Chinese Automakers’ Answer to E.U. Tariffs: Build in Europe

"BYD, which leads China’s electric vehicle sector, is constructing a plant in Hungary while its Chinese rivals expand through joint ventures in Europe.

The leafy city of Szeged, Hungary, boasting wide avenues, a respected university and ornate, pale yellow villas near the country’s border with Serbia, looks more like a relic of the Hapsburg empire than the location of Europe’s automotive future.

But at a 740-acre construction site there, excavators have already begun preparing for what will be the first European assembly plant of China’s leading automaker, BYD. Large concrete pipes and stacks of metal sheets stand ready, with the cornerstone to be set this fall.

Timing is crucial. The European Union is poised to decide by Oct. 30 whether to increase tariffs on electric vehicles entering the bloc from China. The duties, which come on top of an existing 10 percent tariff, would range from 9 to 35.3 percent and remain in effect for five years. They are significantly lower than the 100 percent tariffs imposed by the United States and Canada, but they come as Chinese automakers are eager to break into the European market.

BYD has already been seeking to raise its profile in Europe, working with distributors across 19 countries to offer electric and hybrid models and sponsoring the European Championship soccer tournament this summer.

“They have very ambitious plans,” Sandor Nagy, a deputy mayor responsible for urban development in Szeged, said of BYD’s plant, which the company plans to bring online next year. “And they obviously have a very strong incentive with the tariffs.”

Other Chinese automakers, eager to convince Europeans that their cars are fun to drive and more affordable than models made by European companies, are also looking for ways to avoid the tariffs.

Chery, a Chinese car manufacturer, announced in April that it would begin producing electric vehicles in Barcelona, in partnership with Ebro EV Motors. Stellantis, whose European brands include Peugeot, Fiat and Opel, announced in May that it was entering into a partnership with Leapmotor of China, with production of electric vehicles in Europe to begin this fall.

Zhejiang Geely Holding, which acquired the Swedish automaker Volvo Cars in 2010, is also scouting for a possible production site in Europe. It owns Polestar, which is based in Sweden, but produces its vehicles in China. Earlier this year, the company began making an S.U.V. at a plant in South Carolina, which will also be used to supply the European market.

The moves into Europe come as deliberations about the tariffs head into their final weeks. Wang Wentao, China’s minister of commerce, is touring European capitals ahead of a meeting on Thursday in Brussels with Valdis Dombrovskis, the E.U. commissioner for trade.

E.U. officials worry that China poses a threat to Europe’s auto industry, which accounts for nearly 7 percent of the region’s economic output. They say that Beijing has not offered a solution that sufficiently addresses their concerns that years of government support have granted Chinese automakers an unfair advantage over their European peers.

Analysts believe that shifting production closer to the market will benefit both sides: The European auto industry would gain jobs and access to cutting-edge technology, while Chinese producers would save on tariffs and shipping costs.

“I don’t think it makes corporate sense from simply a profitability point of view to think you can supply the global car market from factories in China,” said Jacob F. Kirkegaard, a senior fellow at the Peterson Institute for International Economics.

Chinese brands accounted for 3.7 percent of all electric vehicles sold in Europe in 2023, compared with 0.4 percent of market share four years earlier. That number is expected to climb in the next five years.

In July, Turkey announced that BYD would build an assembly plant there, with production of battery-powered and hybrid cars to begin in 2026. Turkey is not an E.U. member, but trade agreements mean that cars made there would not be subject to the tariffs.

In Szeged, BYD is aiming to ramp up production over the next few years, creating thousands of new jobs. The speed is part of a push to get its cars onto the European market, despite the recent slump in demand.

Already the company has been working to make itself known across Europe, setting up relationships with dealers. At the European soccer championship in Germany, BYD displayed its cars at fan fairs in 10 different cities and its logo flashed on the sideboards throughout the matches.

Germany is Europe’s largest economy and its largest market for cars. But it also holds a special prestige for China. Germany’s top automakers — Volkswagen, BMW and Mercedes-Benz — helped to develop the auto industry there through joint ventures formed with Chinese companies in the early 1990s.

But German consumers are traditionally conservative and deeply loyal to their brands. Berlin’s decision to abruptly cut subsidies toward the purchase of electric vehicles led to a nearly 37 percent drop in new registrations in the year through July, compared with the same time in the previous year.

That has not stopped Chinese automakers from trying to gain a toehold. Last week, several Chinese car manufacturers displayed their latest models at a trade fair in Frankfurt that is normally focused on automotive suppliers.

“Even if some in Europe turn against us, we will never turn against the European market,” Victor Yang, senior vice president at Geely, told reporters at the fair.

The interest in Europe is not just from automakers. More Chinese suppliers have arrived over the past several years to be closer to the assembly plants that purchase their products, said Maarten Otte, the head of investor relations for Central and Eastern Europe at CTP, a logistics and industrial real estate firm.

Automakers such as BMW that rely on parts made by Chinese companies are concerned about the costs and the risks associated with shipping goods overseas and are looking to make their supply chains more affordable and secure, he said.

“So they say, ‘If you want to produce for our European market, you need to be in Europe,’” Mr. Otte said. A combination of skilled workers available at lower wages and the availability of undeveloped land has made countries in Central and Eastern Europe especially interesting, he said.

The Hungarian government of Viktor Orban has pledged incentives to support the project but has not yet disclosed the amount. BYD did not respond to a request for comment.

Some analysts have drawn parallels between the situation playing out in Europe and Washington’s approach to Toyota and Honda, Japanese brands that invested heavily in production in the United States in the 1980s.

But despite attempts to shift the relationship from cooperation to competition, China remains Europe’s second-largest trading partner, after the United States, with bilateral trade worth 739 billion euros, or $814 billion, in 2023.

“All of these things combined produce an overall political situation where the national security-driven U.S. approach is certainly not desirable in Europe,” said Mr. Kirkegaard of the Peterson Institute.

This is especially true in Germany, where automakers are heavily invested in China and, fearful of endangering their interests there, oppose the tariffs.

And during a visit to China last week, Pedro Sánchez, the prime minister of Spain — Europe’s second-largest car manufacturer — urged Brussels to reconsider its position, arguing that pursuing the tariffs would be harmful.

“We don’t need another war, in this case a trade war,” Mr. Sánchez said. “I think we need to build bridges between the European Union and China.”" [1]

1. Chinese Automakers’ Answer to E.U. Tariffs: Build in Europe. Eddy, Melissa.  New York Times (Online) New York Times Company. Sep 19, 2024.