Tariff Hikes: Directions for Automakers' Overseas Expansion

In 2023, China became the world's largest exporter of automobiles, prompting the United States and the European Union to subsequently increase tariffs on electric vehicles imported from China. Among the major export markets for Chinese automobiles, the EU's ranking does not exert a decisive influence. However, when it comes to electric vehicles, the EU occupies a significant position. How to mitigate the impact of increased tariffs has become an inevitable question for Chinese automakers.

Following the United States' announcement in mid-May to substantially raise tariffs on Chinese electric vehicles, approximately one month later in mid-June, the EU also declared that it would impose additional tariffs ranging from 17.4% to 38.1% on pure electric vehicles produced by different Chinese automakers. After becoming the largest global exporter of automobiles in 2023, the path of Chinese automobiles going global has become unstoppable.

Unlike the major automakers in Europe and America, which are slowing down the development of new energy vehicles, Chinese automakers are accelerating their transition to new energy. Not only are the new forces in car manufacturing focusing on this, but traditional automakers are also collectively betting on new energy vehicles, with new energy vehicle sales in 2023 reaching about 65% of the global total. In terms of automobile exports, the export of new energy vehicles is growing rapidly, significantly higher than the overall growth rate of automobile exports.

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Globalization is an important breakthrough for Chinese automakers. Faced with the rapid rise of Chinese new energy vehicles, tariff frictions are hard to avoid. Automakers in Japan and South Korea also encountered trade barriers during their rise, and industries like Chinese home appliances have also experienced tariff frictions, but none of this has changed the industry trend.

Therefore, as Chinese automakers develop overseas, the key on the demand side is to create consumer value, and on the supply side, it is to improve corporate efficiency. The industry's transition to new energy vehicles is an inevitable trend. While Chinese automobiles reject purely inward-spiraling marketing, they must maintain strategic focus on technological innovation and continue to exert effort around demand value and supply efficiency. At the same time, by flexibly adjusting market entry methods through overseas joint ventures and cooperation, and local localization of factories, they can adapt to the market.

Tariff Dispute

On June 12th, the European Commission issued a statement temporarily determining that the value chain of Chinese electric vehicles benefits from unfair subsidies, posing a threat of economic damage to EU electric vehicle manufacturers. It plans to impose provisional countervailing duties on electric vehicles imported from China starting from July 4th.

The provisional countervailing duties involve both the sampled three Chinese automakers and the unsampled Chinese electric vehicle manufacturers. According to the interim results, additional tariffs ranging from 17.4% to 38.1% will be imposed on pure electric vehicles produced by different Chinese vehicle manufacturers.

Specifically, the additional tariffs imposed on pure electric vehicles from the three sampled Chinese automakers are as follows: BYD 17.4%, Geely Automobile 20%, and SAIC Group 38.1%. For unsampled Chinese pure electric vehicle manufacturers, an average additional countervailing duty of 21% will be imposed on electric vehicle manufacturers involved in the investigation but not sampled, and a 38.1% tariff will be imposed on manufacturers who did not cooperate with the investigation.

In response, the spokesperson for the Ministry of Commerce stated that China has taken note that on June 12th, the European Commission published preliminary rulings on the anti-subsidy investigation of Chinese electric vehicles, proposing to impose provisional countervailing duties on electric vehicles imported from China. The European side disregarded the facts and World Trade Organization rules, ignored China's strong opposition on multiple occasions, and disregarded the calls and dissuasions from several EU member state governments and the industry, persisting in its own way. China is highly concerned and strongly dissatisfied with this, and the Chinese industry is deeply disappointed and firmly opposed.Chinese Foreign Ministry spokesperson Lin Jian emphasized that these investigations are typical acts of protectionism, disregarding objective facts, ignoring World Trade Organization rules, and going against the historical trend, which will only harm others and oneself. We urge the European side to seriously listen to objective and rational voices from all sectors, immediately correct erroneous practices, stop politicizing economic and trade issues, properly handle economic and trade frictions through dialogue and consultation, and avoid damaging mutual trust and dialogue cooperation between China and Europe.

The European Commission stated that if discussions with the Chinese side do not lead to an effective solution, temporary countervailing duties will be imposed from July 4th. According to procedure, definitive measures should be implemented within four months after the imposition of temporary duties.

East Wu Securities indicated that the proposed tariffs are an additional levy on the current 10% import tariff. At the same time, imported goods registered 90 days before the implementation date of temporary measures (April 5, 2024) may be retroactively subject to import duties.

Impact Analysis

The latest data released by the China Association of Automobile Manufacturers shows that from January to May, automobile exports reached 2.308 million units, a year-on-year increase of 31.3%. Among these, new energy vehicle exports were 519,000 units, a year-on-year increase of 13.7%. Within the new energy vehicle composition, pure electric vehicle exports were 414,000 units, a year-on-year decrease of 1.8%; plug-in hybrid vehicle exports were 105,000 units, a year-on-year increase of two times.

In recent years, China's automobile exports have been growing rapidly. In 2022, China's automobile exports exceeded 3 million units, reaching 3.111 million units, a year-on-year increase of over 50%. In 2023, the volume of automobile exports was 4.91 million units, a year-on-year increase of nearly 60%. Of course, these are the data from the China Association of Automobile Manufacturers; according to the General Administration of Customs, China's automobile exports in 2023 were 5.221 million units. Regardless of the data source, China has replaced Japan to become the world's largest automobile exporter.

In the composition of exported automobiles, the proportion of new energy vehicles is increasing. According to the China Association of Automobile Manufacturers, from 2021 to 2023, the volume of new energy vehicle exports in automobile exports was 310,000 units, 679,000 units, and 1.203 million units, respectively, with the proportion increasing from around 15% to about 25%.

Among the main exporting car companies, SAIC Motor, Chery Automobile, and Great Wall Motor rank in the top three, followed by Geely and BYD. The three car companies that were sampled by the European Union for investigation are all included, and SAIC Motor, which has the largest export volume, is also subject to the highest additional tariffs. In 2023, SAIC Motor's export volume reached 1.208 million units, making it the only car company with exports over one million units.

In fact, in the face of tariff barriers from Europe and the United States, the current focus of Chinese car companies' export destinations is not here. Taking 2023 as an example, data from the China Association of Automobile Manufacturers shows that the top ten countries for China's automobile exports are Russia, Mexico, Belgium, Australia, the United Kingdom, Saudi Arabia, the Philippines, Thailand, the United Arab Emirates, and Spain.

The sales volume of these ten countries accounts for nearly 60%. Among them, Russia, ranking first, exported 909,000 units, accounting for nearly 20% of China's automobile exports.Due to factors such as trade frictions, there are certain difficulties for Chinese automobiles to enter the U.S. market. Europe is the second-largest market for new energy vehicles, and the European Union (EU) is an automobile consumption market that can be compared with China and the United States. Although the sales volume of individual countries is not large, the market share of the entire EU is not low.

In terms of pure electric vehicles, the EU is a major export destination for Chinese automobiles. According to customs data, in 2023, China exported 482,000 pure electric passenger cars (including used cars) to the EU, accounting for 45.1% of China's total electric vehicle exports. Found Securities pointed out that in 2023, Europe accounted for 37.5% of China's automobile exports. It cited data from Bloomberg Green Gold, stating that the EU occupies about one-third of China's new energy vehicle exports.

For specific car manufacturers, Dongwu Securities said that overall, the impact on BYD is controllable, while SAIC MG is relatively more affected. The tariff on BYD has increased by 17.4% compared to before, and considering price increases and cost reductions, the corresponding gross profit per car is expected to be affected by 20,000-40,000 yuan. Considering the previous export profit of 30,000-50,000 yuan per car to Europe, there is still a profit of 10,000-20,000 yuan per car after the tariff increase. However, the gross profit per MG car is expected to be affected by 40,000-60,000 yuan, and if prices are not increased, exports may incur losses.

Learning from Others

Looking at the growth experiences of peers, Japanese and Korean car manufacturers also had similar experiences during their rise. From the process of Chinese advantage industries such as the home appliance industry going global, tariff barriers have existed more than once. These successful cases of shaking off policy pressure and achieving overseas development can undoubtedly serve as a reference for Chinese car manufacturers to go global.

As the world's largest automobile manufacturer, Toyota initially entered overseas markets through exports. The company's export markets mainly included Asia, Oceania, and Latin America, with the European and American markets not being the focus at that time.

In the U.S. market, Toyota initially failed due to product issues and other reasons. Later, it successfully entered the U.S. market in the 1960s with successful products and effective promotion.

In the 1980s, as Japan-U.S. trade frictions intensified, Toyota avoided some trade restrictions by building factories overseas and gradually completed localized expansion. Its overseas layout evolved from joint ventures to wholly-owned factories, from some regions to global production, and in 1995, it achieved overseas production exceeding domestic export volume for the first time. Currently, Toyota has firmly occupied the top two positions in the U.S. market.

During the rise of Chinese home appliances, there were also continuous trade frictions. In this process, Chinese home appliances not only did not lose market share but also grew into global companies.

In addition to having excellent product quality, overseas factory construction is a key step for home appliance companies to go global. Building factories in Mexico has driven exports to the United States, and factories in Southeast Asian countries such as Thailand and Indonesia have exported to Europe and America. Moreover, Chinese home appliance companies such as Midea, Haier, and TCL have successively acquired home appliance companies or businesses in Europe, America, and Japan. In this process, Chinese home appliances have also shifted from initially pursuing cost-effectiveness to brand premium.Compared to acquisitions and the like, establishing factories overseas is a more realistic option. Starting from 2023, Chinese automakers have gradually set up factories in Europe for localized production. For instance, by the end of 2023, BYD announced the construction of a new energy vehicle production base in Hungary, marking the first passenger car factory built by a Chinese automotive company in Europe.

Subsequently, Chery Automobile also declared an agreement with a Spanish automotive company to establish a joint venture in Barcelona to produce new types of electric vehicles. SAIC Motor, the largest exporter, had publicly announced in July 2023 that it would select a location in Europe to build a factory.

After the implementation of additional tariffs, local factory construction has become an inevitable trend. Dongwu Securities pointed out that with the rapid increase in export volume of Chinese automakers in recent years, trade frictions and protectionism have intensified globally. The globalization of Chinese automakers has reached an inflection point where localized production, operation, and research and development are prioritized.