Are Chinese brands poised to strike the European BEV market?

There are signs that Chinese brands are starting to gain a significant foothold in the European BEV market. Can legacy OEMs compete?

David Leah, Senior Analyst

25 November 2021

Throughout the ICE (internal combustion engine) age, Chinese carmakers have struggled to penetrate the mature European car markets. Issues of perceived quality and poor performance in Euro NCAP crash tests, as well as uncompetitive engine technology have led to scepticism among European consumers about purchasing Chinese vehicles. At the same time, Western OEMs have, by and large, successfully penetrated the Chinese auto market through local joint ventures.

However, there are signs that the tide is turning and that Chinese brands are starting to gain a significant foothold in the European market as consumer preferences for zero-emission vehicles – alongside the European Union’s ambitious CO₂ targets – open up new opportunities for Chinese OEMs. As an illustration, the number of Chinese models on European roads has more than doubled in the last five years.

Chinese OEMs currently have a competitive advantage, following more than a decade of government-backed investment and incentives into battery electric vehicle (BEV) technology. This has allowed Chinese OEMs to develop more competitive battery technology, as well as control large parts of the battery material supply chain, thus enabling them to achieve greater economies of scale versus many of their Western counterparts. Indeed, our partners JATO Dynamics estimate that “BEV prices have halved in China during the last eight years, whilst increasing by 42%-55% in the West”.

As a result, Western OEMs are playing catchup in the mass-market BEV space, and the growing threat of new entrants has forced Western OEMs to reassess their competitiveness as competition in this space intensifies. Meanwhile, European policymakers have expressed concern over China’s stranglehold over the battery supply chain and have drawn up plans to support investment in the domestic BEV supply chain to reduce this dependency.

Growing investment in the battery supply chain is part of the European Union’s broader climate ambitions under the ‘Fit for 55’ package, which aims to reduce greenhouse gas emissions by at least 55% by 2030 (compared with 1990 levels). This has forced OEMs to consider the entire lifecycle and carbon footprint of a vehicle, including end-of-life and second-life batteries, to maximise utilisation and sustainability. One solution has been to localise battery cell production, which also reduces transportation costs.

Will increased competition and the growing requirements for OEMs to scrutinise their entire carbon footprint force Chinese OEMs who are targeting Europe to localise? And while Chinese carmakers currently have a competitive edge, can they sustain it? To counter this and meet the rising demand for BEVs, Western OEMs are investing massively in BEV technology, while moving away from ICE development and putting all their eggs firmly in the BEV development basket.

These questions remain partly unanswered, but one thing is clear: the window for Chinese OEMs to fully penetrate and secure a sustainable foothold in the European car market is open, for now at least, until the legacy OEMs have built up their BEV capabilities and maximised production efficiencies. Beyond China, Tesla may be the only OEM to have achieved this so far.