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The Chinese carmakers planning to shake up the European market

Visitors to the Nio House in Frankfurt can do more than just admire the sleek new electric vehicles on display. Half the showroom, a stone’s throw from the city’s 15th-century Eschenheimer Gate, is a free-to-use co-working space, equipped with meeting rooms, a café and a crèche.

When Qin Lihong, co-founder and president of the Chinese carmaker, attended its opening in late March, he told the freshly hired sales team not to bother with sales targets and to instead “give to the community”. 

The charm offensive is a prelude to an aggressive export drive by the Hefei-based company and other Chinese carmakers that threatens to reshape Europe’s automotive landscape, dethroning its powerful incumbents and forcing governments to choose between protecting their industries and embracing competition and consumer choice.

“We want to be in the top three” brands in the region by the end of the decade and number one “if we can”, says Michael Shu, European chief of leading Chinese automaker BYD. The company, backed by US investor Warren Buffett, has been name-checked by former Volkswagen chief executive Herbert Diess as the carmaker that the German juggernaut should fear the most.

Over the past quarter-century China’s automakers have become experts in electric vehicles, while the country dominates the production of almost every resource, material and component used to make them.

With their home market largely conquered — China buys proportionately more electric vehicles than any other country — companies such as Nio, BYD, Li Auto, Xpeng and Great Wall have turned their eyes abroad.

So far, China has tapped western markets largely by buying existing brands; Geely owns Swedish carmaker Volvo, while SAIC owns MG in the UK. Now, they intend to bring their own brands to Europe in rapidly increasing numbers and some intend to build their own factories there, as the Japanese did in the 1980s and 1990s.

If the past decades have been a story of patience, as Chinese manufacturers mastered electric vehicle and battery technology, the coming one will be coloured by ambition. By 2035 cars with petrol and diesel engines will no longer be sold in Europe — one of the most drastic curbs on vehicle emissions anywhere in the world — and the Chinese sense a huge opportunity.

Chery

Founded: 1997
Status: State-owned
Based in: Wuhu, Anhui
Annual NEV output: 221,000

Chery, currently China’s biggest exporter of cars, plans to sell up to 15,000 vehicles next year in the UK alone, a level that would see it overtake Jeep, Jaguar and Suzuki from a standing start. The group, based west of Shanghai in Anhui province, began working on electric vehicles in 2000. It has taken a quarter of a century for the company to push the button on a European offensive that will also include some petrol-engined vehicles.

“Our product level years ago was not fully ready, but gradually, after so many years, it has increased”, says Victor Zhang, manager of the Chery group in the UK. “Now, we are fully ready.” 

China’s ‘new energy vehicles’

So far, development of EVs in the west has been dominated by Tesla, a business built by a small cadre of driven entrepreneurs and spearheaded by their obsessive leader, Elon Musk. But the rise of the sector in China was a matter of state industrial policy. 

Lars Pauly, who spent three decades at Mercedes-Benz but now oversees German imports of BYD cars, says Chinese carmakers would not have been able to take on incumbents in combustion engines “where the European manufacturers have achieved a very high level of expertise”. But with battery technology “the race has started again”, he adds, and the Chinese “have probably taken it more seriously”.

Beijing realised that electric vehicles could help reduce China’s heavy dependence on oil imports that come through the disputed waters of the South China Sea. The demise of the internal combustion engine also offered a way to reduce the country’s worsening air pollution, which was becoming a focus of domestic criticism. The fact that EVs now also dovetail with China’s climate change goals is a happy bonus. 

The state’s backing has deepened further since Xi Jinping, with his focus on energy and technological self-sufficiency, came to power in 2012. From 2009 to 2017 cumulative state spending on the EV sector in China totalled close to $60bn, according to estimates from the Center for Strategic and International Studies. The think-tank says it then rose by a further $66bn from 2018 to 2021.

Despite those state-led beginnings, many of the rising Chinese EV makers have the functional advantages of start-ups, with agility and no cumbersome legacy operations to sustain. Tony Wu, a partner at Northern Light Venture Capital (NLVC), a China-focused VC firm with $4.5bn assets under management, says the organisational structures of EV start-ups was a key advantage.

“From day one, all the departments work together and become a part of a big story . . . The [carmaking] process is a whole, just like internet companies developing products. The walls between different departments have been knocked down. All the departments work at the same place. This is where established carmakers find it difficult.”

China has emerged as the world’s largest market for cars, with its homegrown roster of brands such as BYD driving innovation both in battery technology and features related to the internet-connected car — and the European and international brands are slipping behind.

The country’s technological progress has already been “much faster than we expected”, according to Makoto Uchida, chief executive of Japanese carmaker Nissan.

Nio

Founded: 2014
Status: Listed in New York
Based in: Hefei, Anhui
Annual NEV output: 122,500
Employees: 27,000

While the domestic market for “new energy vehicles” — a sector that includes both plug-in hybrids and pure electric cars — has boomed in the past three years, the pace of growth is starting to stabilise. This trend, coupled with scores of companies vying for market share, has sparked warnings from analysts that utilisation rates at factories have fallen to around a third. With so much capacity sitting idle, the obvious solution is to export. China overtook Germany as the second-biggest car exporter last year and is tracking to take the top spot from Japan this year. 

Beachheads in Europe

The European brands that spent fortunes breaking into the Chinese market have fallen down the sales rankings there when it comes to EVs. In the first five months of the year, BYD alone sold nearly 1mn of its battery and plug-in hybrid vehicles in China, accounting for 38 per cent of the country’s new energy vehicle market, according to data from Automobility, a Shanghai consultancy. By contrast, Volkswagen, one of the first European companies to enter the Chinese market in the late 1980s, had just 2 per cent of EV sales.

Berlin-based auto analyst Matthias Schmidt believes that the Chinese carmakers entering Europe have a window between now and 2025, when the region’s incumbent car industry is expected to ramp up production of electric vehicles to coincide with upcoming EU rules on emissions.

“Europe is risking history repeating itself,” Schmidt says, pointing to Tesla’s surprise takeover of the electric segment a few years ago. The continent’s carmakers once confidently said there would be no demand for Musk’s quirky and expensive cars — which today account for one in five electric vehicles sold in Europe.

According to KPMG, Chinese groups could snatch a 15 per cent market share of new car sales in Europe — larger than France’s Renault — within the next two years. Already, Chinese companies are establishing a presence. Chery expects to open 50 showrooms in the UK alone next year, doubling by 2025.

In Germany, Europe’s automotive heartland, the notion that local roads might in a few years be flush with Chinese cars first became tangible last October, when BYD announced it had entered a partnership with Sixt. By 2028, Germany’s largest car rental company has agreed to buy 100,000 BYD vehicles for its European operations, focusing initially on the Atto 3, a compact sport utility vehicle.

So far, the sales push has been modest. Out of the nearly 870,000 new cars that have so far been registered in Germany this year, 111 were BYD models. Nio sold 161 cars in the country. Pauly says the number of registrations in Germany do not reflect BYD’s order intake in the country, which is “fortunately higher”, but for Schmidt “the figures are very disappointing”.

Chinese firms are prepared to play the long game. “The car industry was born in Europe, and Germany and France still have very strong local brands,” BYD’s Shu told the FT. “We are number one in China but it took us almost 20 years.” 

BYD

Founded: 1995
Status: Listed in Hong Kong
Based in: Shenzhen, Guangdong
Annual NEV output: 1.86mn
Employees: 230,000

Chery’s Zhang acknowledges that Europe is a market with “very strict regulation and intensive competition”. Most brands coming to Europe are only launching a small proportion of their offering, he adds, as safety standards and associated compliance costs are too high.

Chinese carmakers have also signalled that they are preparing to start manufacturing cars in Europe, which would help them avoid import tariffs and reduce shipping costs as well as potentially appear more localised for consumers. 

“We need to understand the needs of the European customers better,” Geely holding chief executive Daniel Li told the FT’s Future of the Car Summit last month. “We understand we still lack experience, we need to watch the market demand, and customer requirements carefully,” he said.

The European fightback

Even compared with previous influxes from Japanese and later Korean brands, the looming wave of Chinese electric vehicles into Europe has put the continent’s carmakers on edge. Governments too are wary of yet another industry slipping away to Asia’s largest economy while the threat to domestic jobs will test national pride and possibly even stoke xenophobia. 

European carmakers’ initial response has been to lobby hard against upcoming “Euro 7” rules on combustion engine emissions, due to take effect later this decade. Renault chief executive Luca de Meo says the change “is going to cost me more than €1bn in development . . . and the marginal effect of this on consumption is tiny”. He argues it will drain “people and money from electric cars” at a crucial time and “give the Chinese a foot in the door”.

But some European auto chiefs say fears of an epochal threat from Chinese imports are overblown. “We have to be analytical,” says one very senior executive at a major European auto group. “Yes, they [the Chinese] will take some market share, they will play a major role. But we have the design for European customers, the network and the fleets. So I’m not relaxed, but it’s far from being an existential moment.”

Others are quietly hoping that consumer wariness of Chinese technology will help slow adoption, though the experience of smartphones suggests otherwise. Fears over Huawei’s links to Beijing and China’s military, which led the UK government to order the removal of its kit from the country’s 5G network infrastructure, have done little to deter consumers from buying its cut-price handsets.

Great Wall

Founded: 1984
Status: Listed in Hong Kong and Shanghai
Based in: Baoding, Hebei
Annual NEV output: 132,000
Employees: 59,000

The pricing strategy of Chinese brands has also raised eyebrows. There had been fears of cheap Chinese models flooding the European market, using lower wages at home to undercut carmakers burdened with higher local labour costs and beholden to powerful unions. But BYD has priced its models at exactly the level of VW’s ID. 2, which is scheduled to go on sale in 2025.

Some believe this strategy is just to allow Chinese brands to establish themselves. “By the time VW will have brought the ID. 2 to market, the Chinese should be on a similar playing field,” says Schmidt. “From that point onwards we should see the Chinese be able to undercut the Europeans.”

Others think that it is a deliberate move, inviting consumers to compare cars on technology and innovation rather than cost. That could come as a shock to those expecting Chinese cars to be basic and poorly assembled.

In China, Zhu Yi, a 30-year-old tech blogger, is emblematic of the new generation of car buyers whose purchasing decisions are based as much around processing power as horsepower. Last year Zhu, who lives in the north-eastern city of Dalian, bought a BYD Song plug-in hybrid vehicle for Rmb163,800 ($23,000) after test driving vehicles made by Chinese groups Nio, Xpeng and Li Auto, as well as a Tesla and Volkswagen’s ID electric vehicle brand.

“I found [the VW’s] power performance and control system so bad. It hadn’t gotten rid of the traditional control system,” he says, adding that after purchasing the BYD plug-in, Zhu found himself “obsessed”.

Wu, of NLVC, says BYD’s more upmarket Han model is “revolutionary” with a price tag of around Rmb200,000-ish but features more commonly found on cars costing Rmb500,000 and above.

“In terms of exteriors and interiors, Tesla’s Model 3 is like a raw space, while BYD’s Han model is like a furnished apartment,” he adds. “Which one will you choose?” 

Data visualisation by Steven Bernard

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