Why China won’t come to the aid of European car manufacturing

One analyst on the Volkswagen Group's annual results call this week hopefully put it to CEO Oliver Blume that Volkswagen might want to partner with a Chinese firm to build the ID 1 small EV locally. Maybe MG parent SAIC, a long-time partner of Volkswagen in China, which is looking to build cars in Europe. The answer came back: no. Volkswagen is building the ID 1 at its Portuguese plant on a Volkswagen EV platform, and while the car might use Chinese-supplied modules, this is a Volkswagen project and as such is so close to the edge in terms of profit margin that neither Skoda, Seat nor Cupra will get a version. In theory, Chinese car makers are in an excellent place to help out European counterparts struggling with high costs and a surfeit of factories amid a falling market. They are the current masters of low-cost automotive manufacturing, forged through a combination of white-heat competition and a leg-up from the Chinese state. That cost advantage has been pretty much negated in Europe after the EU levelled the playing field with punitive import tariffs on Chinese EVs and range-extender EVs of up to 45%. Building those cars in Europe would remove those tariffs in an instant – and give the Chinese firms the flexibility to better adapt to local market tastes as their sales increase. And what better way to do that than to partner with existing manufacturers building cars in Europe, many of which already have strong ties with Chinese firms via joint ventures. Factories are increasingly coming up for grabs as Ford, Volkswagen, Renault and Stellantis shrink their production networks. Or there’s the option of taking on a mothballed or sub-capacity line in a plant, for example at Nissan’s Sunderland’s facility. Problem solved. Except that’s not really happening. Last year, Chinese premium EV brand Nio was reportedly interested in taking on Audi’s doomed EV plant in Brussels, Belgium, while BYD and Chery were both mentioned as possible buyers for Ford’s Saarlouis plant in Germany, which will cease manufacturing the Focus in November. In the end, neither plant will be sold to another automotive company, Chinese or otherwise. Buying an existing plant in western Europe makes no sense for Chinese car makers, even if the price is low and further sweetened with subsidies. The bill for both wages and power will be too high, the plant will need extensive modernisation to efficiently build new EVs and the workforce is likely to be heavily unionised. Unions aren’t necessarily a problem, but the immediate clash of cultures with a Chinese management used to a more adaptable workforce is likely to cause issues. China currently has shown very little desire to build capacity elsewhere when its own car factories are in many cases just ticking over, even with sales at 22.9 million last year and growing. So far, only BYD has committed to volume European production, with a new plant in Hungary and a second plant planned in Turkey. These are greenfield sites, however, built from scratch and in lower-cost eastern European countries that offer at least a chance of matching China's low build costs. The model of Sino-European production partnership that looks most persuasive – meaning that it solves problems on both sides - is that between Stellantis and Leapmotor, the Chinese EV specialist whose exports are controlled by Stellantis. For example, the Leapmotor T03 small EV is built on a line that would have otherwise gone unused at the Fiat plant in Tychy, Poland. Leapmotor claims this agreement allows it to duck the EU's import tariffs, keeping pricing low. Stellantis is also reportedly looking at its Opel plants to build subsequent Leapmotor EVs. Also showing potential is Chery’s agreement to assemble two of its Tiggo range of SUVs at the old Nissan plant in Barcelona, now run by local firm Ebro. The cars are badged Ebro – named for a defunct Spanish commercial vehicle maker -and the first one rolled off the line at the end of November. The sticking point here is what constitutes ‘production’. The European Commission in its recent proposal to boost European EV production and sales included a commitment to cracking down on what it calls “circumventing practices”. This essentially targets ‘screwdriver ’assembly operations that build cars from imported kits with the sole purpose to dodging the tariffs, with no meaningful plans to establish a supply chain. Leapmotor, for example, might be planning full-scale production in the future, but right now, given that it has had no chance to localise parts supply, the T03 is essentially coming into the EU as a kit. Whether this represents ‘circumvention’ is for the Commission to prove. The definition is murky. The EU claims that “at least 45% of value must be added to parts not originating in the EU during the manufacturing process” but also admits “there is no general rule”. A decision can only be reached after individual investigations. China’s preference for keeping production outside of China to a bare minimum is has recently raised the ire of Russia, which is struggling to replace global car makers within its borders after their swift exit following its invasion of Ukraine. Import leader Chery has recently started production in Russia in abandoned plants but, according to a Reuters report last year, is merely adding the final touches to vehicles that arrive “nearly finished”. The same thing happened with the MG 6 at Longbridge after SAIC’s takeover: assembly from 2011 was confined to just installing the engine and fitting the wheels. The plant was finally closed for good in 2016. Then there’s the political angle. The Chinese state is directing where factories should be built in Europe and last year steered car makers to avoid locating manufacturing in those EU countries that voted for the higher tariffs on EVs, including France, Italy and Poland. That could account for the reported recent decision by Stellantis not to add the Leapmotor B10 compact SUV to its Polish plant, with Germany (an approved location) possibly in the running instead. The slow progress of the Chinese's integration in Europe is reminiscent of the Japanese 40 odd years ago. They first wanted merely to import, then got around barriers imposed by worried politicians with a combination of partnerships (Rover and Honda, for example), greenfield plants (mainly in the UK) and importing favoured suppliers. The problem what to do with existing European plants headed for closure could be solved from another direction: Volkswagen's axed Osnabrück plant in Germany is reportedly being eyed by tank maker Rheinmetall, if more orders are forthcoming.

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Why China won’t come to the aid of European car manufacturing

Chinese firms will build cars in Europe but not necessarily in a way that will fill the region’s ghost plants

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Why China won’t come to the aid of European car manufacturing

​Chinese firms will build cars in Europe but not necessarily in a way that will fill the region’s ghost plants

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Chinese firms will build cars in Europe but not necessarily in a way that will fill the region’s ghost plants