China's electric vehicles are rising in Europe, relying on production capacity rather than price wars.

**" China storm is looming over the European electric car industry." On Saturday, July 8, Renault Chairman Jean-Dominique Senard expressed such emotion in an interview with Reuters. The head of the Renault Group said:> When I talk about the'China Storm', I mean It is the tremendous pressure brought by the export of Chinese electric vehicles to Europe today **.>> China's current electric vehicle industry and raw material supply chain are the result of years of investment, and it will cost Europe billions of euros to reach this level. As Renault's chairman said, Chinese electric cars are on the rise in Europe. Just halfway through 2023, Chinese electric vehicles have twice shaken the European automotive industry. First of all, at the Shanghai Auto Show, China's electric cars shocked Western competitors with quality, functionality and price, the Wall Street Journal said. What's more, China overtook Japan as the world's largest auto exporter in the first quarter of 2023. The European market is becoming the first "roll" for the respect of Chinese car companies "occupied" the high ground, 2022 the EU is not only China's most important car export destination, but also 2022 China's car export growth in one of the fastest region * *. According to data released by the General Administration of Customs, EU imports of Chinese cars in 2022 amounted to US $13.3 billion, up 100 percent year on year * *. **According to S & P Global data, by the end of this year, one-fifth of European cars imported may come from China, compared with less than 1% five years ago. * *! Image Within five years, Europe has become an important destination for China's new energy vehicles to "go out to sea". Behind the explosive growth of export data are Chinese car companies that are accelerating "going out. **What does China's new energy car companies rely on to continue to occupy the European market? Not by price war, by production capacity. HSBC Bank pointed out in its latest report in July that the current Chinese automakers do not take advantage of cost and price, but rely on production capacity-constantly updating automotive products, expanding product lines, and ensuring quality. China's overseas car brands can "compete" with European car companies in terms of mileage, performance and warranty ". ## Path 1: Chinese production + European/American brands The Financial Times analyzed in an article earlier this year that European car companies are not ready for the transformation and are tired of working on fuel vehicles to support the electrification transformation, which is a great opportunity for Chinese car companies * *. In order to enter the European market, some Chinese manufacturers have chosen the path of acquiring European brands, such as SAIC's MG, GEELY AUTO's Volvo and Polestar, and some Tesla, which is made in China. HSBC believes that path 1: acquiring a local European brand and exporting Chinese cars with this brand overcomes the problem that Chinese brands need to regain their popularity in the European market:> GEELY AUTO's acquisition of Volvo and SAIC's acquisition of MG are the most prominent examples of the achievements of this strategy. Both automakers have achieved considerable success in terms of volume growth and market share.>> ! It is worth noting that Tesla's super factory in China has become an important factory for transporting Tesla cars to Europe:> Tesla's most popular Tesla basic version in Europe comes from the production and export of China's Shanghai super factory. Therefore, the market has issued a burst of "China car threat theory" view: more and more electric vehicles are produced in China, **which will pose a threat to European car production. **** But HSBC believes that only one-fifth of the cars imported from Europe are Chinese brands, accounting for a limited share of the European market :> According to KBA's latest annual data, only about 55% of the electric cars sold in Germany are sold in Europe.>> ! > > About 45% of cars are produced outside Germany, of which Tesla and Volkswagen account for more than half of this number (note: this number will be lower, because Tesla and ID.4 are now partially produced in Europe), of which Chinese brands account for only 1/5 of this number.>> ! HSBC pointed out that this data means that although the number of electric vehicles imported from China is increasing, the share of Chinese domestic brands in the European market has not increased significantly. This also means that the influence of * * Chinese local brands in the European market is still limited. ## Path 2: Chinese Brands Enter Europe As Qin Lihong, co-founder and president of NIO-SW, said in an interview," It takes more patience to run brands in Europe." In 2022, most of China's electric vehicles exported to the EU are American and European cars produced in China, while only 40% of China's local brands. HSBC believes that more local Chinese brands are actively participating in this war, and this may be the slowest and most difficult way to enter the market: **> The biggest problem is to solve the reputation of Chinese brands overseas. Pricing may be a good way to attract customers, but it is not enough to change the negative perception of most European consumers on Chinese cars in a short time. In addition to the obvious brand awareness and customer trust, Chinese car companies have many thresholds to cross to Europe. One of the most critical "culture shocks" is: **European customers will trust dealers more than car companies, often with three generations of" family "dealers operating continuously. * * * *! **Some analysts pointed out that if Chinese new energy car companies enter Europe with the dealer model, although the burden is heavier, it will help open up the situation in an unfamiliar market while taking into account brand building. HSBC pointed out that the cooperation between Chinese local brands and European dealers/agents can help Chinese car companies seek development in Europe:> not only from the perspective of distribution, but also from the perspective of brand positioning. Perhaps the direct model allows the brand to reach consumers directly (such as Tesla), but working with some of Europe's largest car dealers can make it easier to reach potential customers. Through these familiar and well-known dealer retail stores, you can use the dealer's good reputation to help the brand.>> ! ! In Europe, only Tesla's direct operation model has succeeded after ten years of continuous investment. * * Chinese enterprises in Europe to adopt a direct model, but also depends on whether there is such a long investment determination and resource platform to support. ## What are the competitive advantages of Chinese brands? Chinese EV makers are likely to pose a threat to European automakers from a cost and EV price perspective alone, HSBC said. **Why do Europeans choose to buy Chinese branded electric cars? HSBC believes that the most obvious and immediate reason is price:> The market share of local Chinese brands in China and Europe can be seen in the fact that it is price that now dominates European consumers in buying Chinese branded cars. According to JATO Dynamics research, since 2015, the average selling price of electric vehicles in Europe has risen from $51000 to $59000, the price of electric vehicles in the United States has risen from $53000 to $64000, while the price of electric vehicles in China has fallen from $70000 to $33000 * *. HSBC pointed out that in Europe, the current price of electric vehicles of Chinese brands is lower than that of fuel vehicles. The control cost of Chinese original equipment manufacturers (OEMs) and the bargaining power in the electric vehicle market are beyond doubt:> We admit that, on the one hand, the reason is that the Chinese electric vehicle (BEV) market is mainly biased towards entry-level products, while the US and European markets pay more attention to high-level hybrid models, but there is no doubt that China's OEM manufacturers have bargaining power, and this is inseparable from the cost advantage. HSBC pointed out that although car manufacturers have the ability to carry out "price wars" in Europe, * * but China's major car brands do not take advantage of price in Europe, but rely on production capacity-constantly update car products, expand product lines *:> Looking at all major car market segments in Europe, we have noticed that there are already many Chinese brands: such as SAIC MG, Great Wall Euler, BYD and NIO-SW, etc., although the penetration rate is still low, but sales are growing and the product line is gradually expanding.>> SAIC's sales volume has been growing steadily (78% CAGR 2019-2023) and has "rescued" MG; now with Great Wall Motor and BYD entering the European market, IHS predicts that China's electric vehicle sales will continue to grow steadily in the next few years (11% CAGR 2023-2030). It is worth noting that HSBC pointed out that in terms of car quality, Chinese car brands going out to sea can" compete "with European car companies in terms of mileage, performance and warranty:> It is clear that Chinese car companies have not lowered the prices of existing European OEMs. In our opinion, this is reasonable, not only because of the impact of the future residual value of the car, but also because the characteristic of" cheap "is not necessarily a good starting point for building a brand image.>> ! ## China's high update frequency of electric vehicles is "rolled out". HSBC believes that from a longer-term perspective, China's local electric vehicle brands have not yet found their own uniqueness or sustainable differentiation characteristics, * * but the short development and life cycle of China's electric vehicles can enable new technologies to be adopted faster, and the current update speed of China's automobile products is very fast * *. More importantly, when we compare Chinese electric car manufacturers with existing EU car manufacturers, it is not necessarily an "apple to apple" comparison. HSBC says they usually compare the latest models of a group of car manufacturers with models of other car manufacturers at different times in their life cycle. Chinese car renewal cycle is shorter than that of Europe: Compared with China, European model cycle is longer (see the bottom left picture). According to experience, the life cycle of European car models is about 7 years, and there will be a facelift (small changes) about half of the time. The profitability of each model largely determines the length of the model cycle. In China, this period is relatively short, about 3-4 years, which may be the result of increased competition, which forces car companies to continuously increase the frequency of updates.! China's electric vehicle renewal cycle is shorter: In China, the renewal time of electric vehicles is shorter, about 1-2 years (see the bottom right figure). We believe this is the result of a "roll" out by automakers (especially new entrants). Car companies are hoping to gain more market share through new models. We believe that in these cases, **volume growth and market share are more important than profitability. * * * *! **HSBC believes that Chinese electric cars are very advanced in software and update quickly compared to foreign competitors:> In fact, the main advantage of Chinese cars is not software updates, but the model cycle. The Chinese automaker, which has been caught in a trance, has also raised questions in the report about the sustainability of the ever-shortening update rate for models? HSBC pointed out that Tesla's lack of relatively fresh products may be the reason why it has to cut prices round and round in China. So are most Chinese automakers that are still in the red, and continue to release new models sustainable?> as existing OEMs turn their attention to software that can be continuously updated, automakers' model updating and learning capabilities will also increase. In the future, car manufacturers should be able to de-link the car release cycle from the software cycle, and also allow them to keep their models fresh for a longer period of time.