

EU regulators have lasered in on the ‘unfair’ state support Chinese EV companies receive, but it’s wrong to assume they just grabbed a wad of cash from Beijing and leaped into the market. The path to success has been deliberate, careful, and lateral.

In a recent blog post, Chengyi Lin, affiliate professor of Strategy at INSEAD, notes that half the EVs on the road globally are found in China. That milestone, he says, wasn’t reached by subsidy alone.

A sizable internal market and favorable government policies set the stage. However, other nations have implemented similar policies yet haven’t been as effective in accelerating mass-market EV adoption, according to Lin.

Chinese companies played a different game, he says, opting to enter the market indirectly in order to establish a foothold — and learn. Instead of directly targeting the auto industry, Chinese automakers BYD and Geely remained under the radar and quietly experimented in their early stages.

“They kickstarted their EV development by focusing on adjacent industries — namely, electric buses and motorcycles,” Lin says. “These products are less visible than cars, yet present unique challenges that are ripe for automakers to address. What they learned by tackling these challenges ultimately contributed to their EV manufacturing strategy.”

Costs and Co-opetition

China has also enjoyed advantages in labor and energy costs, though perceptions of China as a low-wage market are surely outdated. Lin says the key advantage is in batteries and the raw materials needed to build them.

“In 2002, Chinese automakers estimated that battery costs would comprise between 30–40% of the total manufacturing cost of a fully electric vehicle. This meant that there was a window of opportunity for newcomers to leapfrog the competition by focusing on the technology that powers this central component.”

China also holds roughly 70% of global production of rare earth on its territory, “a central component for battery production. This means that Chinese battery companies control the bottleneck position of the supply chain, which can provide both positional advantages for them to develop new battery technologies and negotiation power with suppliers beyond batteries.”

EU regulators actually had to climb down last year from the bloc’s ‘rules of origin’ around EV batteries, as a lack of locally sourced components and raw materials threatened to stall EV production.

Another advantage Lin notes is Chinese EV makers’ willingness to work together in pursuit of broader industry goals.

“Chinese companies collaborated broadly — with other automakers as well as technology companies — to strengthen their capabilities in terms of EV manufacturing.”

How Europe’s Auto Industry Can Defend Its Territory

In addition to raising tariffs and incentives to encourage the production of more compact and affordable EVs, the European Commission has mooted other measures it could take to make life harder for Chinese companies.

In a speech to the Institute for Advanced Study at Princeton University in April, EU Competition Commissioner Margrethe Vestager pitched the idea of a ‘systematic’ defense strategy to protect European EV makers.

It would include a code of trustworthiness based on factors like carbon footprint, labor practices, cybersecurity, and data privacy. It would hand the Commission a range of rule-based tools that would favor domestic EV producers and restrict market access for Chinese imports.

Raise the Bar for Cybersecurity

The EU could try to restrict market access for Chinese EV producers by making them adhere to new cybersecurity requirements.

Embedded cameras and sensors could see all EVs classified as a cybersecurity risk, and Chinese companies would face extra scrutiny due to Beijing’s close relationship with domestic companies.

Tweak Consumer EV Subsidies

The purchasing incentives offered to first-time buyers by many member states could be rewritten to add sustainability requirements and restrict Chinese-made EVs based on those criteria.

Add Rules Against Forced Labor

According to Human Rights Watch, many EV companies (including BYD, but also Tesla and Volkswagen) could be sourcing aluminum from mines that use forced labor.

Banning products that benefit from inhumane practices could limit the import of ‘Made in China’ EVs.

Place Smaller EV Contracts Under the Microscope

The EU currently reviews member state procurement contracts larger than €250 million.

Numerous EV contracts, however, fall well below that threshold and can even qualify for EU subsidy support through mechanisms like REPowerEU.

Regulators could tighten scrutiny of EV contracts to ensure compliance with new and existing rules.

The Bottom Line: Marshall Plan for Europe’s EV Industry

Sweeping changes to product development, supply chain management, import duties, and regulatory rules will require leadership and a willingness to think big: clear objectives, a sense of urgency, realistic timelines, and a high level of coordination.

The need for a transformative EV strategy prompted Renault CEO Luca de Meo to publish an open letter to the EU on April 19 of this year. He called for “a European Marshall Plan” to speed up the transition to electric vehicles and fend off “an onslaught of electric vehicles from China.”

He also made recommendations to shape Europe’s competitive response, which included more focus on affordable EVs, new purchasing incentives, extending the footprint of Europe’s charging infrastructure, and adoption of vehicle to grid (V2G) technologies.

“Working together is vital, for competitors and for industrial sectors,” wrote de Meo. “The prosperity of Europe is at stake.”

FAQs