The EU’s Lenient Tariffs on Chinese EVs: Good for Europe’s EV Transition, Decent for BYD, Bad for European OEMs

The European Union (EU) has now released the provisional conclusions of its anti-subsidy probe into Electric Vehicle (EV) imports from China, launched last October. The Commission has decided that the Chinese Battery Electric Vehicle (BEV) supply chain benefits form unfair subsidies and will be subject to additional duties on top of the current 10% tariffs.

The three OEMs investigated were BYD, Geely, and SAIC, and they will receive additional tariffs of 17.4%, 20%, and 38.1%, respectively; SAIC has been punished with a higher tariff for being non-cooperative in the investigation. Other non-cooperative producers will be subject to the same higher duty of 38.1%, while cooperative OEMs will be subject to tariffs of 21%. The list of cooperative OEMs includes several major Chinese automakers such as NIO, XPENG, and Leapmotor, as well as the Western OEMs, BMW and Tesla. Notable omissions from the list of cooperative OEMs include GAC, Li Auto, and Volkswagen Anhui. The Volvo EX30, Dacia Spring, and BMW iX3 will receive the more favorable rate, but the CUPRA Tavascan will be subject to the higher rate.

These tariffs came in lower than expected, causing a jump in the stock price of many Chinese OEMs. They are well below the lethal 100% rate on Chinese EVs imposed by the United States, and the cooperative rate is below the 25% to 30% that analysts at Citi and UBS suggested would be needed to counteract the advantages of Chinese automakers.

The additional duties are certainly not good news for Chinese OEMs, but things could have been much worse. As discussed in ABI Research’s Chinese Electric Vehicle OEMs report (AN-5809), Chinese EV makers have stiff competition on price at home, but in Europe, the local OEMs are struggling to build affordable EVs. Chinese OEMs appear to have set their prices to only slightly undercut the local market, enabling them to generate greater profits from their exports than their domestic sales. The ZEEKR X, for example, costs 70% more in Germany than in China, while the BYD ATTO 3 costs over twice as much. Even after the costs of shipping and distribution, there is substantial headroom for them to absorb the additional tariffs and still be cheaper than their competitors. Things may be tighter for SAIC given its higher duties, but as it also charges around twice as much for its BEVs in Europe as in China, it could also avoid tarnishing its reputation for low prices without too much difficulty.

BYD will also have a way around these tariffs. They will only be applied to cars that are powered exclusively by electric motors, which means that Plug-in Hybrid Electric Vehicles (PHEVs) will not be affected. The European PHEV market has been disrupted by the withdrawal of subsidies, but PHEVs still account for 38% of European EV sales. BYD is now launching PHEVs in Europe, starting with the Seal U DM-i. It has been priced at £33,205 (US$42,000), which undercuts most of the local market, but is over twice as expensive as in China.

The luxury EV startups of China have less room to maneuver and may be unable to follow the strategy of absorbing tariffs. XPENG’s models command a premium of around 60% in Europe, while NIO’s are only about 40% more expensive. Unlike BYD, NIO and XPENG are still struggling with profitability as they try to scale up, and unlike Geely’s ZEEKR they do not have the financial support or economies of scale afforded through ownership by an Internal Combustion Engine (ICE)-making parent company. These brands are already struggling to generate sales because they are in a segment where an OEM’s brand reputation is more important, and they have almost none of that in Europe. These tariffs could be fatal for their European ambitions.

Western OEMs importing cars to Europe from China are also likely to suffer more. The BMW iX3 costs around 29% more in Europe than in China, while the Tesla Model 3 costs around 38% more; Tesla has already announced that it will likely have to increase the price of the Model 3 when the new tariffs are imposed. Tesla has, however, submitted an appeal to reduce its individual tariffs and BMW is likely to follow suit as these OEMs will not have received the same state support as Chinese brands.

By setting tariffs at this rate, European policymakers have put in place incentives that will help the domestic EV industry develop without seriously impacting the EV transition. European consumers will still be able to get cheap Chinese EVs because their manufacturers will probably be forced to absorb the cost of the tariffs: they have room in their margins, and if they do not, they will have no ability to penetrate the European market. Meanwhile, the tariffs will further incentivize these Chinese automakers to set up local production in Europe and discourage European automakers from shifting production of their EVs to China.

Through state-owned media, China has warned of retaliatory measures against cars with large engines under the guise of “promoting green development.” In 2023, China imported nearly 260,000 of these cars worth US$22.5 billion; 160,000 cars with large engines were imported directly from the EU with a total value of US$13.5 billion, but European OEMs also export significant quantities of U.S.-made cars to China. The current Chinese duties of 15% on cars with large engines could be raised to 25% within World Trade Organization (WTO) rules and encourage manufacturers to lobby their governments against tariffs. This would principally affect Mercedes-Benz and BMW because they sell large luxury vehicles, a relatively high proportion of which are imported—21% and 15%, respectively.

There is also the potential for China to tighten its export controls on critical minerals. In 2023, it began restricting exports of gallium, germanium, and graphite, which are essential inputs for power transistors, optical fibers, and battery anodes, respectively. China produces a majority of the world’s germanium and almost all of its gallium and graphite. There is currently no commercially viable option for EV batteries that do not use graphite, and there is no potential for Europe to be remotely self-sufficient before 2035.

These tariffs are generally bad news for European OEMs. Volkswagen, BMW, and Mercedes-Benz are heavily reliant on the Chinese market and would be the first targets for retaliatory measures. At the same time, they are all using China as a manufacturing base to export vehicles to Europe: Volkswagen with the CUPRA Tavascan, BMW with the iX3, and Mercedes-Benz through the smart brand of which it is joint owner alongside Geely. Stellantis only plays a minor role in the Chinese market, but these tariffs will disrupt its plans to export Leapmotor BEVs to Europe. Of the major European OEMs, Renault is the only one that has not come out against additional duties. It has withdrawn from the Chinese market, so it has no reason to fear retaliation; however, its best-selling EV model is the Chinese-made Dacia Spring, and it is focused on the cheaper segments that will remain vulnerable to competition from Chinese OEMs.

Chinese OEMs are already planning to shift production to Europe, and these additional duties will further encourage them to pursue this route. SAIC is planning to build a European factory to return MG production to the continent, and Geely will be shifting production of Volvo EVs from China to its plant in Ghent. BYD is building a factory in Hungary that will open in 2025 and is already scouting locations for a second plant. Chery will be producing EVs under the OMODA brand at the site of a former Nissan plant, which closed in 2021. There have been several major job cuts of this nature by automakers across Europe, including 1,600 by Ford in Spain, over 3,000 by Stellantis in Italy, and 2,000 by Renault in France. This leaves behind skilled workers for Chinese OEMs to employ, helping them set up their operations and ingratiate themselves with governments. This production localization will create opportunities for European suppliers to form part of their local supply chain, and for manufacturing solutions providers to assist them in designing, optimizing, and operating their facilities.