The European Union's recent decision to impose tariffs on electric cars imported from China is the start of a new trade war that could be regretted in the long term. According to a 200-page document from the European Commission, there is substantial evidence to suggest that the Chinese government is actively subsidising its battery electric vehicle (BEV) industry to accelerate its global expansion.

Europe has concluded that this practice is unfair and has a direct negative impact on the local industry. Access to subsidised loans and many other financial solutions promoted by the Chinese government has enabled companies such as BYD, SAIC (MG) and Geely Group (owner of Volvo, Polestar and Lotus) to offer very competitive prices for their electric cars.

In the official document, the EU claims that imports, sales and registrations of Chinese BEVs are increasing rapidly, to the detriment of the smaller market share of European operators. Essentially, the EU attributes the slow growth in sales of BEVs manufactured in Europe to these subsidies. However, there are two aspects not mentioned in the document that, in my view, need to be addressed.

Europe's lack of competitiveness

The unfairly low prices of Chinese BEVs may have an impact on the European car industry, but they also clearly show that Europe is not yet competitive. Tariffs are a short-term solution that will, of course, give local suppliers more time to come up with more competitive BEVs. However, they do not solve the real problem which is their lack of competitiveness.

Average retail price difference between a Chinese and a European electric cars in Germany
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Average retail price difference between a Chinese and a European electric cars in Germany

High labour costs, lack of access to raw materials for battery construction and increasing regulation and bureaucracy make it almost impossible to offer truly affordable battery-powered vehicles. Indeed, a large proportion of BEV sales in Europe are driven by incentives, not because these cars are more attractive than internal combustion engine cars.

For example, the cheapest electric car available today in Germany is the Dacia Spring 27 kWh Essential with 45 PS and a range of 140 miles. The retail price without incentives is €16,900, but if consumers are looking for the cheapest internal combustion engine car, they can buy the larger Dacia Sandero 1.0 SCE 65 Essential with 67 PS petrol engine for €11,500, without worrying about range or charging points.

The cheapest model/version/equipment in Germany to date. Retail price without incentives/discounts. Excludes Chinese models
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The cheapest model/version/equipment in Germany to date. Retail price without incentives/discounts. Excludes Chinese models

If you want something bigger, you can buy a 50 kWh electric Opel-Vauxhall Corsa with 136 PS for €34,650 before incentives. For the same price, you can have the petrol B-SUV Peugeot 2008 GT 1.2 with 131 PS*. It's important to remember that many customers need other reasons to buy an electric car, in addition to the benefits of not paying for petrol.

More benefits than ever

The other reason is closely related to the first. Until now, all the traditional car manufacturers have concentrated on producing fewer cars but selling them at higher prices. They learned this during the pandemic and the supply chain crisis between 2020 and 2022, and since then it has become like a drug for them.

With higher prices and longer waiting times to get a new car, carmakers in Europe and the US have been transparently increasing their profits... until the arrival of Chinese competitors.

Unfortunately for the consumer, the incumbent manufacturers have used their dominant position to keep prices high, to the detriment of a growing number of people who cannot afford to buy a new car. For example, the Volkswagen Group's operating margin has risen from 6.7% in 2019 to 7.0% in 2023, while between these years unit deliveries to customers have fallen by 16%. Despite the fall in volumes, the company's sales have increased by 28%, reflecting a sharp rise in car prices.

This was more or less the case for all European and American car manufacturers. The formula was good for them (not for consumers), but it only affected their own markets. However, once China started exporting its cars at competitive prices (its strategy so far is based not on profits but on volumes), these products became the only choice for many new car buyers around the world.

Another interesting example is the large price difference between a Chinese-made car sold in China and in Europe. Why does the same vehicle with very similar technical specifications and weight, produced in the same plant, have such different prices depending on the market in which it is sold?

Import tariffs could explain some of the difference, but not everything. The BMW iX3, produced in China with an 80 kWh battery and 210 kW (286 PS) power, costs €51,500 in China at today's exchange rate. The same vehicle in France is priced at €74,200.

Retail price comparison May 2024
Motor1 Italy

Retail price comparison May 2024

The problem is that instead of addressing this price increase by traditional car manufacturers, regulators are targeting the upcoming competition by moderating prices. The local industry must surely be protected. But the way to do this must not be to increase the price of the few competitive products available, but rather to simplify regulation, reduce bureaucracy and improve the conditions for investment in Europe.

*All pricing information is from JATO Dynamics

The author of this article, Felipe Munoz, is Automotive Industry Specialist of JATO Dynamics.