Recently, the European Union (EU) and India officially inked a bilateral free trade agreement, with the automotive tariff clauses garnering substantial attention from the industry. According to the agreement, India's tariffs on EU auto imports will see a gradual reduction from the current maximum of 110%, with projections indicating a drop to approximately 10% in the future. This adjustment heralds a further opening of India's auto market, long shielded by high tariffs, to Europe, potentially prompting strategic realignments among major global automakers.

▍A Strategic Pact of Mutual Gain

India's auto market has traditionally been "heavily fortified," employing high tariffs as a barrier to keep most international auto giants at arm's length while successfully fostering a domestic industry ecosystem led by Tata, Mahindra, and others. Despite their storied history, European brands have found it challenging to penetrate the market on a large scale due to these prohibitive tariffs. Data reveals that European brands command less than 4% of India's auto market share. India's decision to "open its doors" this time is aimed at luring Europe's cutting-edge manufacturing technologies, direct investment, and management acumen to fuel upgrades in its auto industry. Amidst geopolitical and economic upheavals, it also seeks to fortify ties with Europe and diversify its trade alliances.

For the EU and its auto sector, this agreement is a "welcome relief." Faced with sluggish growth in domestic markets and competitive pressure from Chinese brands' electrification push, the Indian market—boasting annual sales exceeding four million units and sustained growth—has emerged as a pivotal expansion target for European automakers. Lower tariff barriers present a golden opportunity for Volkswagen, BMW, Mercedes-Benz, Stellantis, and others to introduce their products, particularly high-margin luxury models, into India at more competitive prices, offering unprecedented prospects for discovering new growth avenues.

▍A Nuanced Chess Match Amidst Opportunities

While tariff reductions create market space for European automakers, India's market uniqueness presents hurdles. Not only is it the world's third-largest auto market, but it is also dominated by economy cars, with price-conscious consumers and deeply entrenched local brands. Whether European brands' strengths in mid-to-high-end models can swiftly gain market acceptance remains uncertain.

More crucially, the agreement exempts electric vehicles (EVs) from tariff reductions, signaling an intent to safeguard domestic new energy supply chains. This implies that European automakers seeking to make inroads into India's EV market must still commit to large-scale local production investments rather than relying solely on exports.

For Indian domestic automakers, the short-term impacts are mitigated by import quota restrictions and the primary impact (shock) being confined to high-end markets. However, competitive pressures will systematically escalate in the long run. Indian manufacturers like Tata and Mahindra, currently striving for brand elevation, will face direct head-to-head competition from European luxury brands lowering their price thresholds.

Meanwhile, the entry of European brands may spur overall market enhancements in quality, safety, and technical standards, compelling local firms to expedite product upgrades and technological innovations—or risk the marginalization of their brand value. This rivalry could spawn new industrial alliances, with some Indian automakers potentially seeking deeper collaborations with technology leaders to secure critical competitive edges.

These shifts will also disrupt other international automakers' strategies in India. Established Japanese (Toyota, Honda) and Korean (Hyundai) brands, which have already achieved success, will confront direct challenges from European automakers in their traditional high-end market strongholds. A "scramble" for mid-to-high-end Indian consumers involving products, brands, and services is poised to intensify, with India's auto market competitive landscape expected to become even more intricate.

▍Ramifications for Chinese Automakers

The signing of the EU-India Free Trade Agreement underscores the global trade system's pivot towards regionalization and alliance-building. For Chinese auto firms, this entails navigating a more convoluted trade and policy landscape abroad. The tariff advantages accrued by European automakers in India may amplify the challenges for Chinese brands seeking market entry. Chinese automakers in India will confront cost barriers from local giants, first-mover advantages from Japanese and Korean brands, and now a "fortified" European contingent—a triple squeeze.

Facing these transformations, Chinese auto firms must exhibit heightened strategic acumen and adaptability. Persist with differentiated breakthroughs. China's existing strengths in electrification and intelligence remain pivotal to unlocking opportunities. India's EV tariff barriers persist, creating a window for Chinese automakers to capitalize on mature battery-electric vehicle (BEV) technologies and supply chain cost advantages through localized production or technical cooperation models.

Deepen local integration and role transformation. Simple finished vehicle exports may encounter more hurdles under the new trade dynamics. Chinese automakers and parts giants should accelerate their transition from "exporters" to "local value creators." Consider establishing R&D and manufacturing centers in India or nearby regions to cater not just to local markets but also to wider areas, embedding themselves into new regional supply chain systems.

Flexibly deploy global market strategies. European automakers diverting more resources to India may somewhat divert their attention from defending their home markets. This could present opportunities for Chinese EV firms to expedite their penetration in Europe.

The EU-India Free Trade Agreement signifies not just an upgrade in bilateral economic ties but also a microcosm of the global auto industry's realignment. Against the backdrop of rising regional trade agreement influence, automakers need a heightened global vision and localized depth, comprehensively considering trade policies, supply chain layouts, and product strategies to adapt to the emerging competitive milieu.

Layout | Zheng Li

Source | CNBC, Economic Times

Image Source | Qianku Network