Europe’s largest automakers are preparing to take on the challenge of electric vehicles in China

Europe’s largest automakers are concerned about the competitive threat posed by Chinese start-ups, as the auto industry moves toward electrification, several CEOs have told CNBC in recent days.

Europe’s dominant position in the automotive sector has been established over many decades by its ability to build superior combustion engines. But this competitive advantage is becoming less important, as demand for battery electric cars grows and Chinese companies benefiting from government subsidies are able to produce battery cells at a lower cost.

Christophe Perillat, CEO of French auto parts maker Valeo, told CNBC on Monday that China is now the company’s main market, as the previous “barrier to entry” for the combustion engine has been removed. This has enabled a new wave of Chinese companies to make their mark not only locally, but also as potential exporters.

This development poses a major threat to auto giants in Europe, such as Volkswagen, Renault and BMW, as they look to grow their fleets of electric and hybrid offerings without the same backing from government subsidies.

Luca de Meo, CEO of Renault, told CNBC at the IAA Mobility Conference in Munich on Monday that the French automaker continues to grow its investments in new technologies, battery plants and giant factories, and hopes the company’s new pure electric vehicle unit, Ampere, will enable it to compete. in the global market. A “different sport” from its traditional markets.

“One of the commitments we’re making with Ampere is actually cutting costs by 40% generation by generation, and that’s about a lot of investment in technology and development and manufacturing techniques,” Di Meo told CNBC’s Annette. Weissbach.

“We think we have the argument and the confidence to do that, and it’s going to take some time because the Chinese OEMs, they started a generation earlier than the Europeans because the market conditions were different in China, so that’s the fight, and we’re ready to get involved.”

The challenge from the east was also acknowledged by Volkswagen CEO Oliver Blum, who said the company has developed a new strategy for China this year to focus on developing technologies to specifically meet Chinese demand.

The German giant has already established automotive software company CARIAD, as well as partnering with Chinese electric car startup Xpeng, joint venture partner SAIC and self-driving company Horizon Robotics.

“Competition is also a positive aspect to improve ourselves, so China is one of our important markets, and we continue to invest heavily there,” Blum said.

He added that Volkswagen has established “cost-effective initiatives” and sees great opportunities to increase electric vehicle production while reducing battery production costs by 50 percent.

“On the one hand, we have a lot of experience in terms of the car’s driving capabilities, we have high quality standards in the Volkswagen Group, we focus on design, we have the great heritage of all our brands, and these aspects represent a significant advantage over new competitors,” Blum said.

“On the other hand, we have to accelerate in terms of electrification, digitization and connectivity, and so we develop our own platforms and combine them with the partnership, so I think we’re in a good position, but in the end what matters is speed and that’s why we made the right decisions at the Volkswagen Group.”

European leaders ‘move too slowly’

Over the past decade, China has built battery plants at an astonishing rate, and the country’s massive battery production line is expected to swell to 4,200 GWh by 2030, as new announcements about capacity building continue to emerge, according to metals researchers at CRU. group.

They stressed that even at this current level, the capacity is twice the GWh required if China’s entire vehicle fleet were to convert to battery electric vehicles.

“The battery factory is very dependent on electricity costs after all, and that is the biggest cost driver if you are producing battery cells, and this is where Europe has yet to catch up. Our electricity costs compared to China or North America are very high,” said Klaus Zellmer, Skoda CEO, to CNBC Monday: “High.”

And in the United States, President Joe Biden’s historic Inflation Reduction Act allocated $370 billion for climate and clean energy investments, vastly expanding tax breaks and other incentives for clean vehicle manufacturing, along with bolstering the domestic supply chain for electric vehicles.

Many subsidies and incentives are now available to European companies, but Zilmer said they are “nowhere close to the US or China” and policymakers are “not moving fast enough” to keep up.

Skoda is part of the Volkswagen Group, which Zelmer noted has also set up its own battery cell company, PowerCo, and plans to build a massive plant in Canada to complement existing facilities in Spain and Germany.

“I think in terms of supply, we’re in a good position, but when it comes to expanding our footprint with giant plants, Europe at the moment is not in a good position,” Zilmer added.

While companies such as Renault and Volkswagen – which have traditionally specialized in mass-producing affordable midsize cars – appear wary of the Chinese threat, luxury carmakers seem more confident in their ability to maintain their value proposition.

Michael Steiner, Porsche’s head of research and development, told CNBC that the German luxury company, which went public last year, has been focusing on high-quality components to separate itself from Chinese competitors.

“China is the most important competition and is growing very quickly in battery and cell technology. For Porsche we are looking, let me say, for better cells with higher energy density,” said Steiner.

“We have a subsidiary of ours — called the Cellforce Group — where we develop and produce, or will produce, cells for high-performance cars (which are) better than the bulky cells and batteries you can buy.”