Europe's EV Tariffs Seen As Minor Speed Bump For BYD - BYD CO LTD H SHS by BYD Co., Ltd. (OTC:BYDDF)

Key Takeaways:

The EU’s proposed tariffs on Chinese EVs turned out to be lower than feared, especially for BYD
Chinese EV companies are expected to accelerate efforts to set up factories in Europe to minimize transport and tariff costs, while seeking growth in Asian markets

By Fai Pui

The European Union has thrown a roadblock in the path of China’s electric car industry with a proposed package of import tariffs. But as far as investors are concerned, the extra costs may just be a bump in the road for the country’s top EV producer.

The policy would apply tariffs of up to 38.1% on Chinese electric cars in what EU leaders describe as a defense against unfair competition. While Europe joined the United States in outlining punitive action, its response was far less aggressive than the 100% tariffs imposed from Washington.

A layered EU tariff system also means that some Chinese EV makers will be less penalized than others, notably domestic market leader BYD Company (OTC:BYDDF)(OTC:BYDDY), whose shares jumped in a relief rally.

Policy makers set the tariff levels after investigating the impact of Chinese auto subsidies, taking account of the extent to which EV makers cooperated with the probe. The results were 17.4% tariffs for BYD, 20% for Geely Automobile (0175.HK) and a top-tier 38.1% for SAIC Motor (600104.SH).

The rates are set to be imposed from July 4, barring any challenges or last-minute bargaining, on top of an existing 10% import duty for non-EU vehicles. In effect, BYD will face the lowest tariff barrier among Chinese auto manufacturers at a combined 27.4%.

After the news broke on June 12, BYD shares rose 8.8% and Geely’s stock price was 4.6% higher at one point. Shares in three other emerging EV stocks, Nio (NYSE:NIO), XPeng (NYSE:XPEV) and Li Auto (NASDAQ:LI), showed a muted reaction.

Investors are betting that, at these tariff levels, the bottom lines of leading Chinese EV companies may not be greatly affected. A research report by the Rhodium Group took BYD’s Seal U model as a case study. The vehicle costs the equivalent of 20,500 euros ($22,010) in China compared with a price tag of 42,000 euros in Europe, leaving a profit of 1,300 euros in China versus 14,300 euros in Europe. As a result, the company can still make a profit on EU exports up to an additional 30% tariff rate, the report found. It concluded that only a rate between 45% and 55% could totally wipe out Chinese profits in the European market.

Kenny Wen, head of investment strategy at KGI Asia, also assessed the potential damage to be relatively minor, although China could face more car sanctions in the run-up to November’s U.S. presidential election. He noted that Chinese companies sold most of their cars in the home market and Southeast Asia, with just a small share going to Europe. “The additional tariffs might slow down the rollout of new Chinese EV models in Europe, but the overall impact will not be substantial,” he said.

Setting Up Shop In Europe

With their cost advantages, Chinese car companies can still turn a profit in Europe and will look for ways to circumvent the charges, said Ivan Chow, an independent analyst. “More and more companies are likely to set up factories in Europe to skirt the new tariffs, reduce transport costs and avoid any future tariffs.”

After a global battle lasting nearly a decade, leading Chinese brands such as BYD are overtaking established European car companies in the electric vehicle race, with the benefit of more advanced battery technologies. Moreover, Europe is growing more dependent on China for its EVs. According to data from an environmental lobby group, one of every five battery-powered EVs sold in Europe came from China last year, and the share is expected to increase.

European countries have also offered incentives for Chinese companies to set up local car factories, aiming to reduce their reliance on China’s manufacturing base and to learn from its technologies. BYD announced plans last year to start producing cars in Hungary, gaining employment subsidies and tax credits from the government there. Hungary is also reported to be pulling out all the stops to seal a deal with Great Wall Motor (2333.HK).

Joint ventures and cooperation deals are springing up in other parts of Europe. Chery Automobile will work with a European partner to set up a factory in Barcelona, Spain, in the fourth quarter of this year and is also in talks with Italy about another production base. Dongfeng Automobile (0489.HK) is exploring options with the Italian authorities.

Spain, the second-biggest car manufacturer in Europe after Germany, rolled out a project worth 3.7 billion euros four years ago to attract EV or battery companies. The Chinese company Envision Group has established factories there, creating 3,000 jobs and obtaining 300 million euros in subsidies.

The Chinese EV sector, with a crush of companies jostling for pole position, is generating such fierce competition that even the U.S. giant Tesla (NASDAQ:TSLA) has felt the need to cut its prices. Keen to turn a profit, many Chinese EV firms have accelerated a push into overseas markets, especially in Southeast Asia.

The Chinese share of Southeast Asia’s EV market is estimated to have reached about 67.5%, according to a TrendForce report, with companies rushing into Thailand and Indonesia as manufacturing hubs. But they will not face an easy ride, with the region’s lack of charging infrastructure and limited appetite for new energy vehicles. Battery life and maximum driving ranges will be severely tested by heavy traffic jams in big Asian cities such as Bangkok, Kuala Lumpur and Jakarta. Meanwhile, Vietnam’s VinFast (NASDAQ:VFS) is also making rapid inroads as a potential EV competitor.

Investors have been taking a positive view on BYD’s prospects, with the company’s share up around 13% in the year to date. Analyst Chow says visitors to Thailand are struck by the number of BYD cars on the road, with a range approaching 2,000 km acting as a brand selling point. He suggests investors buy the stock at HK$218 with a target price of HK$260.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.

BYDDFBYD CO LTD H SHS by BYD Co., Ltd.

$11.36-1.00%

Overview

BYDDYBYD CO LTD UNSP/ADR by BYD Co., Ltd.