Escalating trade tensions in the electric vehicle (EV) sector are set to create new hurdles for Chinese carmakers. Fitch Ratings anticipates these manufacturers will respond by boosting investment in alternative markets and diversifying production to sustain growth and profitability in a shifting global environment. Increased capital expenditure and equity investments in partnerships are expected to strain cash flows.

The growing headwinds for EV exports could also intensify domestic competition, accelerating the shift towards EVs within China. This would further erode the market share of internal combustion engine vehicles (ICEVs) and hurt profitability for some Fitch-rated Chinese carmakers and their global joint venture (JV) partners.

On 12 June, the European Commission pre-disclosed provisional countervailing duties on battery electric vehicles (BEVs) imported from China, effective 4 July. This decision follows an anti-subsidy investigation initiated in October 2023.

Definitive measures may be implemented within four months and could remain in place for five years. Three Chinese automakers — BYD, Geely, and SAIC — would face countervailing duties of 17.4%, 20%, and 38.1%, respectively, in addition to the ordinary 10%. Other BEV producers might incur duties of 21% or 38.1%, depending on their cooperation with the investigation. Tesla may receive an individually calculated rate at the definitive stage.

These high tariffs threaten to undermine Chinese carmakers’ growth in the EU by increasing pricing pressure and reducing competitiveness. SAIC, Geely, and BYD accounted for most Chinese-branded BEVs exported to the EU, representing 7.9% of the EU BEV market in 2023.

The total market share of China-made BEVs, including those from global brands like Tesla, Dacia, and BMW, reached 19.5% last year, according to the European Federation for Transport and Environment.

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Fitch suggests that carmakers with diversified export destinations are better positioned to withstand escalating trade barriers. For example, BYD’s top export markets include Brazil, Thailand, Israel, Australia, and Malaysia.

Additionally, automakers are likely to diversify production facilities globally, investing in markets with lower trade barriers and forming JVs with local partners to navigate regulatory uncertainties. This strategic shift could increase capex or equity investments in JVs, adding to cash outflows.

The European Commission’s decision mirrors the US government’s proposed tariff hikes under Section 301, announced in May 2024, which could increase tariffs on Chinese EVs to 100% and affect key EV supply chain inputs.

However, the direct impact of US tariffs is currently limited, as Geely’s Polestar is the only Chinese OEM exporting EVs directly to the US. Most Chinese companies have limited their direct exposure to the US market due to rising geopolitical tensions.

Despite these challenges, Chinese car exports have continued to grow, with a 34.7% rise in the number of cars exported in the first four months of 2024 compared to the previous year. Traditional ICEVs still constitute over 70% of exports, with Russia being the largest market.

The surge in plug-in hybrid vehicle exports this year could help mitigate pressure on BEV exports as trade barriers increase. Fitch also anticipates a shift towards emerging markets, with an increasing portion of sales in these markets being served by local production plants.

As trade barriers rise, the strategic responses of Chinese carmakers will be crucial in maintaining their foothold in the global EV market and navigating the complex landscape of international trade.

EU slaps import duties on Chinese EVs amid growing competition concerns