When the industry is not worrying about electrification, tariffs or supply chain disruption, we currently spend a lot of time focused on the impact of the ‘new entrants’, mainly those from China.
We compare their progress to that of the Koreans and Japanese before them in the 1990s and 1970s. As they gained market share across Europe, their focus moved from import to local assembly, typically around fifteen years or so after they became established.
The efforts by then UK Prime Minister, Margaret Thatcher, to attract the Japanese to establish plants in the UK (at that time an EU member) resulted in the arrival of Nissan, Honda and Toyota as local manufacturers in the 1980s and 1990s.
This led Jacques Calvet, at the time the CEO of PSA Group to describe the UK as “a Japanese aircraft carrier floating off the coast of Europe.” Fast forward thirty years, and the Honda plant has been demolished, and the Nissan and Toyota plants are running at around 50% capacity utilisation.
However, another aircraft carrier has come into view. The announcements this week of the construction of a new plant in Galicia for MG and the takeover of the surplus assembly line at the Nissan Sunderland plant by Chery will provide a combined capacity of around 400,000 units annually, which is equivalent to over half the total sales of Chinese brand across Europe in 2025.
This is in addition to the capacity that BYD is building in Hungary and Turkey, and the announcement by Stellantis that they will produce Leapmotor products in two Spanish plants.
There are a number of other ‘screwdriver’ operations already in place with some Chinese brands and local partners, but the local added value falls far short of the levels required to qualify as ‘European’.
That point is critical to the question of whether these Chinese brands will become as integrated into the fabric of the European industry as their Japanese and Korean predecessors have.
It does not help that the EU is still debating rules of origin in general and some specific rules related to a new ‘M1E’ small BEV car class in particular, whilst also leaving open the question of whether UK-built cars will still have tariff-free access to the EU.
The Chinese are being hit hardest by the additional tariffs imposed on their BEVs by the EU as a supplement of up to 38% on the standard 10% rate, so although no details have been formally announced, it seems likely that these new plants will focus on BEV models.
As the high voltage battery can be as much as 40% of the total direct product cost, this implies that the battery must be considered ‘European’ for the car to qualify under any likely version of the local content rules.
If it does, much of the rest of the product including high-tech systems like e-drive trains and whole suspension assemblies, could be imported, still benefiting from Chinese production scale and costs.
But does a battery assembled in Europe/UK from imported cells count as European? It is likely that this will not be acceptable, so for a Chinese brand BEV to be considered European, they must also have a European source of battery cells – and that is an area where Europe has struggled.
On the broader question of local content, there are some systems which must be co-located for supply chain management reasons such as seats and cockpit assemblies, and there the question will be whether the Chinese brands choose to work with existing European manufacturers (some of whom are also their suppliers in China through local plants) or will drag along Chinese OE suppliers who are not currently present in Europe, as was the case with the Japanese and Koreans in the past. Whether new supplier capacity is added by new co-located facilities of European OESs or through new Chinese-owned facilities, this will add to the over-capacity concerns of the OES community, but also mean that the product cost is likely to be increased due to the higher operating costs in Europe.
Even taking into account the savings on tariffs and transportation from China, the cars leaving these new plants are therefore likely to cost more than the landed cost of a car coming from the Chinese factories, and it will not help with solving the over-capacity that some of the Chinese brands face domestically. It’s therefore reasonable to ask what the motivation is for what will be significant investments, particularly where they are greenfield investments requiring bodyshops and paint shops – the two largest fixed costs in any car assembly plant.
As a dealer selling Chinese cars, I do not see any customer resistance to buying from a Chinese brand or a Chinese factory. I know that people exist with those views, but that does not stop us having a waiting list measured in months for relatively standardised affordable cars. Having production closer to the markets will definitely help in terms of responsiveness to shifts in demand, but some of the upstream supply chain will remain in China, so there will be some limits on those benefits. Additional production capacity will help to meet the unprecedented rate of growth that a number of the brands are experiencing, but if the consensus view of around 10% of European sales in 2030 being held by Chinese brands, that implies a need for another half million capacity in addition to what has already been announced – though I’m sure there are more announcements to come from Geely and others. We may instead end up with local Chinese brand capacity being more or less aligned with local market demand – which could then lead to more aggressive sales strategies to ensure full utilisation.
What is clear in my mind, is that we are moving into a new phase of the Chinese brands presence in Europe, which will evolve over the next 2-3 years. The aircraft carrier has now come into view, when it has docked, the impact on the established players – manufacturers, suppliers and retailers – will be widespread.
Steve Young is MD of ICDP
