China is rapidly expanding its footprint in the European electric vehicle market, leveraging a highly integrated value chain and strong government support. As Europe strives to meet its 2035 zero-ICE sales target, can its industry keep pace, or will Chinese automakers take the lead?
Europe’s 2035 challenge: a race against time
In June 2022, the European Parliament voted to ban the sale of new Internal Combustion Engine (ICE) vehicles within the European Union (EU) from 2035. The objective is to achieve carbon neutrality by 2050 by drastically reducing emissions across several sectors, including transport. The latter contributes 60% of the greenhouse gas (GHG) emissions in Europe. This deadline poses significant risks to the automotive industry on the Old Continent, particularly to European car manufacturers.
On the one hand, the European automotive market is still predominantly dominated by Internal Combustion Engine (ICE) vehicles, which account for about half of sales in 2024. In addition, hybrid (HEV) and plug-in hybrid vehicles (PHEV), which have experienced significant sales growth in Europe, represent 38% of sales in 2024. Only battery electric vehicles (BEVs) will be allowed for sale starting in 2035, but currently, more than 85% of car sales do not comply with this regulation. Furthermore, BEVs ranked only third (by powertrain) with 13.5% of total sales in the past year. Achieving the EU’s goal of 100% BEV sales would require an annual growth rate of 14% for BEV sales starting from this year—well above the -5% achieved in 2024 compared to the previous year.
China’s Strategic Advantage in the EV Sector
On the other hand, several Chinese automotive companies—both manufacturers and suppliers—have acquired considerable expertise, particularly technological, in the electric vehicle (EV) segment. Widely supported by Beijing (chart 1), Chinese battery and electric vehicle manufacturers have developed a robust value chain since the 2000s, spanning from the mining sector (upstream) to the final manufacturing of EVs (downstream).
China is a major global player in the extraction and supply of essential raw materials, owning numerous mining assets abroad and producing, for example, around 60% of the world’s refined lithium supply.
Data for the graph in .xls file
Sources: Center for Strategic and International studies (CSIS), Coface
The establishment of an extensive vertical value chain—integrating extraction, refining, and manufacturing—along with financial backing of the Chinese central government, has allowed the rise of a leading Chinese electric vehicle sector. Chinese manufacturers have developed a wide range of products, improved production capacities, and invested heavily in research and development. In response to intense domestic competition and a price war within the Chinese market, manufacturers have progressively lowered their production costs, and consequently, their selling prices. EVs sold in China are therefore two to three times cheaper than those sold in export markets.
Can Europe Replicate the US-Japan Model?
From a European perspective, there is an evident risk of domestic manufacturers being outpaced by Chinese competitors, who are better positioned to meet the 2035 deadline. This challenge is being addressed by the European Commission, which is implementing tariff surcharges to narrow the price gap.
If Europe wants to maintain a leading automotive industry on its soil, it must establish sufficiently competitive electric vehicle production capabilities to rival Chinese competitors. However, the main issue lies in the substantial difference in production costs between Europe and China (chart 2). The introduction of tariff surcharges aims to reduce the gap between the EU and China. These new trade barriers, which could be strengthened over time, appear to be part of a "reverse offshoring" industrial strategy. This strategy was adopted by the United States in the 1980s in response to fierce competition from Japanese manufacturers. By combining import quotas with a monetary system rebalancing in favor of the U.S. dollar, Washington encouraged Japanese manufacturers to establish factories on U.S. soil to access the American market. Thus, ten years after the signing of the Plaza Accords, Japanese vehicle imports to the U.S. had decreased by 55%, replaced by Japanese car production based in the U.S. (chart 3).
Hourly Labor costs in industry in 2023 (in EUR)
Data for the graph in .xls file
Timeline of Japan-US passenger cars trade (by vehicles)
Data for the graph in .xls file
Sources: Japanese Automotive Manufacturers Association, Coface
Theoretically, this model could appeal to European policymakers. However, European negotiating margins currently appear quite limited. In the U.S.-Japan case, Washington had a position of strength over Tokyo since 1945. Furthermore, in 1980, the American market accounted for 45% of Japan’s total car exports. Moreover, the tariffs imposed by the EU do not close the price gap between European and Chinese EVs. For example, the Chinese firm BYD shows price differences of around 80% to 100% between its models sold in China and those sold in Europe. To truly bridge the price gap between the Chinese and European markets, surcharges in the range of 45% to 55% would be required.
What’s next for Europe’s EV market?
The European market will remain a significant target for Chinese car manufacturers in the medium term, who are seeking alternatives due to the slowdown in the domestic market and are increasing their investments in different regions of the world (chart 4). To limit customs measures against them, Chinese manufacturers could opt for a hybrid solution. This would involve assembling vehicles from kits produced in China. This is the case with the partnership between Stellantis and the Chinese company Leapmotor, which will assemble its T03 electric model in Poland.
Data for the graph in .xls file
Sources: Trademaps, Coface
