German carmakers in the line of fire of possible EU-China trade war

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Prior to last week’s announcement of an anti-subsidy probe into Chinese electric vehicles from Brussels, German car industry executives had been hearing that a move was afoot.

“We knew something was coming, but not that it would be announced in such a political way,” said one industry insider. The EU’s move was placing German carmakers, which command a fifth of the Chinese market, in a precarious position, the person added.

There is now widespread concern in Germany that Beijing, which has become embroiled in a tit-for-tat trade war with the US, might unleash its own punitive measures against European carmakers.

The move by Brussels comes as investors already question the German carmakers’ reliance on China.

BMW and Mercedes-Benz have both had great success in China with their premium brands, loved by wealthier Chinese customers, as has Volkswagen, which sells more cars in the world’s biggest car market than any other company. A third of BMW’s car sales last year were in China, while the equivalent figure at Mercedes-Benz was 37 per cent and nearly 40 per cent at Volkswagen.

For German carmakers, the main worry is a retaliatory increase in tariffs on European cars imported into China. The companies also have large local manufacturing operations, which could provide Beijing with another front to turn the screws.

Gregor Sebastian, an analyst at Mercator Institute for China Studies, said Germany’s top-end brands were the most likely to suffer from any new Chinese import tariffs, as most cheaper cars are already produced in China. “A lot of the foreign automotive production or foreign automotive industry in China is actually heavily localised, but the exception is really the top premium segments,” he said.

The German company most exposed to higher Chinese import tariffs would be Mercedes-Benz, according to Stifel analyst Daniel Schwarz, who noted that the company imports roughly 20 per cent of its cars sold in China, compared with a figure closer to 10 per cent for VW and BMW.

However, German carmakers with large local operations are also feeling uneasy.

The rising tensions between Brussels and Beijing come as VW fights to remain relevant in the country whose automotive industry it helped to build up in the late 1970s. Its flagship VW car was recently dethroned by BYD as the best-selling brand in China. New electric models by Audi and Porsche — the group’s main profit makers — have also been delayed by troubles at VW’s software arm Cariad.

Despite calls from Berlin that its car industry reduce its reliance on China, VW has announced investments in the country worth nearly €5bn in the past year. In 2022 it moved Ralf Brandstätter, its board member responsible for China, to Beijing to work in “close collaboration” with its three main joint venture partners.

With France among the vocal proponents for action against Chinese carmakers in Europe, there is brewing resentment within German car companies’ board rooms that the planned EU probe is a win for Paris.

“The Germans will be far worse off from this than the French,” said one executive at a German automotive supplier. “[Ursula] von der Leyen clearly listened more to [Emmanuel] Macron than [Olaf] Scholz on this one,” the person added, referring to the president of the European Commission, the president of France and the chancellor of Germany.

Both Carlos Tavares, the boss of Peugeot owner Stellantis, and Renault’s chief executive Luca de Meo have warned that European manufacturers face a tough challenge as Chinese rivals show up on their turf with cheaper models, forcing them either to seek more cost cutting or improve their own supply chains.

The two companies have had a rougher ride in China than their German rivals. Renault ended some of its joint ventures in China in 2020, and halted sales of its main passenger vehicle in the country.

The French government has more actively sought measures against Chinese carmakers and is planning to introduce a decree that will effectively disqualify Chinese-made vehicles from its electric car subsidies.

Berlin-based analyst Matthias Schmidt said that given German carmakers’ exposure to China compared with their French rivals, “the French can say what others are thinking, but the Germans have to keep their mouths shut”.

One potential risk faced by European carmakers could be a decision by Beijing to restrict access in the supply chains of important battery raw materials such as lithium. The Chinese government has built large stakes in battery material processors and battery producers since its decision to invest heavily in building a domestic EV industry more than a decade ago.

However, executives and analysts are cautious about prejudging Beijing’s reaction at this stage. “We must not forget that China needs Europe just as much as Europe needs China, because both economies are so interlinked,” Schmidt said.

One German car industry insider hangs his hope on Chinese comments made in a meeting between a group of Germany’s most senior business leaders and China’s premier Li Qiang in June. Li’s message had been that German business presence was still very much needed in the country. “Their message was: ‘please don’t stop investing in China — our economy is struggling a bit’.”

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