The Chinese brands that will still win in Europe

Trade barriers that could see Chinese-made BEVs attract up to 48pc duty will not result in China being shut out of the European car market, analysts at last week’s Move conference in London agreed. But not all of the country’s OEMs with European entry ambitions will be successful.

The experts see four major areas that will define success for aspiring entrants: price, technology, scale and brand recognition. And the last two of these in particular could signal bad news for start-ups like Nio and Xpeng.

“In our forecast, we are seeing Chinese OEMs definitely taking market share in the European markets. We are seeing forecasts of about 10-15pc share will be displaced from the conventional or traditional car makers,” says Jose Asumendi, head of European automotive research at bank JP Morgan.   

But this will not leave room for every Chinese brand to be a winner. “If we count it all the brands that are planning to enter Europe… it is definitely impossible for all of these brands to be successful,” says Daniel Kirchert, CEO of Noyo, a platform for Chinese EVs entering the European market.

“If I would make a bet in 2030, I also agree with the estimate that Chinese brands maybe can take up to 20pc. But I think the real winners will only be five or six brands.”

Still game on

Nor is there any sign that Europe’s latest tariffs will immediately thin the field. “We do not think this is going to slow down the entry of Chinese OEMs into the European market,” says Asumendi.

“I have been talking to a lot of Chinese brands in the last few days. They are all, of course a bit nervous about this, and it was a surprise. But I have not heard from anyone who is going step back,” agrees Kirchert.

“There are at least ten Chinese brands which are preparing for production in Europe, so this will just trigger a faster localisation. It will not really help the local industry to transform faster,” he concludes.

Price advantage

The ability to offer lower-priced vehicles will be a key driver for successful Chinese OEMs. New entrants have “got a good chance because they have got that entry point that a lot of the other legacy OEMs just have not got to yet”, says Graeme Beveridge, account executive at dealer support firm Urban Science.

“Chinese OEMs offering cheaper alternatives that are fantastic products open up a much wider market,” he continues. And he points to the initial success of Chinese firms that own non-Chinese marques — such as Saic, which controls MG, and Geely, the major shareholder in Volvo Cars — that have “been faster starting to come into Europe” with their attractively priced products and already “made some headway”.

What will be helpful going forward, suggests Tu Le, managing director of advisory firm Sino Auto Insights, is that 80-90pc of all vehicles sold in China retail for less than £30,000 ($37,900). “They live in the mass market,” he continues.

“MG, obviously, are very successful already in the European markets. When I look at Spain, they have an SUV that retails at just €16,000 ($17,100),” agrees Asumendi.

And he also identifies two other winners in terms of price for what a vehicle offers. One is the Aion brand from Guangzhou Automobile, or GAC, given that “entry point is RMB100,000 ($13,800), an incredible price point for the car”. The other is Li Auto, which offers “three cars at a price point of RMB200,000, which is exceptional”.

But not everyone is fully convinced of Li’s future success in BEVs, rather than extended range EVs in which the firm has initially specialised. Asumendi wonders if the firm will be able to grow to a 500,000+ vehicles/year car maker. “Can they generate cash and create a sustainable business model?” he asks

“Of course, Li Auto is still entering the BEV space — they just launched the Mega few months ago, which is still in a bit of a struggle,” Claudio Afonso, founder of the eletric-vehicles.com news site, also cautions.

Tech disparity

However, it is not just about price; the Chinese edge in software is also key, and Li may have advantages here. “The interesting thing in China was, when [electrification] took off, the market shifted from foreign brands to Chinese brands — from 25pc Chinese brands 10 years ago, now it is already close to 60pc Chinese brands,” Kirchert explains.

“And it is not because the Chinese became suddenly patriotic to buy Chinese cars. It is really consumer sentiment buying the car: it is not only because it is electric; it is also because these are great cars in terms of digital experience in the car.

“The young generation are buying premium brands, and they do not care so much anymore about the traditional show-off BMW, Audi or Mercedes, they go for the amazing digital ecosystem and experience in the car.

“In Europe, we are not seeing that yet, but I think this is something we have to keep in mind when we talk about Chinese product. It is not only about being cheap and electric; it is also offering something on the digital side,” he concludes.

Enter the giants

And Asumendi suggests that this will be good news for Chinese consumer tech firms moving into the EV space such as Huawei and Xiaomi, both of which he sees as having made “excellent” first steps into the sector. Given the level of connectivity, display, configuration, seats etc. in these tech firms’ products compared to the price point, the analyst was left unsure, following a recent trip to China, if their offerings sat in the premium or mass markets.

“I cannot wait for this price to hit Europe,” Asumendi says, identifying a “disconnect” between what is being offered to consumers in China compared to Europe. And he suggests this disconnect is behind firms like BMW, Audi, Mercedes and Porsche “starting to see their car sales in China decelerate for the first time in 20 years”.

“The digital experience that the Chinese cars can provide to the consumer is definitely above what competition from the European OEMs” can offer, agrees Afonso, even though “some of them cost double or triple the Chinese cars”.

“There is a brand, for example, from the Geely Group called Galaxy. Galaxy is selling a car in China which is less than $25k, and which has an impressive screen. Li also has an impressive screen for a second row.

“These are cars for families, where you can easily put your kids watching videos in the second row with super quality.” Afonso continues. In contrast, he has yet to see EVs for sale in Europe “with a reasonable price that can offer things like Li Auto”.

“I think, for a younger generation, the technology is even more important. How easy can I send the podcast I am listening on the iPhone to the car? This kind of ecosystem… and seamless integration is something that consumers are giving more and more attention to. It is not just like this car can take me from point A to point B, but it is also the overall experience and the brand,” Afonso concludes.

Shift in consumer sentiment

And European OEMs need to be aware that the same attitudes towards car technology seen in China could well move to Europe too, increasing the threat posed by Chinese OEMs’ software lead. “I think sometimes we miss in the industry the fact that most people who drive a car do not really know how it handles; it is just a car to some people,” warns Dan Gregson, co-founder of e-mobility platform Electroheads.

“The Europeans love to say that only they can really build a car because it is in our heritage. I think what we are seeing to a degree is, for some people, the car is just a means of getting around. And actually, it being just a device overrides some of those things that they might feel about how it performs. I think there is a shift happening,” Gregson continues.

“For some of this audience, they do not see the car in the way that people who run OEMs think they do,” he warns. While they might still “buy a badge, and they might feel good about what they are buying”, inherently these drivers “are going to the shops, going to the airport, just using [a car] very functionally”.

European OEMs lagging on technology should “be very worried about the shift in that in-cabin experience, which just feels completely different”, Gregson suggests. “From a user perspective, when it feels different, it is exciting. You want to spend time in that, and I think that is a shift that is happening.”

Getting to scale

But the challenges for Chinese OEMs looking to enter Europe, even with their price and tech advantages, include scale and brand development. And not all will be able to overcome them.

“I think the Chinese will need to be very tactical how they take market share,” suggests Asumendi. “It will be done step-by-step.”

Ironically, one of the reasons why some brands might succeed has nothing to do with their BEVs, but rather the scale that can be obtained from selling their ICE products while Europeans continue to buy them. “If you look at the Chinese OEMs, they need to play to their strengths in the European market — it may be a combustion engine, it may be electric cars,” Asumendi continues.

“There is this idea that Chinese OEMs are taking a share in Europe just through electric vehicles. That is not the reality. They are very, very strong in combustion engines. About three quarters of Chinese exports to Europe are actually combustion engines.”

BYD, with 3mn annual sales of BEVs and PHEVs, boasts a “huge scale advantage relative to other players”, compared even to legacy Western OEMs, Afonso suggests. “It does not matter if they are selling 10mn cars, they are only building maybe 150,000-300,000 EVs,” he cautions.

The Chinese market leader, currently a high-profile sponsor of the European Championships football tournament, is therefore coming to the continent “in a big way”, echoing a point made by Beveridge that BYD success is “almost a given”. On the other hand, while conceding that it has “a good chance” of ultimately prevailing, Kirchert suggests the Chinese heavyweight is currently being “a little bit too aggressive — I just think a little bit of patience would be better for Europe”.

But its peers have other problems. “Everybody else in the Chinese EV sector is [selling] pretty much a couple hundred thousand units annually because of the current price war,” Afonso continues.

“There are some start-ups I like very much because they have great products, like Nio and Xpeng. But a big challenge for them is scale,” agrees Kirchert.  

“They are selling 250,000 cars. It is not enough to be profitable, so they are still losing half a billion per quarter right now. It is not clear that they can survive independently,” he warns.

In contrast he identifies some “hidden champions”, whose strong domestic base offer a good platform for growth abroad. These include Dongfeng, Changan and GAC’s Aion brand. Beveridge adds Chery, with its Omoda and Jaecoo brands, to that list.

“These are some of the brands that I think take a little bit more of a slow approach to entering but have more long-term goals. I think they have good chance to be successful here, but it will be very tough and what is going on in China now is brutal,” Kirchert continues.

One shot at branding

The other hurdle for Chinese new entrants is how to build brand awareness and, on top of attracting buyers, delivering after-sales service of sufficient quality to avoid any reputational damage. “In terms of branding, I think this is a big challenge for the Chinese coming to Europe, which they underestimated,” suggests Afonso.

He enjoyed a spell working for Nio’s European arm, where a pinch point was “how can we spread our key messages” as the firm tried to expand out of its initial Norwegian market entry into Germany, Sweden, the Netherlands and Denmark. “Our brand had existed in China for eight years at the time, but in Europe we were a baby and no-one knew us,” he explains, even though Nio’s cars are Munich-designed.

Brand recognition is “a major challenge for all these car companies from China entering Europe”, agrees Kirchert, who suggests that as many as 20 new Chinese brands clamouring for attention will be “very confusing” for the consumer.

“How to let them know who you are, build up trust in the product and in the service is, I think, going be a hard job,” he warns. “It is a little bit like 20 years ago when the Germans entered China. They really failed because they did not understand the consumer in the market.”

“To take market share, you have to make the brand known, you have offer eight-year guarantees, you have to have a good distribution and after-market network,” agrees Asumendi. Such things are not achieved overnight, or on the cheap.

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“It requires not only good products, but it requires good service and having the patience to build up trust to develop a sustainable business in Europe,” says Kirchert. Chinese OEMs “are not immediately going in and pushing volume to the consumer — this takes time”.

“And you do not get a second chance, so you have to really get it right,” he cautions.

Traditional route

“What [Chinese] OEMs need to think about is, how do I get [products] to the customers,” says Beveridge. “What we are seeing is a number of them defaulting to the traditional franchise retailer network because, one, it provides them visibility.

“So, for BYD, Omoda, Jaecoo, how do you get the vehicles in front of the public so they can touch them, play with them, and see all the great tech? One of the ways is doing it through a franchise network. How do you do that cheaply? You do not, it is an expensive model.

“So for the Chinese OEMs coming in, offering cheap products, you have really got to nail that down and make sure you get the right investors in the right spots. Do not over-franchise, or over-invest, or make some of the mistakes that legacy OEMs have made because they are now trying to take costs out,” Beveridge advises.