Editor | Liu Jingfeng

The global electric vehicle market is simmering with an undercurrent.

In recent years, the global market supply shortage and the enhanced competitiveness of China's automotive industry, especially the explosion of demand in the new energy vehicle sector, have provided China's automobile industry with an opportunity for leapfrog growth in overseas markets. In 2023, China surpassed Japan for the first time to become the world's largest exporter of automobiles.

However, since the beginning of this year, many countries and regions have begun to adjust tariffs on imports of automobiles from China, and the significant increase in tariffs has undoubtedly cast a shadow over Chinese automakers' overseas expansion plans.

Taking the European Union as an example, the EU implemented new tariffs on automobiles imported from China starting on July 5 this year. In the first month after the implementation of the new tariffs, Chinese automakers experienced a noticeable decline in EU sales in July.

In addition to the EU, countries such as Brazil, the United States, Turkey, and Canada have also successively announced new tariff policies for automobile imports. Amid the crucial transformation period of China's automotive industry from "big" to "strong," facing the looming "tariff stick," Chinese automakers are attempting to adjust their overseas expansion strategies with a deft touch.

Brazil 35%, Turkey 40%, EU up to 46.3%, USA 102.5%, Canada 106.1%.

These are not just ordinary numbers; they represent the tariff rates imposed by many countries and regions on imported automobiles since the beginning of 2024.

Starting in January this year, Brazil increased tariffs on imported battery electric vehicles (BEVs), hybrid electric vehicles (HEVs), and plug-in hybrid electric vehicles (PHEVs) to 10%, 12%, and 12% respectively. In July 2024, these tariffs were adjusted to 18%, 25%, and 20%, and will further increase to 25%, 30%, and 28% in July 2025, and 35% across the board in July 2026. (Note: These increases apply to global automakers, not just Chinese brands.)

On May 14, US President Joe Biden announced that tariffs on electric vehicles imported from China would be raised from 25% to 100%, with an additional 2.5% special tariff, effectively imposing a total tariff of 102.5% on electric vehicles.

On June 10, Turkey decided to impose an additional 40% tariff on automobiles imported from China, with a minimum additional tariff of USD 7,000 (approximately RMB 50,000) per vehicle. This decision took effect on July 7.

On August 20, the European Commission announced a draft imposing definitive countervailing duties on pure electric vehicles imported from China. Among them, SAIC Motor received the highest tariff rate of 36.3%. Together with the original 10% basic tariff, the highest tariff rate for Chinese-made pure electric vehicles exported to the EU has reached 46.3%.

A few days later, the Canadian government announced plans to impose a 100% surtax on all electric vehicles made in China starting October 1 this year. This surtax will be imposed in addition to the current 6.1% tariff on electric vehicles made in China.

It is noteworthy that the tariff hikes imposed by many countries and regions on Chinese-made new energy vehicles have been long-planned.

Taking the EU as an example, in September 2023, the EU initiated an anti-subsidy investigation against Chinese electric vehicles. Nine months after initiating the investigation, the European Commission announced on July 4 this year that it would impose provisional tariffs of up to 37.6% on pure electric vehicles imported from China starting July 5. In late August, the tariff policy became clearer, with further increases in the tariff rates.

Regarding these tariff hikes, Wang Peng, associate researcher at the Beijing Academy of Social Sciences, believes that the EU's imposition of significant tariffs on Chinese automakers is undoubtedly a trade protectionist measure aimed at protecting the interests of the EU's domestic automotive industry.

There are multiple reasons behind this behavior. First, with the rapid development of China's automotive industry, especially in the field of electric vehicles, Chinese automakers have gradually increased their market share in Europe, posing competitive pressure on local automakers. To safeguard the interests of domestic industries, the EU may impose tariffs to restrict Chinese automakers' market entry and expansion.

Second, the EU may fear that Chinese automakers will occupy market share through unfair trade practices such as dumping, thereby disrupting competition in the European market. Imposing tariffs can be seen as a means to prevent such unfair competition. However, such tariff hikes may also undermine the fairness and openness of international trade, triggering trade disputes and retaliatory measures.

In the long run, this is detrimental to the healthy development of the global automotive industry and may harm the interests of EU consumers, who may not be able to enjoy cost-effective products and services provided by Chinese automakers.

Industry insiders believe that to stay ahead in the competition, it is necessary to rely on disruptive technological innovations and breakthroughs rather than tariffs.

Indeed, the high tariffs have impacted sales of Chinese new energy vehicles in certain regions to some extent.

In July, sales of electric vehicles by Chinese automakers in Europe decreased but did not experience a sharp drop.

According to research firm Dataforce, the number of electric vehicles registered in Europe by Chinese companies in July totaled less than 14,000 units, down from over 23,000 units in June and a 9.7% decrease from July 2023.

From a cumulative perspective, sales of Chinese new energy vehicles in the EU declined by 17% from January to July, while sales in the US and Canada also decreased by 10%.

While the US is the world's largest automotive market and Europe is the third largest, the impact of tariff increases on China's overall automobile exports is limited in the broader context.

First, the proportion of vehicles sold by Chinese brands to the EU and North America is relatively small. From January to May 2024, the sales of BYD, SAIC Motor, Geely Auto, and Great Wall Motor in EU member states accounted for only 4.6%, 6.6%, 0.4%, and 0.5% of their total overseas sales, respectively. According to the China Passenger Car Association, in the first seven months of this year, China exported 28,000 new energy vehicles to North America, accounting for just 2.4% of total new energy vehicle exports.

Second, many other countries and regions have adopted tax reductions or exemptions for Chinese new energy vehicles, which can stimulate sales growth to some extent and offset the decline in sales caused by high tariffs in other regions.

Taking India as an example, in May this year, the Indian government decided to significantly reduce import taxes on electric vehicles. The plan is to lower the import tax rate for electric vehicles to 15% (for vehicles priced at USD 35,000 or more per unit, with an annual import limit of 8,000 units). Before the new policy, India imposed a 70% tariff on imported vehicles priced below USD 40,000 and an even higher 100% tariff on vehicles priced above USD 40,000.

From January to July 2024, China exported 44,000 new energy vehicles to India, representing a year-on-year increase of 24%. Specifically, in July alone, 8,213 new energy vehicles were exported to India, a year-on-year increase of 20%. In terms of total global exports, according to the "Analysis of China's Automobile Export Market from January to July 2024" released by the China Passenger Car Association, China exported a total of 1.17 million new energy vehicles from January to July this year, up 25% year-on-year. In July, 168,000 new energy vehicles were exported, an increase of 23% year-on-year.

This means that despite the fluctuations in tariffs, China's total exports of new energy vehicles have not experienced significant volatility so far. However, the long-term impact of tariffs cannot be underestimated.

The motivations behind the tariff hikes imposed by the US, Canada, and the EU on Chinese electric vehicles are fundamentally different.

Foreign media reports suggest that the US is simply trying to block Chinese electric vehicles from entering its market under the guise of "national security" and "political correctness." Meanwhile, Canada's imposition of high tariffs on Chinese electric vehicles is based on concerns about free trade, arguing that imports of Chinese electric vehicles harm Canadian key industries and may lead to job losses in the automotive and metalworking sectors.

In contrast, the EU aims to use tariff barriers to encourage Chinese automakers to invest, transfer technology, and share supply chains.

Taking Turkey, which has already adjusted its tariffs, as an example, the government's Official Gazette published a presidential decree in early July this year amending the decision on imposing additional tariffs on imported products. The decree stipulated that no additional taxes would be imposed on automobiles imported within the scope of investment incentives policies, which took immediate effect. According to the latest regulations, automakers investing in factories in Turkey will enjoy investment incentives and will only need to pay a 10% tariff instead of the previously stipulated 40% additional tariff.

Brazil follows a similar approach. After taking office, Brazil's current President Lula da Silva hopes to strengthen the country's automotive industry chain through a series of policy adjustments and encourage foreign automakers to increase localized investments. During his visit to China last year, Lula even personally met with Wang Chuanfu, Chairman of BYD, and promised corresponding investment incentives, ultimately leading to BYD's investment in a factory in Brazil. According to information, automakers investing in factories in Brazil can enjoy various preferential policies, including tax incentives, national treatment, and market openness.

India's intentions are even more apparent. The prerequisite for imported vehicles to enjoy a tariff reduction from 70% to 100% to 15% is that the relevant automakers of the imported vehicles must invest at least INR 41.5 billion (approximately RMB 3.5 billion) in India and begin producing electric vehicles in India within three years, with at least 25% of the components sourced from local Indian suppliers.

The reason why so many countries are striving to attract Chinese companies to set up local factories is primarily due to the strong competitiveness of Chinese automakers.

US automotive data research company Caresoft Global purchased and disassembled a BYD Dolphin, and was surprised by its USD 12,000 price tag. They believed that "with US manufacturing standards, the same vehicle would cost more than three times as much!"

Even Tesla CEO Elon Musk has repeatedly expressed his high praise for Chinese electric vehicles: "Chinese electric vehicles are excellent. If other countries did not set trade barriers, Chinese electric vehicles would almost destroy most automobile companies in the world.""In fact, to mitigate risks, many Chinese automakers have already taken precautions. BYD and NIO have established factories in Hungary, a member state of the EU, enabling their products to directly enter the European market. Several automakers, including BYD, Chery, and Great Wall Motor, are interested in setting up factories in Mexico. Under the US-Mexico-Canada Agreement (USMCA), automobiles produced in Mexico can be directly exported to the US and Canadian markets duty-free (subject to the condition that at least 75% of the components are produced in Mexico).

In addition, domestic automakers such as Dongfeng Motor, Changan Automobile, Great Wall Motor, and XPeng Motors are all planning to establish factories in Europe.

However, there are still certain difficulties in overseas factory construction for automakers.

Taking Europe as an example, first, labor costs in Europe are relatively high, especially in automotive production powerhouses such as Germany, France, and Italy, where wage levels are higher, leading to increased costs for local factory construction. Furthermore, these countries have strong domestic automakers and a fiercely competitive environment, posing a significant challenge for foreign automakers to compete and capture market share.

Second, the mature European market demands high automotive quality, requiring automakers entering the market to continuously improve their products to meet the discerning tastes of European consumers. Additionally, subsidy policies for new energy vehicles in the European market are gradually phasing out, necessitating automakers to seek new opportunities in the market.

It is important to emphasize, however, that Chinese automakers' decisions to establish factories are not solely driven by tariff policy pressures but rather based on strategic considerations according to their own circumstances.

Taking SAIC Motor as an example, the group internally proposed in 2019 to not only sell cars in the European market but also establish factories there at an appropriate time. However, due to the COVID-19 pandemic, the factory construction plan was temporarily suspended. In the second half of last year, SAIC repeatedly stated publicly that it was actively preparing to establish factories in Europe and discussing site selection. In July this year, according to Spanish media outlet Expansion, SAIC Motor was considering establishing its first production base in Europe in Spain and was in-depth discussions with the Spanish Ministry of Industry on related matters.

Overall, tariff hikes cannot hinder Chinese enterprises from "going global." "To reduce the risk of reliance on a single market, Chinese enterprises will actively explore emerging markets and developing countries through a diversified overseas market layout, achieving market diversification and globalization," said Jiang Han, a senior researcher at Pangu Institute.

Looking back at history, there are precedents for trade frictions faced by automobile exports.

Decades ago, Japanese automaker Toyota experienced similar events. Here, we focus on Toyota's experience in the US in the 1980s.

In February 1981, to protect its domestic automotive industry, the US required Japan to implement voluntary restraint measures, limiting the annual import volume of Japanese passenger vehicles to 1.68 million units for three years. Subsequently, influenced by the US, Canada and Europe also introduced import restrictions on Japanese passenger vehicles.

To avoid new trade frictions and break through quota policy restrictions, Toyota began exploring plans to establish local factories.

Toyota first chose to jointly establish a factory with Ford Motor Company in the US. However, negotiations quickly broke down due to competition between Toyota's target models for the production base and Ford's compact passenger vehicles. Subsequently, Toyota negotiated with General Motors and established a factory in California in 1984, with each company contributing 50% of the investment. In the early stages, key components such as engines and transmissions were imported from Japan, while local procurement of glass, interior trim, paint, etc., was conducted. Later, almost all components were produced locally in the US.

In July 1985, Toyota announced that it would establish its own factories in the United States and Canada, planning to produce about 200,000 passenger cars equipped with 2000cc-class engines in the United States and about 50,000 passenger cars equipped with 1600cc-class engines in Canada every year, with a target production date of 1988.

The direct result of this joint venture factory + independent factory layout is that nearly half of the Toyota vehicles sold in the United States throughout the 1990s were manufactured locally in the United States. The compact Corolla and Tercel models that are "customized" specifically for the American market have even defeated similar competitors such as Ford Pinto and Chevrolet Vega in sales.

Today, Toyota has 10 manufacturing plants in the United States and 2 plants in Canada. These layouts have helped Toyota successfully bypass the quota restrictions in the United States and Canada, and have also helped Toyota sell more cars to North America and even the world.

From Toyota's expansion story in the United States, Chinese automakers may gain some enlightenment.