The Estonian Wuling Hongguang Mini and the imminent question of Chinese vehicle assembly in Europe

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Cars are not textiles or consumer electronics and products travel more readily within a region than across the globe. For this reason, the "Chinese question" will soon cease to be the question of imports and their possible containment and become that of the assembly of Chinese vehicles in Europe. What attitude will Europe then develop? Everything converges today to cast doubt on its ability to develop a different Chinese policy from the one that is taking shape in the case of the Wuling Hongguang Mini entering Europe through the Estonian door.

At a time when we were worried about American protectionism and Emmanuel Macron was going to raise with President Biden the question of exporting European vehicles to North America, which only interests German manufacturers and the Chinese Volvo, it was announced that an electric vehicle called the FreZe Nikrob EV would be marketed in France in 2023 by the Estonian group Dartz, with a starting price of 12 or 13,000 euros, minus the bonus.

Although neither General Motors nor SAIC nor the SGW consortium (for SAIC-GM-Wuling) that they form claims it, it is in fact the famous Wuling Hongguang Mini EV. Launched in 2020 in China at a customer price equivalent to less than 4,000 euros, the car was an instant success, making it the best-selling electric vehicle in China in 2021 with almost 400,000 registrations.

In 2022, it seems that the monthly average will be around 35,000 sales and that the 2021 record will not be regained as the Tesla Model Y and the BYD Song Plus (also known as BYD's Model Y) progress and overtake it. The million SGW electric vehicles sold in China (cumulative) was reached this summer and the JV owes it mainly to this model and its "Global Small Electric Vehicle (GSEV) platform", which enables the design of a range of battery electric vehicles (BEVs) for the Wuling and Baojun brands.

For GM, this implies that, as we have been sensing for several years, American brands such as Buick, Chevrolet or Cadillac and the Western products they badge are in the process of marking time and gradually giving Chinese brands the leading roles. Thus, in the Top 10 of the biggest Chinese players, the SAIC-GM JV was in 6th place in August with 120,000 registrations and was followed by SGW with 104,000 registrations.

Dongfeng-Nissan was in 8th place with 85,000 and SAIC alone in 10th place with 83,000. In the same perspective, when we consider the hit parade of 2022 sales in China, all energies combined, there are only three thermal vehicles in the top 10 (Nissan Sylphy in 4, VW Lavida in 6 and Toyota Corolla in 10): the others are BEVs or PHEVs and, apart from the Tesla Model Y (in 1st position) and Model 3 (in 8), they are BYD or the Wuling.

The automobile plan announced in 2015 as part of MIC 2025 (MIC for Made In China) could not be more effective and GM is the only western manufacturer that really submits to it by accepting the "sinicisation" of its product policy in China and by sharing with its Chinese partner the last dimension: prolonging the takeover of the Chinese market by Chinese brands and players through international expansion.

Although it is an obsession in the press and in the political world, the question of automobile foreign trade with China is probably not the most crucial issue here.

Indeed, historically and statistically, in the automotive industry, the bulk of foreign trade in vehicles and a large proportion of components is not global but regional: importing vehicles from another region of the world is only feasible for small volumes and/or to complete one's catalogue; as soon as a manufacturer has major ambitions in a large market, it has no choice in the long run but to assemble its vehicles there and develop local sourcing.

If this is the case, it is firstly for functional and logistical reasons linked to the nature of the product which does not travel as well as a T-shirt. It is also for political reasons: states have the means to "deal" access to their markets when they are important or growing in return for development and job creation.

To take a historical example that reminds us that what Biden is demanding is not so scandalous: when, following the scuttling of British Leyland by Margaret Thatcher, the question of the establishment of Japanese manufacturers in Europe arose with unprecedented acuteness, Europe had the good idea of imposing local content and a recourse to European suppliers.

Even more obviously, if in a transitional phase such as the one we are going through, because of China's lead in terms of volumes produced, there were massive imports of vehicles into Europe, then activating a safeguard clause and imposing very high tariffs would be feasible. Retaliation on vehicle exports to China would be very manageable. Retaliation on the management of JVs and/or the supply of electronic components or battery components and/or capital goods for the gigafactories currently being built in Europe would be more problematic.

However, if it is only a question of trying to avoid massive imports from China, the issue is solvable. Even in the case of batteries, it can be seen that, as soon as volumes become substantial, as is becoming the case in Europe, market needs are no longer met by imports but by the development of local manufacturing, i.e. by the creation of Chinese gigafactories in Europe intended to meet most of the assembly needs.

Thus, if it is only a question of obtaining, as is the case in the Biden plan, local production of vehicles and their components, then the strong injunctions are fairly easy to formulate and enforce because they do not fundamentally contradict the plans of the manufacturers or their partners. They alter the timetable by forcing them to hasten a move they would have made anyway. If what the US wants are BEVs assembled at home with batteries from gigafactories as "American" as the one Panasonic has created to meet Tesla's needs, then the Biden plan is sufficiently unambitious to be assured of success.

The problem posed by the case of the FreZe Nikrob, which will be assembled in CKD under licence in Lithuania, has another dimension, since it is the prefiguration of a question that will inevitably arise in the months and years to come: that of the establishment of assembly factories of Chinese manufacturers in Europe.

Since Europe has done nothing to block Tesla's path in the same way that it welcomed Korean factories on its soil in the 2000s, the question will be to know whether, with regard to Chinese players, in order to preserve strategic or technological autonomy in a very problematic transition phase of the industry, it is necessary to vary the doctrine. This question is itself subdivided into two questions:
i) Are these protections desirable and/or legitimate?
ii) Can the EU, which unlike the US is not a state but a collection of 27 states with very heterogeneous automotive interests and issues, agree on a common China policy?

Although we can congratulate ourselves on the fact that, over the last 40 years, the entry of Japanese and Korean manufacturers has taken place under conditions that are much less damaging to European manufacturers and existing factories than those in North America, it is clear that some of the overcapacity that has been complained about over the last 15 years is partly linked to this movement, which could have been less actively supported by the EU and the European Investment Bank.

At a time when the likely rise in the price of automotive products is likely to drive down demand volumes, allowing additional production capacity to develop could only increase value problems and erode European manufacturers' profits.

Moreover, as the case of the Wuling Hongguang Mini shows, Europe's delay in expanding its BEV market allows Chinese players to present themselves in Europe with products whose development costs have already been paid by Chinese consumers and to be more aggressive in terms of price.

It could then be the capacity of the European electric offer to take off and reach this relative maturity that would be threatened by letting MGs resembling the Megane E-Tech or the ID3 or 4 position themselves in price at the level of the future R5 or ID2. The good reasons to protect oneself exist but, with China already, making these arguments heard will be very complicated for two reasons:

i) European manufacturers cannot do without Chinese suppliers who have developed gigafactories at their request to supply their factories with batteries, and this gives the Chinese authorities some arguments for negotiation.
ii) Many manufacturers, particularly German, have not, unlike Renault or Stellantis, given up on remaining key players in the world's largest market, China. Volkswagen in particular is as Chinese as it is European and this Chinese dependence can make it very accommodating.

Clearly, on both the American and Chinese issues, the Franco-German couple can only work if one of the two renounces its interests. Insofar as, as was the case when it came to welcoming Korean factories twenty years ago or finding a gateway for the Wuling Hongguang Mini this year, the new member states welcomed after the fall of the Wall are sufficiently in need of attracting foreign partners not to want to distinguish between Chinese investors and others, it is difficult not to be pessimistic about the EU's ability to develop a common policy towards China.

Indeed, if it is only a question of protecting against imports, as the United States does, this may create some tension, but compromises can be found. If it is a question - as would be desirable - of considering that what has been accepted from the Japanese, Koreans or Tesla cannot be accepted from Chinese manufacturers, then this requires a determination that will be sought in vain among the 27.

5/12/2022

 

The weekly column by Bernard Jullien is also on www.autoactu.com.

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