Why Europe’s car crisis is mostly made in China

In its 87-year history, Volkswagen has never closed a factory in its German heartland. It is now considering shutting three and cutting workers’ pay by 10 per cent.

The plans were disclosed at an employee meeting by the head of VW’s powerful works council and have not been confirmed by the company, which is due to report third-quarter results on Wednesday.

But the world’s second-biggest car manufacturer, which also owns Audi, Škoda and Seat, has already warned on profits twice this year and flagged the previously unthinkable step of closing factories in Germany.

It isn’t the only European carmaker contemplating deep and controversial retrenchment. Stellantis, owner of Opel, Fiat and Peugeot in Europe, is under intense pressure from Italian politicians and unions to keep its oldest Fiat factory in Turin running despite a slump in sales.

Assembly lines in France are already being shifted to lower-cost locations such as Morocco and Turkey. Earlier this month, several hundred French workers, including from suppliers like Bosch, protested outside the Paris Motor Show.

Europe’s automotive industry, which employs nearly 14mn people and accounts for 7 per cent of the EU’s GDP, is confronting a perfect storm. Demand for cars is falling at home and abroad, while carmakers are navigating a risky and expensive multiyear transition from combustion engines to electric propulsion.

All these problems are being exacerbated by China — where competition for sales in the once-lucrative domestic market is ferocious, and whose high-quality, lower-cost EVs are now being exported to Europe in greater numbers.

There are no easy solutions. The EU has followed the US in raising tariffs on vehicles imported from China, but industry leaders such as Carlos Tavares, chief executive of Stellantis, and BMW chief executive Oliver Zipse, say protectionism will only make cars more expensive for consumers and accelerate plant closures in Europe.

“We don’t need protection,” Zipse said recently on the sidelines of the Paris Motor Show, adding that European carmakers “shouldn’t be over-afraid” of Chinese competition.

Manufacturers have urged governments to roll out charging infrastructure and introduce or reinstate financial incentives for electric vehicles — but this will not help sluggish exports outside the continent.

Working with Chinese carmakers, who have learnt how to make high-quality EVs at lower cost, could provide formidable current and future competitors with a ready-made distribution network in Europe, accelerating their expansion.

Roberto Vavassori, who heads the Italian Association of the Automotive Industry, describes China as “the elephant in the room” and the factor that makes this downturn different from previous ones. “For many suppliers in the automotive industry, [the Chinese] are both the biggest threat and biggest customer.”  

Tavares has a simple question for Europe’s carmakers and politicians: “Do you want to race or not?” The outcome for those who choose not to step up, he warns, is that “you disappear”.

The problems of European carmakers begin at home. Vehicle sales in Europe have not recovered to pre-pandemic levels and higher interest rates are hurting demand. 

This pressure comes at a time when manufacturers are grappling with the green transition. Under current legislation, it will be impossible to sell a petrol or diesel car in the EU, and in other markets such as the UK, after 2035.

Electric cars are still expensive to produce in Europe, mostly because of the high cost of batteries, making them expensive to buy. Consumers want cheaper EVs and more charging stations, and many are holding off buying until they get them. As a result, sales are slowing just as tougher EU emissions rules from next year mandate a faster shift to cleaner vehicles.

Vavassori points out that Europe’s carmakers can no longer export their way out of trouble either. Last year, China replaced Japan as the world’s largest exporter of new cars as its own producers looked to diversify away from their overcrowded domestic market.

China is a problem for European carmakers in other ways. Chinese manufacturers such as BYD, Nio, MG-owner SAIC, Great Wall and Chery are building more advanced electric cars with costs 30 per cent lower than those of European carmakers, according to Tavares and others. On Chinese showrooms, EVs are nearing price parity with petrol cars.

The rise of homegrown brands has sharply reduced the sales of European, US and Japanese carmakers in China, which in recent years has been the biggest and most lucrative market for brands such as Volkswagen, Mercedes-Benz and BMW.

Foreign brands’ market share of Chinese auto sales is trending at a record low of 37 per cent in the first eight months of 2024, down from 64 per cent in 2020, according to data from Shanghai consultancy Automobility.

That has also put pressure on the joint ventures that western carmakers formed with local partners when they first entered the Chinese market. Two years ago, Beijing permitted foreign companies to operate independently; in September, Mercedes-Benz withdrew from a 13-year EV joint venture with BYD. Volkswagen, one of the first to enter the Chinese market, is considering closing a Nanjing factory operated with its oldest joint venture partner, SAIC. 

If Chinese carmakers opt to circumvent EU import tariffs by opening manufacturing sites in Europe, as their Japanese peers did in the 1980s and 1990s, the overcapacity in European carmaking will get worse. 

New arrivals are also more likely to choose low-cost locations in eastern Europe to produce their vehicles, especially nations such as Hungary with relatively China-friendly governments. That would put more pressure on manufacturers in high-cost countries and undermine the effectiveness of tariffs for German and French carmakers.

As China’s advances in EVs, battery technology and software continue to ripple through the global industry, some European car companies are pursuing a different strategy for survival — becoming more Chinese.

“What did the Chinese do, what did the Japanese do and what did the Koreans do when they were behind on technology? They collaborated,” says Andy Palmer, a consultant who was previously chief executive of luxury marque Aston Martin. 

“The European industry needs to get the Chinese to localise in Europe and it needs to collaborate with them, particularly around battery technology, in order to catch up,” he adds.

VW is already partnering with Chinese start-up Xpeng to develop EVs at a faster speed and lower cost. France’s Renault, which has largely cut its exposure to the Chinese market, has partnered with Volvo Cars owner Geely to build more advanced combustion engine technologies.

After winding down its ventures in China, Stellantis is now gambling on a new strategy that breaks with that of its rivals: bringing a Chinese brand to Europe itself. Last year it took a 20 per cent stake in Chinese start-up Leapmotor for €1.5bn, giving it exclusive rights to build and sell Leapmotor cars outside China through a joint venture. As a result, the brand already sells through 200 dealers in 13 European markets.

Its T03 compact electric car is one of the cheapest offerings in the UK, with a price tag below £16,000. At the recent Paris Motor Show, Leapmotor also unveiled its first global model for an electric compact sport utility vehicle.

Access to the vast distribution and aftersales network of Stellantis will allow Leapmotor to grow faster outside China. The T03 is produced in China and at a Stellantis plant in Poland that used to build the Fiat 500, so the company can avoid the EU’s tariffs.

“We have the agility, the flexibility and capacity to localise the models outside of China if we want as business needs grow,” said Tianshu Xin, who heads the joint venture between Leapmotor and Stellantis. “There is a lot of opportunity to be further explored.”

For Stellantis, the unusual tie-up gives it a much-needed affordable addition to its own EV offering, allowing it to better compete with other Chinese imports. If Leapmotor sales grow in Europe, Stellantis could utilise more spare capacity at its own factories and avoid politically controversial closures.

“The Chinese carmakers will have 10 per cent of the European market in a few years,” Tavares says. “So if the Chinese sell 1.5mn cars, it means the equivalent of seven plants.”

China’s leadership in electric propulsion is not just a matter of cost. Another major gap that is emerging is in technology.

Christoph Weber, who leads the China business for Swiss engineering software group AutoForm and is based in Shanghai, says traditional European and US carmakers need to radically change the way they work if they are to match the speed at which their Chinese rivals are embracing new technologies and designs.

He points out that William Li, the founder and chief executive of Nio, and Joe Xia, the chief executive of Geely-Baidu joint-venture Jidu Auto, both attend weekly design meetings and make decisions “on the spot”. The result, Weber says, is that Chinese companies are developing new cars in around one year, compared to the four-year timeframes typical of more bureaucratic European groups.

The entry of telecoms and tech giants Xiaomi and Huawei into the auto sector presents a new threat to foreign groups, Weber adds. “When consumers see what Xiaomi and Huawei are offering, they are very quick to expect that of everyone, and it puts everyone else under even more time pressure,” he says.

Huawei has been hunting for new growth drivers after the Shenzhen-based group was shut out of many telecoms markets over security fears (which it says are unfounded). It is co-developing vehicles with Seres, Chery, BAIC, JAC and Changan, and manufacturing components for many other groups. 

It’s an approach that highlights how Chinese tech brands with no prior auto industry presence are rapidly gaining a foothold in the industry.

Tang Jin, a senior research officer at Mizuho Bank in Tokyo, says carmakers such as Toyota are already moving to address the threat by actively partnering with Huawei in China. “Due to political issues, there are certain areas where Chinese cars cannot enter. So by partnering with Huawei in China, companies can absorb the technology knowhow and use them in other parts of the world such as the US,” he adds — a reversal of what happened when western carmakers entered China.

The next big battleground in automotive technology is likely to be automation and self-driving technology, an area where even Elon Musk’s Tesla may struggle to compete against BYD, Huawei and other Chinese rivals.

Bill Russo, the former head of Chrysler in China and founder of consulting firm Automobility, believes the country is entering a new period of auto industry disruption, with the movement of people and goods increasingly automated as carmakers and others leverage its huge digital economy.

But even if China’s product-centric car industry can become a service-orientated “mobility” sector, it is uncertain whether such technology is exportable to some western countries. Consumer behaviour in Europe is different and there would be regulatory obstacles around data transfer, privacy and insurance.

“The portability of these solutions outside of China is going to be much more challenging to the Chinese companies, because the ecosystems for autonomy are built locally,” Russo says. “But that doesn’t take away from the accumulated experience of learning and training the algorithms and building the solution sets, which will commercialise much faster in China.”

Brian Gu, co-president of Xpeng, says he wants to introduce the latest technologies developed in China to international markets, arguing that they will warrant premium pricing of its vehicles when they arrive in Europe.

“The world should enjoy the best technology that has been developed,” Gu says, while acknowledging the challenge of meeting European standards. “We’re not going to overthrow anybody who’s developed over 100 years. We can help them.” 

Renault’s chief executive Luca De Meo admits the European car industry and its suppliers “need some help” from the Chinese, especially in the crucial battery supply chain.

“The centre of gravity of the automotive system has drifted towards China,” he says. “It doesn’t mean that the Chinese are going to wipe us out. We can fight. We are going to compete.”

Others are not so sure. In a 400-page report issued last month, former European Central Bank president Mario Draghi called for a “new industrial strategy for Europe”, urging the EU to raise investments by €800bn a year to boost its competitiveness so that the bloc does not fall behind the US and China.

BMW’s Zipse has also demanded a more coherent industrial framework. “The basis of our success and prosperity are under increasing pressure,” he says. “What is happening to us here?”

Many auto executives are still hopeful that it will not be so simple for Chinese carmakers to replicate their domestic success in Europe. Consumers tend to be older — the average age of a new car buyer is over 50 in Europe compared to mid-thirties in China — and have built up genuine loyalty to particular brands. As so many new players enter the market, a period of consolidation may well follow the initial aggressive expansion.

“The biggest hurdles for Chinese carmakers are not the products themselves, but the distribution network and brand recognition,” said José Asumendi, JPMorgan’s head of European automotive research.

Matthias Schmidt, an independent analyst, estimates that the share of Chinese carmakers in west European markets is unlikely to surpass 12 per cent due to the introduction of import tariffs and the rollout of new European EV offerings. Chinese manufacturers had an 8.3 per cent share in August.

But Palmer, who was also previously chief operating officer at Nissan, warns against complacency and wishful thinking. He says carmakers such as Nissan, Renault and BMW were pioneers in EV technology but failed to follow through on their early leadership due to poor strategic planning.

“It’s not that the European industry has been beaten by the Chinese,” he says. “It’s that the European industry has lost because of itself.”

Additional reporting by Gloria Li in Hong Kong and Amy Kazmin in Turin