Revving their engines

China benefits from being the largest and, arguably, most competitive auto market in the world. With exports of more than 5 million vehicles in 2023, it has surpassed Japan to become the top exporting country. We think Chinese automakers are poised to replicate the decades-long global sales success of Japanese and Korean manufacturers.

Europe, steeped in the storied automotive histories of Ferrari, Jaguar, BMW and Mercedes, is an emerging battleground for global car sales because of its significantly lower import tariffs (10%) compared to the U.S. (27.5%). Will that advantage last? The European Commission launched a probe last fall into whether Chinese electric vehicle (EV) makers received subsides that could shift the structure and level of tariffs on all Chinese autos. Europeans want to protect their market, but also don’t want to subject European automakers to reciprocal attacks in China.

Today, exports from China to Europe have a price advantage of about $3,000 to $5,000 per car, net of tariffs. The most popular Chinese car in Europe is SAIC’s MG4 (an old U.K. brand that moved to China in 2016), an EV with a significant cost advantage over locally produced autos. Last summer, SAIC announced plans to build a factory in Europe, and China’s BYD also intends to open one. Developments like these could force traditional companies to drive costs lower. For example, Renault has targeted a 40% cost reduction in their battery electric vehicles (BEV) to make them cost competitive versus Chinese brands in the value segment.

Accustomed to domestic consumers’ continual demand for advanced technologies, Chinese automakers are making global inroads through technology—specifically EVs and connectivity. As the BEV segment expands, established automakers could lose as much as 15-20% of the global market share, with U.S.-based Tesla and BYD presumably being the biggest winners. The shift to EVs likely will cause traditional automakers to rationalize product lines and exit unprofitable segments of the market. Some may not survive the paradigm shift.

But politics might make navigating the road to broader global distribution more difficult for Chinese automakers. Politicians might choose protectionism over free markets, leaving car buyers with regional champions. We believe such an approach would most negatively effect well-known global brands with big exposure to China, such as Volkswagen, Mercedes and BMW, and benefit those with limited exposure to the Chinese market, such as Stellantis and Renault.

As the race for distribution grinds into the next gear, the shift to EVs could provide Chinese automakers—which already compete on price and product quality—the opportunity to expand sales beyond the confines of China’s longitude and latitude.