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Electrical storms are characterized by intense thunder and lightning. Similarly, the ongoing dispute between the EU and China regarding China’s exports of affordable electric vehicles is heating up. The EU is threatening to impose import tariffs if Chinese EVs violate trade rules, and China is responding with retaliatory actions. This escalating tension reflects the challenging position European car manufacturers are finding themselves in.
Europe’s established car companies have a rich history of producing internal combustion engines, and their substantial investments in branding have supported these traditional products.
However, internal combustion engines are on the decline as electric vehicles become significantly cheaper to operate compared to their fossil fuel counterparts. Additionally, the purchase price of EVs has dropped, making them more appealing to consumers. Global EV sales are expected to rise from 10 million in 2022 to about 14 million in 2023, accounting for 18% of all cars sold.
These factors contribute to the lower valuations of legacy carmakers. For instance, Volkswagen’s valuation is at 3.5 times this year’s forward earnings, while Stellantis and Renault trade even lower at around 3 times.
Furthermore, consumers are increasingly prioritizing the software capabilities in car cockpits alongside the hardware. Chinese carmakers have excelled in integrating these features, surpassing industry leader Volkswagen in China’s auto market.
The shift to EVs, where legacy branding is less influential, reduces barriers to entry into the European market. Currently, Chinese imports account for about 15% of EVs sold in Europe, with companies like BYD making significant inroads in the mass market segment, which presents a $130 billion revenue opportunity by 2030.
Given these circumstances, EU policymakers are eager to safeguard their domestic industries, especially if Chinese carmakers are benefiting from market-distorting subsidies. However, implementing tariffs would not guarantee a simple victory, as it could potentially trigger a trade war. German automaker Volkswagen, heavily reliant on Chinese operations for over half of its net income, would be particularly vulnerable, according to Daniel Roeska from Bernstein. BMW’s exposure is also significant, with Chinese operations accounting for over 30% of its net income.
Investors are well aware of the challenges faced by legacy carmakers. The consistently undervalued stock prices, despite improved operating margins in 2021-2022, underscore this reality.
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