In its 87-year historical past, Volkswagen has by no means closed a manufacturing unit in its German heartland. It’s now contemplating shutting three and slicing employees’ pay by 10 per cent.
The plans had been disclosed at an worker assembly by the pinnacle of VW’s highly effective works council and haven’t been confirmed by the corporate, which is because of report third-quarter outcomes on Wednesday.
However the world’s second-biggest automotive producer, which additionally owns Audi, Škoda and Seat, has already warned on earnings twice this yr and flagged the beforehand unthinkable step of closing factories in Germany.
It isn’t the one European carmaker considering deep and controversial retrenchment. Stellantis, proprietor of Opel, Fiat and Peugeot in Europe, is below intense strain from Italian politicians and unions to maintain its oldest Fiat manufacturing unit in Turin operating regardless of a droop in gross sales.
Meeting traces in France are already being shifted to lower-cost places comparable to Morocco and Turkey. Earlier this month, a number of hundred French employees, together with from suppliers like Bosch, protested outdoors the Paris Motor Present.
Europe’s automotive trade, which employs practically 14mn folks and accounts for 7 per cent of the EU’s GDP, is confronting an ideal storm. Demand for automobiles is falling at dwelling and overseas, whereas carmakers are navigating a dangerous and costly multiyear transition from combustion engines to electrical propulsion.
All these issues are being exacerbated by China — the place competitors for gross sales within the once-lucrative home market is ferocious, and whose high-quality, lower-cost EVs at the moment are being exported to Europe in larger numbers.
There are not any simple options. The EU has adopted the US in elevating tariffs on autos imported from China, however trade leaders comparable to Carlos Tavares, chief government of Stellantis, and BMW chief government Oliver Zipse, say protectionism will solely make automobiles dearer for customers and speed up plant closures in Europe.
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“We don’t need protection,” Zipse stated lately on the sidelines of the Paris Motor Present, including that European carmakers “shouldn’t be over-afraid” of Chinese language competitors.
Producers have urged governments to roll out charging infrastructure and introduce or reinstate monetary incentives for electrical autos — however this is not going to assist sluggish exports outdoors the continent.
Working with Chinese language carmakers, who’ve learnt how you can make high-quality EVs at decrease price, might present formidable present and future opponents with a ready-made distribution community in Europe, accelerating their growth.
Roberto Vavassori, who heads the Italian Affiliation of the Automotive Business, describes China as “the elephant in the room” and the issue that makes this downturn completely different from earlier ones. “For many suppliers in the automotive industry, [the Chinese] are both the biggest threat and biggest customer.”
Tavares has a easy query for Europe’s carmakers and politicians: “Do you want to race or not?” The result for individuals who select to not step up, he warns, is that “you disappear”.
The issues of European carmakers start at dwelling. Automobile gross sales in Europe haven’t recovered to pre-pandemic ranges and better rates of interest are hurting demand.
This strain comes at a time when producers are grappling with the inexperienced transition. Underneath present laws, it will likely be not possible to promote a petroleum or diesel automotive within the EU, and in different markets such because the UK, after 2035.
Electrical automobiles are nonetheless costly to supply in Europe, principally due to the excessive price of batteries, making them costly to purchase. Customers need cheaper EVs and extra charging stations, and lots of are holding off shopping for till they get them. Consequently, gross sales are slowing simply as harder EU emissions guidelines from subsequent yr mandate a sooner shift to cleaner autos.
Vavassori factors out that Europe’s carmakers can now not export their manner out of hassle both. Final yr, China changed Japan because the world’s largest exporter of recent automobiles as its personal producers regarded to diversify away from their overcrowded home market.
China is an issue for European carmakers in different methods. Chinese language producers comparable to BYD, Nio, MG-owner SAIC, Nice Wall and Chery are constructing extra superior electrical automobiles with prices 30 per cent decrease than these of European carmakers, in line with Tavares and others. On Chinese language showrooms, EVs are nearing worth parity with petrol automobiles.
The rise of homegrown manufacturers has sharply diminished the gross sales of European, US and Japanese carmakers in China, which lately has been the largest and most profitable marketplace for manufacturers comparable to Volkswagen, Mercedes-Benz and BMW.
International manufacturers’ market share of Chinese language auto gross sales is trending at a document low of 37 per cent within the first eight months of 2024, down from 64 per cent in 2020, in line with knowledge from Shanghai consultancy Automobility.
That has additionally put strain on the joint ventures that western carmakers fashioned with native companions once they first entered the Chinese language market. Two years in the past, Beijing permitted international firms to function independently; in September, Mercedes-Benz withdrew from a 13-year EV three way partnership with BYD. Volkswagen, one of many first to enter the Chinese language market, is contemplating closing a Nanjing manufacturing unit operated with its oldest three way partnership associate, SAIC.
If Chinese language carmakers decide to bypass EU import tariffs by opening manufacturing websites in Europe, as their Japanese friends did within the Eighties and Nineties, the overcapacity in European carmaking will worsen.
New arrivals are additionally extra seemingly to decide on low-cost places in japanese Europe to supply their autos, particularly nations comparable to Hungary with comparatively China-friendly governments. That may put extra strain on producers in high-cost international locations and undermine the effectiveness of tariffs for German and French carmakers.
As China’s advances in EVs, battery know-how and software program proceed to ripple by way of the worldwide trade, some European automotive firms are pursuing a unique technique for survival — changing into extra Chinese language.
“What did the Chinese do, what did the Japanese do and what did the Koreans do when they were behind on technology? They collaborated,” says Andy Palmer, a advisor who was beforehand chief government of luxurious marque Aston Martin.
“The European industry needs to get the Chinese to localise in Europe and it needs to collaborate with them, particularly around battery technology, in order to catch up,” he provides.
VW is already partnering with Chinese language start-up Xpeng to develop EVs at a sooner pace and decrease price. France’s Renault, which has largely minimize its publicity to the Chinese language market, has partnered with Volvo Vehicles proprietor Geely to construct extra superior combustion engine applied sciences.
After winding down its ventures in China, Stellantis is now playing on a brand new technique that breaks with that of its rivals: bringing a Chinese language model to Europe itself. Final yr it took a 20 per cent stake in Chinese language start-up Leapmotor for €1.5bn, giving it unique rights to construct and promote Leapmotor automobiles outdoors China by way of a three way partnership. Consequently, the model already sells by way of 200 sellers in 13 European markets.
Its T03 compact electrical automotive is among the least expensive choices within the UK, with a price ticket under £16,000. On the current Paris Motor Present, Leapmotor additionally unveiled its first world mannequin for an electrical compact sport utility car.
Entry to the huge distribution and aftersales community of Stellantis will permit Leapmotor to develop sooner outdoors China. The T03 is produced in China and at a Stellantis plant in Poland that used to construct the Fiat 500, so the corporate can keep away from the EU’s tariffs.
“We have the agility, the flexibility and capacity to localise the models outside of China if we want as business needs grow,” stated Tianshu Xin, who heads the three way partnership between Leapmotor and Stellantis. “There is a lot of opportunity to be further explored.”
For Stellantis, the bizarre tie-up provides it a much-needed inexpensive addition to its personal EV providing, permitting it to higher compete with different Chinese language imports. If Leapmotor gross sales develop in Europe, Stellantis might utilise extra spare capability at its personal factories and keep away from politically controversial closures.
“The Chinese carmakers will have 10 per cent of the European market in a few years,” Tavares says. “So if the Chinese sell 1.5mn cars, it means the equivalent of seven plants.”
China’s management in electrical propulsion isn’t just a matter of price. One other main hole that’s rising is in know-how.
Christoph Weber, who leads the China enterprise for Swiss engineering software program group AutoForm and is predicated in Shanghai, says conventional European and US carmakers want to seriously change the best way they work if they’re to match the pace at which their Chinese language rivals are embracing new applied sciences and designs.
He factors out that William Li, the founder and chief government of Nio, and Joe Xia, the chief government of Geely-Baidu joint-venture Jidu Auto, each attend weekly design conferences and make choices “on the spot”. The outcome, Weber says, is that Chinese language firms are creating new automobiles in round one yr, in comparison with the four-year timeframes typical of extra bureaucratic European teams.
The entry of telecoms and tech giants Xiaomi and Huawei into the auto sector presents a brand new menace to international teams, Weber provides. “When consumers see what Xiaomi and Huawei are offering, they are very quick to expect that of everyone, and it puts everyone else under even more time pressure,” he says.
Huawei has been attempting to find new development drivers after the Shenzhen-based group was shut out of many telecoms markets over safety fears (which it says are unfounded). It’s co-developing autos with Seres, Chery, BAIC, JAC and Changan, and manufacturing parts for a lot of different teams.
It’s an strategy that highlights how Chinese language tech manufacturers with no prior auto trade presence are quickly gaining a foothold within the trade.
Tang Jin, a senior analysis officer at Mizuho Financial institution in Tokyo, says carmakers comparable to Toyota are already shifting to deal with the menace by actively partnering with Huawei in China. “Due to political issues, there are certain areas where Chinese cars cannot enter. So by partnering with Huawei in China, companies can absorb the technology knowhow and use them in other parts of the world such as the US,” he provides — a reversal of what occurred when western carmakers entered China.
The subsequent huge battleground in automotive know-how is more likely to be automation and self-driving know-how, an space the place even Elon Musk’s Tesla could wrestle to compete in opposition to BYD, Huawei and different Chinese language rivals.
Invoice Russo, the previous head of Chrysler in China and founding father of consulting agency Automobility, believes the nation is coming into a brand new interval of auto trade disruption, with the motion of individuals and items more and more automated as carmakers and others leverage its enormous digital financial system.
However even when China’s product-centric automotive trade can change into a service-orientated “mobility” sector, it’s unsure whether or not such know-how is exportable to some western international locations. Client behaviour in Europe is completely different and there can be regulatory obstacles round knowledge switch, privateness and insurance coverage.
“The portability of these solutions outside of China is going to be much more challenging to the Chinese companies, because the ecosystems for autonomy are built locally,” Russo says. “But that doesn’t take away from the accumulated experience of learning and training the algorithms and building the solution sets, which will commercialise much faster in China.”
Brian Gu, co-president of Xpeng, says he desires to introduce the most recent applied sciences developed in China to worldwide markets, arguing that they’ll warrant premium pricing of its autos once they arrive in Europe.
“The world should enjoy the best technology that has been developed,” Gu says, whereas acknowledging the problem of assembly European requirements. “We’re not going to overthrow anybody who’s developed over 100 years. We can help them.”
Renault’s chief government Luca De Meo admits the European automotive trade and its suppliers “need some help” from the Chinese language, particularly within the essential battery provide chain.
“The centre of gravity of the automotive system has drifted towards China,” he says. “It doesn’t mean that the Chinese are going to wipe us out. We can fight. We are going to compete.”
Others aren’t so certain. In a 400-page report issued final month, former European Central Financial institution president Mario Draghi known as for a “new industrial strategy for Europe”, urging the EU to lift investments by €800bn a yr to spice up its competitiveness in order that the bloc doesn’t fall behind the US and China.
BMW’s Zipse has additionally demanded a extra coherent industrial framework. “The basis of our success and prosperity are under increasing pressure,” he says. “What is happening to us here?”
Many automobile executives are nonetheless hopeful that it’s going to not be so easy for Chinese language carmakers to duplicate their home success in Europe. Customers are typically older — the common age of a brand new automotive purchaser is over 50 in Europe in comparison with mid-thirties in China — and have constructed up real loyalty to explicit manufacturers. As so many new gamers enter the market, a interval of consolidation could nicely comply with the preliminary aggressive growth.
“The biggest hurdles for Chinese carmakers are not the products themselves, but the distribution network and brand recognition,” stated José Asumendi, JPMorgan’s head of European automotive analysis.
Matthias Schmidt, an unbiased analyst, estimates that the share of Chinese language carmakers in west European markets is unlikely to surpass 12 per cent because of the introduction of import tariffs and the rollout of recent European EV choices. Chinese language producers had an 8.3 per cent share in August.
However Palmer, who was additionally beforehand chief working officer at Nissan, warns in opposition to complacency and wishful pondering. He says carmakers comparable to Nissan, Renault and BMW had been pioneers in EV know-how however didn’t comply with by way of on their early management resulting from poor strategic planning.
“It’s not that the European industry has been beaten by the Chinese,” he says. “It’s that the European industry has lost because of itself.”
Further reporting by Gloria Li in Hong Kong and Amy Kazmin in Turin
