As the advance of the Chinese brands in Europe continues, there has been a great deal of talk about how to address the threat to the European car industry – meaning not just the European brands, but also the brands from Asia and the Americas who have set up home here and together employ many thousands in Europe.
The first response has been defensive – additional tariffs on BEVs with the rate dependent on the level of government subsidy that the European Commission found to have been received by each manufacturer.
In response, the Chinese brands then accelerated plans to come to the unprotected UK market, and pivoted their product mix in the EU away from BEVs to PHEVs. That has now resulted in calls for tariffs to also be applied to PHEVs.
This is all going on against the background of the prolonged discussion on the exact terms of the Industrial Accelerator Act, also known as ‘Made in Europe’, which is intended to protect the industry in the longer term by favouring cars which are – as the term implies – assembled locally.
The issue here is that two critical elements of that legislation have not yet been defined in the drafts and have been passed across to the European Parliament to debate and decide – how do you define ‘Europe’ and what will count as local content.
This is significant because there is substantial manufacturing capacity sitting around the edges of the EU but not in EU states such as Renault in Morocco, Ford in Turkey and BMW, Nissan, Stellantis and Toyota in the UK.
Local content matters as a significant part of product cost for a BEV is in the battery pack, and within that the battery cells. As far as I am aware, there is no European producer of battery cells which does not rely on either Chinese or Korean knowhow to produce cells in volume, and many battery packs assembled in Europe still depend on cells produced in Asia, or by Asian producers through new European plants.
These tariff and non-tariff barriers have sent a clear message to the Chinese brands that they need to consider local manufacturing and a number have already responded to that – BYD in Hungary (possibly also Turkey) and MG in Spain with greenfield sites, Geely with their Ford joint venture in Spain, Chery potentially taking surplus capacity from Nissan in the UK and Leapmotor and Hongqi being assembled in underutilised Stellantis plants. There are certainly more announcements to come, as well as a number of existing ‘screwdriver’ operations that may be upgraded to increase the local content.
And that is where the real challenge begins. The Industrial Accelerator Act is likely to require a minimum 70% local content threshold excluding batteries for cars with some specific rules related to critical battery components, with a further tightening of the rules by 2030 to add a 50% local content threshold for e-powertrains and 50% for main electronic systems.
Cars that do not meet these requirements will not be eligible for public sector purchases or qualify for any state incentives. These rules therefore require that some significant battery components and other major systems must be sourced in Europe. The major OE suppliers are obviously hoping that they will be a beneficiary of that, helping to compensate for reduced volumes from their traditional customer base, maintaining their factory capacity and employment.
It’s not clear however that this will happen. There are many calls for a level playing field, but the Chinese understandably do not want a level playing field at the higher cost base of their European-based rivals.
In China, both BMW and Toyota are being forced to move the sourcing of some of the content of their China-built cars from their traditional (still China-based in some cases) suppliers to Chinese suppliers, including switching to generic technologies used by the Chinese OEMs rather than their proprietary designs.
This is in order to achieve cost savings of up to 30% and therefore remain competitive in a market where they continue to lose market share. European and Japanese brands in China are therefore becoming ‘more Chinese’ in order to stay in the game.
For the Chinese brands who start full European manufacturing (or at least full enough to hit the 70% threshold) it therefore seems unlikely that they will be willing to source systems and components from the established European OE supply base (including some who have Japanese, Korean or US parentage) if this is going to significantly erode their competitive advantage, which is derived from both a lower Chinese cost base and a cheaper underlying technology.
They are likely to drag along their Chinese supply base as well, who will be exposed to European factor costs such as labour and energy, but will carry no legacy and employ what appears to be a lower cost technological approach. If this approach is seen as appropriate by non-Chinese brands in China, then why would they not also choose to switch to these suppliers when they establish themselves in Europe?
Although employment may be protected in Europe, the labour will be working for Chinese suppliers at locations optimised for cost and proximity to their Chinese OEM customers, not the traditional suppliers with their bases predominantly in Northern Europe.
There is ironically a possibility that a lower local content requirement might protect more jobs as there would be less need to drag along Chinese suppliers, therefore buying more time for the European OE supply base to adapt. We might be better from an overall economic standpoint to have a slightly uneven playing field that makes play a bit more unpredictable.
