The news that China and Europe are moving closer towards a potential agreement regarding electric vehicle tariffs is “a very positive message” for Chinese automakers to establish a more solid presence in this highly mature and strategically important market, a UBS analyst said on Monday.
The comments were delivered after Bernd Lange, chairman of the European Parliament’s trade committee, reportedly disclosed information about a possible deal to a German broadcaster, saying that Chinese automakers would commit to not selling EVs in the EU below a minimum price, known as a “price undertaking.” In a later report, Bloomberg said Beijing and Brussels have only seen limited progress in their talks on an alternative solution to tariffs.
Against this backdrop, Chinese firms would compete to make better cars for the region, which could feature a longer driving range, a more luxurious interior, and advanced intelligent driving capabilities, Paul Gong, head of China auto research at UBS, said in Hong Kong.
“This is sort of a good thing for the reputation of Chinese-made cars in Europe over the long term,” Gong added (our translation).
Price competition in China
In Europe, global automakers and major suppliers have been facing big headwinds from high inflation, weakening demand, and a slow transition to electrification. Volkswagen plans to lay off tens of thousands of workers with the closure of at least three German factories. More than 4,000 Ford employees will lose their jobs in Europe and the UK by the end of 2027. Bosch, the world’s biggest car parts supplier, on Nov. 22 announced it will reduce its workforce by 5,500 by end-2027, Reuters reported.
The situation is also worsening in China, as UBS projected that international automakers might have to scale back further in the ultra-competitive market next year with another price war potentially in the offing after a brief pause this summer. A UBS analysis showed global mainstream car brands ran at only 56% of their capacity in China last year, a decline from 73% in 2020, while that percentage now stands at 84% for Chinese automakers.
Looking ahead, the excess capacity for global automakers in China could be as much as 10 million vehicles per year, if the combined market share for their Chinese joint ventures is further reduced to 20% from 25% in the first half of 2024, Gong said. Japan’s Honda and Nissan have reportedly been slashing their output in China. SAIC-Volkswagen is reportedly considering closing one of its two plants in the eastern Chinese city of Nanjing.
Gong expects that new price cuts by automakers will come earlier than usual during the first quarter of 2025 because of the Lunar New Year holidays set to begin next January. Major Chinese automakers, including BYD and Geely, rolled out dozens of refreshed models at significantly lower prices last March after the week-long New Year holiday, TechNode reported.
Foreign carmakers’ $20 billion profit pool in China is at risk amid local competition on everything from technology migration to electrification and vehicle intelligence, UBS wrote in a recent note. These companies should switch their strategies away from general Chinese consumers to target more affluent buyers looking for more personalized and niche products, while redefining China’s role in a new business structure, according to the investment bank.
“China has been the biggest single market or a highly efficient production base for global carmakers for a long time, but now it is becoming a global research and development center,” Gong said. “There is only upside in leveraging the latest in-car technologies in China and later worldwide.”
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