Automotive, China vs. Rest of the World

The global credit insurance specialist Allianz Trade has recently released its Global auto outlook Steering through turbulence, focused on the future perspectives for the automotive industry worldwide. Analysts at Allianz Trade are confident that the market is going to stabilise this year, although car makers, as many other manufacturers in different sectors, are struggling with rising geopolitical and economic uncertainties, tightening margins and reducing price power. Last year sales increased across all of the most important markets, namely China, the US and Europe (+11.9; +12.5 and +17.2% respectively) but forecasts are not so optimistic. In fact, deliveries might only record a 1.9% growth over the next months. EV sales should mark a +32.8% year-on-year increase (18 million new vehicles) and Europe should be the best performer (+41.2%). Regulatory and geopolitical issues are threatening both output and global demand, whereas China is emerging as a disruptive force: its products have good chances to dominate the international automotive market. Chinese sales and production have grown eightfold between 2019 and 2023 and of course local makers can build upon their position of early movers as well as on lower labour costs and scale economy, but analysts at Allianz Trade also believe the quality of their offer is largely improving. Furthermore, Chinese carmakers can rely on a wider and easier access to critical components, despite the efforts that the US and EU are putting in place aiming to confront them with duty tariffs.

Visible impacts on the business landscape

Economists at Allianz Trade pointed out that as China is strengthening its role as «the world’s largest car exporter», European brands «are losing ground in the EV market and experiencing a notable decline in market share. This transformation has already had visible impacts on the business landscape, with insolvencies increasing by 13% in 2023 and 730,000 jobs at risk, particularly affecting Germany». Both Europe and the US are «increasingly concerned about their dependence on Chinese supplies and the impact of China’s rapidly expanding EV industry on their local markets» and striving to implement effective countermeasures. «Western governments have tightened restrictions and scrutiny on Chinese auto imports. In the US, the Inflation Reduction Act offers subsidies of up to USD 7,500 to consumers purchasing EVs, excluding those with Chinese components. Recently, president Joe Biden raised tariffs on Chinese EVs to 100%. Similarly, the EU launched an anti-subsidy investigation into Chinese automakers last year, which could potentially lead to increased tariffs». It is questionable, nonetheless, that these measures will prove successful. For Europe, in Allianz Trade’s opinion, this situation presents a dilemma. On one hand, cheap Chinese EVs could accelerate the EV transition by addressing the shortage of affordable mass-market models; and this would help Europe in achieving its green goals more cost-effectively. On the other hand, the influx of these low-cost vehicles is threatening local industries and employment. Therefore, policymakers must manage to balance the benefits of a faster, cheaper transition to sustainable transportation against the potential harm to domestic industries and jobs.

High stakes for Europe

Experts pointed out that «the recent series of anti-subsidy probes, beginning with the EV industry and extending to trains, wind turbines and medical devices, indicates a shift towards a tougher stance ahead, but the stakes are high for Europe» and «it will not be easy to follow the suit without hurting its own auto industry». Going for a moderate increase in the import tariff would not change competitive dynamics much, in their view, so that they do not seem expect the EU to act as aggressively as the US «because European and especially German carmakers are far more reliant on China than their US counterparts». More precisely: «China is an important source of profits and revenue for major German carmakers, making them more vulnerable to potential Chinese retaliation. In addition, with their large production base and cheaper costs in China, German carmakers import a notable portion of cars from China to Europe. In this context, higher EU tariffs could eventually backfire on the EU’s own automakers. Moreover, China could also retaliate by curtailing supplies of critical materials for batteries, such as lithium and graphite, which would further strain the supply chain and increase costs for European carmakers, exacerbating the economic impact of the trade dispute». Finally, «higher tariffs on Chinese EVs could also jeopardize Europe’s own green transition. With new EU CO2 emission standards already coming into effect next year, there is a pressing need for more EVs in Europe but affordability is already the main reason preventing European consumers from switching to electric vehicles. Imposing additional tariffs on Chinese EVs would mean even higher prices for EU consumers, which could potentially backfire on the Green Deal plan and weaken its leading position in reducing emissions».

A brutal price war

According to the global credit insurance company, the key advantages of Chinese EV industry are obviously represented by its massive cost advantages and China’s dominance over the entire EV supply chain. It is also noteworthy that «government support has played an essential role in the rapid development of the industry during its initial stages. Massive funding was directed across all stages of the supply chain in the form of subsidies, tax breaks, public procurement and credits, establishing China’s undisputed dominance in the EV industry today. For instance, six of the top ten global manufacturers of batteries are China companies, and batteries represent the single largest expense in the production of an EV». BYD, for instance, is reportedly selling its EVs in China at half the price they charge in Europe and can still make a profit. At the same time, they also excel at quality. The ultra-competitive Chinese market and local consumers’ preference «have prompted Chinese automakers to swiftly advance in software development. These advancements underscore their strategic focus on not only enhancing vehicle efficiency and safety but also on improving the overall driving experience, positioning them as leaders in the global EV market». It is easy to predict some turbulence will occur, in terms of a «brutal price war in the domestic market», together with a problem of overcapacity. «The price war», as economists recalled, «was triggered by Tesla in 2023 and has become even more cutthroat in 2024, significantly weighing on carmakers’ profitability. Meanwhile, the overcapacity problem has spread over the entire supply chain. In 2023, only 20 out of 77 car manufacturers reached a utilization rate above 60%. As competition intensifies in the domestic market and capacity piles up, many Chinese carmakers have made international expansion their priority. Rising geopolitical tensions could undermine their efforts and further impact their margins, especially if EU follows the the US in stepping up measures against China».

The problem with subsidies

Incentives and subsidies have so far been a driver for EV sales across Europe and the Western world in general, given that high prices represent the most worrisome deterring factor for EV purchases.

In addition, «without subsidies, consumers have few incentives aside from environmental concerns to switch to more expensive EVs, which can be problematic for long-distance driving in areas lacking sufficient charging infrastructure». Changes are underway: «Costs of producing EVs have been decreasing over the years due to economies of scale and advancements in battery technology. In the US, a significant portion of policy support is directed toward constructing charging infrastructure. In Europe, while charging infrastructure is still insufficient and concentrated in just a few countries, progress has been made. Policy incentives not only reduce EV prices for consumers but also have a long-term impact on production costs and infrastructure. This support is gradually addressing the concerns of cost and range, making EVs more attractive option for consumers». Finally, researchers at Allianz Trade offered Electric Motors Engineering an overview on the Italian scenario, where last year new EV registrations, including battery electric vehicles (BEV) and plug-in hybrid vehicles (PHEV), totalled 137,000, compared to 700,000 in Germany, 470,000 in France and 450,000 in the UK. «Although the market share of EVs in Italy has increased compared to a few years ago», economists reported, «it remains relatively low. Since 2021, share of EVs in new car sales has hovered around 9% in Italy. In contrast, EVs constitute about 25% of new car sales in Germany, France and the UK, 30% in the Netherlands, 60% in Sweden, and an impressive 95% in Norway, the highest in Europe. Italy experienced a notable expansion in the EV market during 2020 and 2021, with 250.7% and 129.1% year-on-year growth rates respectively.

(by Roberto Carminati)