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China’s best-selling cheap electric car sells for about $5,000. Last year, prices dropped to such affordable levels that Chinese passenger electric car sales nearly doubled. Sales of 5.9 million units were more than twice the combined sales in Europe and the United States.
At the same time, the industry is facing overcapacity caused by aggressive investment over the past decade. Geopolitical tensions and the government policies they trigger complicate entry into the U.S. market. Therefore, Europe has become a key target for Chinese electric vehicle manufacturers to find new markets. This has given European carmakers new urgency to catch up.
Currently, nearly half of China’s exported cars are sold to Europe. This number grew by about 60% last year. About two-thirds are battery electric vehicles. Historical parallels with Japanese automakers’ expansion into the United States in the 1970s offer clues to what might be happening in Europe.
But currently, the number of Chinese-branded electric vehicles on European roads is still relatively small.Of China’s exports to Europe, almost 40% are Teslas. European and Chinese joint ventures account for one tenth.
Still, China’s electric vehicle exports are growing much faster than analysts had previously expected. In Southeast Asia, another key market, Chinese automakers dominate, accounting for three-quarters of electric vehicle sales. This makes Europe even more important in its pursuit of growth.
Historically, Europe exported far more cars to China than it imported. But the shift to electric vehicles has brought changes in buying patterns. Consumer preference has shifted towards domestic brands, which account for 80% of newly registered electric vehicles in China.
Europe is understandably concerned about competition from Chinese electric car makers. The region’s local automotive industry is key to economic growth and employment. The European Commission’s investigation into Chinese electric vehicle subsidies could mean higher import tariffs on Chinese electric vehicles.
The move will reduce their competitiveness in Europe in the short term and hinder their expansion in China and the largest auto markets outside the United States. But it’s questionable whether potential tariffs will hinder Chinese manufacturers in the long term. In fact, their electric cars may just get cheaper.
The biggest driver of this boom is overcapacity. About 200 companies produce too many cars for the local market. Production capacity is expected to exceed 15 million units, which is approximately twice the expected local demand. Overcapacity is even more serious in battery manufacturing.By 2025, approximately 50 companies will produce expected Exceeding demand four times.
The yuan is now at its lowest level in 16 years, giving electric vehicle companies an advantage when converting foreign currency receivables into yuan. Prices of local raw materials including battery-grade lithium carbonate have fallen sharply this year, driving down the cost of batteries, the most expensive component of electric vehicles.
Meanwhile, local investment in sodium-ion batteries for small electric vehicles is accelerating.These batteries lack the energy density of their lithium counterparts but are expected to cost around half Same as regular lithium-ion batteries. All of this allows for further price cuts while easing pressure on margins.
Starting with small, cheap cars to win the mass market segment has worked in the past. It’s worth looking back to the 1970s, when Japanese automakers first began to gain traction in the United States. Unable to compete with European rivals in design and engineering, Japanese brands offer value.
With prices low enough, tariffs did little to slow their competition for market share over the next several decades. For example, Toyota now has the second-largest market share in the United States, behind General Motors. Chinese electric cars may lack charisma. But over the past eight years, the average price of electric vehicles in China has roughly halved. In Europe, prices are rising.
The EU aims to increase the number of electric vehicles on the road to at least 30 million by 2030, up from about 3 million last year, which will drive growth in the region’s mass-market EV sector.
The top priority for European EV makers should therefore be to ensure resources are directed towards leveraging proven technology to reduce production costs, even if this means early models lacking the design flair and character of their petrol counterparts. Innovation is important, and tariffs buy time. But European EV makers need to become more cost competitive.
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