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Before Brussels announced an anti-subsidy investigation into Chinese electric vehicles last week, top brass in the German auto industry had heard the move was underway.

“We knew something was going to happen, but we didn’t know it would be announced in such a political way,” said one industry insider. The person added that the EU’s move puts German carmakers, which hold a fifth of the market in China, in a dangerous position.

There are now widespread concerns in Germany that Beijing, embroiled in a tit-for-tat trade war with the United States, could take punitive measures against European carmakers.

Brussels’ move comes as investors have begun to question German carmakers’ dependence on China.

BMW and Mercedes-Benz have both been hugely successful in China with their premium brands, beloved by wealthy Chinese consumers, as has Volkswagen, which sells more cars than any other in the world’s largest car market. company. Last year, one-third of BMW sales came from China, compared with 37% for Mercedes-Benz and nearly 40% for Volkswagen.

For German automakers, the main concern is retaliatory tariffs on European cars imported into China. The companies also have large local manufacturing operations, which could provide Beijing with another front to turn the tide.

Gregor Sebastian, an analyst at the Mercator China Research Center, said German premium brands are most likely to be affected by China’s new import tariffs because most cheaper cars are already produced in China. “A lot of foreign auto production or foreign auto industry in China is actually highly localized, but the top premium segment is really an exception,” he said.

Long bar chart of China's passenger car retail sales from January to August 2023 (%) shows that Volkswagen leads the Chinese automobile market

The German company most vulnerable to higher import tariffs from China is Mercedes-Benz, Stifel analyst Daniel Schwarz said, noting that the company imports about 20% of the cars it sells in China. The figure for German car importers is closer to 10%. Volkswagen and BMW.

However, German carmakers with large local operations are also uneasy.

Tensions are growing between Brussels and Beijing at a time when Volkswagen, which it helped build the country’s auto industry in the late 1970s, struggles to maintain influence in the country. Its flagship Volkswagen was recently overtaken by BYD as China’s best-selling brand. New electric models from Audi and Porsche – the group’s main source of profit – have also been delayed by troubles at Volkswagen’s software unit Cariad.

Volkswagen announced an investment of nearly 5 billion euros in China last year despite calls from Berlin for its auto industry to reduce its dependence on China. In 2022, the company will transfer Ralf Brandstätter, the board member responsible for China affairs, to Beijing to “work closely” with the three main joint venture partners.

With France one of Europe’s strongest supporters of action against Chinese carmakers, dissatisfaction is brewing within the boardrooms of German car companies, which see the planned EU investigation as a victory for Paris.

“The Germans will be in a much worse situation than the French in this regard,” said a senior executive at a German auto supplier. “(Ursula) von der Leyen is clearly listening more on this matter. (Emmanuel) Macron’s opinion, not (Olav) Scholz’s,” the person added, referring to the European Commission president, French president and German chancellor.

Carlos Tavares, the boss of Peugeot owner Stellantis, and Luca de Meo, chief executive of Renault, both warned that European manufacturers faced serious challenges as Chinese rivals Cheaper models appear on their turf, forcing them to either seek more cost cutting or improve the quality of their products. own supply chain.

The two companies are having a tougher time in China than their German rivals. Renault ended some joint ventures in China in 2020 and stopped sales of its main passenger cars in the country.

Mercedes-Benz C-Class on display in Shanghai
One analyst says the German company most affected by rising import tariffs from China will be Mercedes-Benz © CFOTO/girl/Alamy

The French government has been more aggressive in pursuing measures against Chinese automakers and plans to introduce a decree that would effectively disqualify Chinese-made cars from receiving electric vehicle subsidies.

Berlin-based analyst Matthias Schmidt said that given German carmakers’ exposure to China compared with French rivals, “the French can say what others think, but the Germans must Shut up”.

A potential risk for European carmakers could be Beijing’s decision to restrict access to the supply chain for key battery raw materials such as lithium. Since deciding to invest heavily in building a domestic electric vehicle industry more than a decade ago, the Chinese government has taken large stakes in battery material processors and battery manufacturers.

However, senior executives and analysts are wary of prejudging Beijing’s response at this stage. “We must not forget that China needs Europe just as Europe needs China because the two economies are closely linked to each other,” Schmidt said.

One German auto industry insider is hopeful about comments made by Germany’s top business leaders when they met with Chinese Premier Li Qiang in June. Li Keqiang’s message is that the country still desperately needs the presence of German companies. “Their message is: ‘Please don’t stop investing in China – our economy is in a bit of trouble’.”


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