Why your first electric car could be Chinese

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Tesla Inc. would have delivered more cars in the past quarter had it not been for a shortage of boats. It is struggling to find ship capacity from Shanghai. No wonder: China recently overtook Germany as the world’s second-largest auto exporter.

Chinese auto exports grew by more than 50% in the first nine months of this year, shipping more than 2 million vehicles. It’s not just Western automakers that are using China as an export hub; local brands are also finding their place on the global stage. And demand is being driven by Europe, the birthplace of the automobile, where a supply chain crisis, energy crisis and war in Ukraine continue to cripple manufacturers.

The threat is not limited to price. Cars made in China are far superior to those it tried to impose on European consumers more than a decade and a half ago. European automakers are already losing market share in China due to the lack of competitive EVs, and they risk doing so at home too, where Chinese automakers already account for 5% of the EV market.

European politicians need not be naive, but they should be wary of brandishing a big stick: tough new trade barriers against China would raise the cost of electric vehicles while reducing pressure on European automakers to boost their competitiveness.

Chinese automakers are moving forward after spending years preparing to meet growing demand for electric vehicles and the batteries that power them. Automakers around the world are partnering with Chinese battery makers to power their electric vehicle fleets.

Thanks in part to government largesse and an industrial policy that has favored domestic producers, Chinese electric vehicle brands are dominating their rapidly growing local market, where they are seeking to lower prices, which will further boost adoption.

They have also taken a lead in the software and infotainment features that Chinese consumers demand. With the exception of Tesla, Western automakers have often failed to keep up.

The opportunity for China is clear: brand loyalty is not yet firmly established in electric vehicles and current battery-powered models are often very expensive. Western automakers have deliberately overlooked the budget end of the European market, believing that high prices, not high sales volumes, will deliver higher profit margins.

Chinese companies are now capitalizing on their economies of scale to ship competitively priced cars to Europe. The scale of China’s ambitions was on full display at the Paris Motor Show in October, where brands such as BYD Co., backed by Berkshire Hathaway Inc., and Great Wall Motor Co. showcased several technically impressive.

However, there is still a lot of work to better establish Chinese brands, dealer networks and service centers. Deals like the one BYD struck in October with German car rental company Sixt SE to buy around 100,000 electric vehicles will help raise consumer awareness.

Unsurprisingly, Western brands acquired by China such as MG and Polestar performed best. (MG is owned by SAIC Motor Corp. while Polestar is financially backed by Zhejiang Geely Holding Group Co.).

China’s advance presents a thorny issue for European politicians, who are under pressure to ensure a level playing field. Currently, car imports into China are subject to a 15% customs duty compared to 10% when entering the European Union.

Stellantis NV CEO Carlos Tavares wants Europe to raise tariffs on imported Chinese models. Meanwhile, French President Emmanuel Macron has said buying incentives should depend on local production, as they currently are in the United States following the Cut Inflation Act. Germany, whose auto industry has far more to lose if China retaliates, has so far been more reluctant. German auto executives are part of Chancellor Olaf Scholz’s delegation of business leaders visiting China this week.

Europe is already worried about deindustrialization because of its exorbitant energy costs. There are also growing political concerns about the continent’s trade dependence on China, a valuable trading partner but increasingly seen as a strategic rival. The fate of industries such as solar panels – where German consumers have effectively subsidized the rise of Chinese manufacturers and domestic producers have gone bankrupt – shows the dangers of complacency.

While Western automakers have overcome the competitive challenge from Japanese and Korean producers in the past, the threat is greater this time as electric vehicles are a new technology and China is years ahead in batteries and associated supply chains. The European Union reached an agreement last week to ban sales of combustion engine cars from 2035; builders on the continent are therefore stuck between a rock and a hard place. It is reasonable to encourage Chinese manufacturers to set up local production as Beijing has done with Western manufacturers. This could help Europe become more competitive and create manufacturing jobs here. Similar compromises have happened before. (Chinese battery makers are already building factories in Europe.)

Stifling Chinese auto imports may be politically popular, but European consumers will end up paying with higher prices and lower quality products. In the end, Europe can choose protectionism or affordability. But unfortunately, he can’t have both.

More from Bloomberg Opinion:

• Afraid of driverless cars? China has the answer: Anjani Trivedi

• The Great Automotive Affordability Crisis: Chris Bryant

• How Chinese car batteries conquered the world: Anjani Trivedi

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Previously, he was a reporter for the Financial Times.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. Previously, she was a reporter for the Wall Street Journal.

More stories like this are available at bloomberg.com/opinion

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