July 14, 2024

Chinese Electric Vehicle Manufacturers Prepare for Increased Trade Barriers

Amid escalating trade tensions in the electric vehicle (EV) sector, Chinese carmakers face new challenges. Fitch Ratings predicts that these manufacturers will need to increase investment in alternative markets and diversify production to maintain growth and profitability in a changing global landscape. This shift towards alternative markets and increased investment may strain cash flows.

The mounting obstacles for EV exports could also intensify domestic competition in China, accelerating the transition to EVs and impacting the market share of internal combustion engine vehicles (ICEVs). This situation could potentially affect the profitability of Fitch-rated Chinese carmakers and their global joint venture (JV) partners.

Recently, the European Commission announced provisional countervailing duties on battery electric vehicles (BEVs) imported from China, set to take effect on 4 July. This decision follows an anti-subsidy investigation that began in October 2023.

These tariffs could significantly impact Chinese automakers such as BYD, Geely, and SAIC, with duties ranging from 17.4% to 38.1%, in addition to the ordinary 10%. Tesla may receive a separate rate once definitive measures are in place.

These high tariffs pose a threat to Chinese carmakers’ growth in the EU by increasing pricing pressure and reducing competitiveness. Companies like SAIC, Geely, and BYD were major players in the EU BEV market in 2023.

Fitch suggests that carmakers with diversified export destinations are better equipped to handle escalating trade barriers. For example, BYD exports to Brazil, Thailand, Israel, Australia, and Malaysia.

In response to trade barriers, automakers are likely to globalize production facilities and form JVs with local partners in markets with lower trade barriers. However, this strategic shift may lead to increased capital expenditure and equity investments.

Similar to the EU’s decision, the US government’s proposed tariff hikes could impact Chinese EVs, though the direct impact is currently limited due to limited direct exposure of Chinese companies in the US market.

Despite these challenges, Chinese car exports have continued to grow, with a significant increase in the number of cars exported in the first four months of 2024. However, traditional ICEVs still dominate exports, with Russia being the largest market.

The rise in plug-in hybrid vehicle exports could help offset the pressure on BEV exports as trade barriers increase. Fitch also predicts a shift towards emerging markets, with more sales being fulfilled by local production plants.

As trade barriers heighten, the strategic decisions made by Chinese carmakers will be critical in maintaining their position in the global EV market and navigating the complex landscape of international trade.

EU slaps import duties on Chinese EVs amid growing competition concerns

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