Currently reading: Why European car factories are courting Chinese manufacturers

BYD, Chery and Leapmotor are leading Chinese brands' charge to build cars locally rather than importing

The case for persuading Chinese car makers and suppliers to manufacture locally in Europe has mainly centred so far around the need to shore up jobs, but there’s another, perhaps more crucial aspect. They can help local players learn from a region that’s taken the lead in not just automotive innovation and electrification but also low-cost manufacturing.

“Knowledge comes on two feet,” Roland Busch, CEO of German automotive supplier and manufacturing specialist Siemens, told an audience at an event held on the sidelines of the Munich motor show in September. 

Busch referenced the Chinese battery industry, which, he said, was five to 10 years ahead of most of the rest of the world, bar some Asian players. “It’s not copying, but learning. If we get more and more people here, manufacturing stuff, they bring Chinese machines and we start learning,” he said.

Right now, almost all Chinese cars sold in Europe are built in China. Imports from the country rose to account for 6% of all cars sold in Europe in the first half of this year, according to European automotive manufacturers' group ACEA. The figure rose to 6.7% in the third quarter, according to data from independent researcher Matthias Schmidt. That is the highest for any country outside the European Union.

Car makers generally prefer to build close to where they sell because it allows them to be more reactive to changing tastes, cuts shipping costs and ties them more closely to the markets they sell in.

Local production is generally considered too expensive unless you’re selling between 75k-100k of a single model annually in the region and many Chinese firms are now almost there. For example, MG sold over 45,000 of the HS compact SUV in the first eight months, BYD shifted 44,000 of the Seal U plug-in hybrid SUV and between them Chery brands Jaecoo and Omoda sold over 50,000 of the related Jaecoo 7 and Omoda 5.

However, the Chinese low-cost manufacturing advantage has so far kept automotive production at home, with only some battery makers such as CATL in Hungary setting up shop in Europe.

The EU’s tariffs on Chinese-built EVs introduced last year were ostensibly designed to level the playing field for local manufacturers that lacked the same access to subsidies and other state aid enjoyed by Chinese firms. 

If the tariffs were also created to encourage China’s car makers to set up shop in in Europe, the result is a “profound failure”, according to Grzegorz Stec from the Brussels office for the Mercator Institute for China Studies. “Chinese EV brands doubled their market share in the EU in the last year, in part by quadrupling exports of plug-in hybrids,” he wrote in a recent report.

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There are signs, however, that the Chinese are starting to locate in Europe. BYD will begin production at its new plant in Hungary at the end of the year, starting with the small Dolphin Surf. Meanwhile, Stellantis-backed Leapmotor will begin full-scale assembly of new compact models in a Spanish Stelllantis in the middle of next year.

In Austria, contract manufacturer Magna has picked up work building the electric Xpeng G6 and G9 SUVs, along with two electric models from fellow Chinese car maker GAC.

In Spain, Chery is already building SUVs badged Ebro with local company EV Motors in the former Nissan Barcelona plant.

Whether any of this activity will teach Europeans how to build cars faster or more cheaply is another question. Many of the cars are built from ‘knock-down’ kits pre-assembled at Chinese plants and then finished off in ‘screwdriver’ operations in Europe. Chery praises the benefits of this method in its recently published share prospectus.

“We believe the knock-down model enables us to quickly enter into new markets and establish a strong market presence while catering to customer needs and preferences and adapting to local laws and regulations,” the company wrote.

The Xpeng and GAC models built at Magna are likely to be from kits and much of the initial BYD output from Hungary is also expected to be built from kits.

“Is that by definition manufacturing locally if you're only shipping kits?” asked Tu Le, head of China-focused automotive consultancy Sino Insights. “You're not hiring that many Europeans to do that.”

The EU theoretically demands levels of local content of around 45% before cutting tariffs, but that seems to be lightly applied, perhaps as it tries to encourage local production.

The Leapmotor operation in Spain is likely to be more involved. Philippe Houchois, chief autos analyst at banking firm Jefferies, estimates that the cars built there will use around 40% local parts as it plugs into Stellantis’s supply chain.

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In total, Jefferies estimates Chinese brands will account for up to 6% of European car production by 2028, totalling around 860,000 units. “Localisation will likely be the dominant strategy long term for Chinese entrants,” said Houchois.

Jefferies estimates that Leapmotor cars produced in Spain will cost around 20% more to build than those sourced from China but there are still savings to be had.

“If you’re building plants using Chinese equipment suppliers, that means that your capex [capital expenditure] is permanently cheaper than if you were buying it from a German supplier,” Andrew Bergbaum, global automotive and industry leader for consultant AlixPartners, told Autocar.

The need to build local could be accelerated if the European Union pushes through local content requirements under its Green Corporate Fleets proposal, under which fleets will be encouraged to buy more electric cars with the lure of tax incentives. The proposals could result in qualifying cars having to meet a minimum level of European steel, components and batteries.

The idea is to reward local car makers as well as persuading the likes of the Chinese to localise, which is something that even ACEA – ever concerned about its own exports – is wary about. “The criteria may invite others to mirror the EU approach by setting up their own requirements where they were previously not in place,” it said.

Until then, though, the Chinese are shipping in as much electrified product from their own plants as they can. “The Chinese know that their window is small and closing,” said Le. “Because of protectionism, and also because the Europeans might end up actually launching a vehicle in the next 18 months, that's pretty competitive.”

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