By Li Mingjun and Cynthia Pi

In October 2023, leading global automaker Stellantis Group announced that it would invest €1.5 billion to acquire approximately 20% of Chinese EV startup Leapmotor. As part of the deal, the two sides also established Leapmotor International, a 51/49 Stellantis-led joint venture that is designed to export and sell Leapmotor products to the global market. The partnership, following cooperation between Volkswagen and Chinese EV maker Xpeng as well as Audi and Chinese automaker SAIC Motor, set out to propose a win-win outcome in driving the electrical transformation of established European car companies and expanding the global footprint of emerging Chinese auto players by leveraging the funds, brands, and distribution channels of the former with the technology of the latter.

A perceived indicator of national strength, the auto industry is highly globalised with growing technological and supply chain integration, making international cooperation necessary for all players. In upcoming years, the looming ban on traditional fuel-powered vehicles will steer the industry into a critical phase, requiring strategic long-term planning for electric vehicles. China and Europe, both key players in both production and sales, stand to benefit from extensive collaboration grounded in shared interests. With a well-established pattern of mutual reliance, both sides are poised to enter a new phase of mutual engagement.

Interdependent primary markets

As primary markets for each other, China and Europe both hold the potential for substantial industry growth, with each depending on the market position and scale of the other. Official data from the Ministry of Industry and Information Technology of China reveals that China constituted 33.2% of global car sales in 2022, making it the world's largest auto consumer market. In the new energy vehicle sector, China claimed 63% of global sales, with domestic brands securing a notable 79.9% market share, while foreign and joint-venture brands accounted for only 20.1%. In the same year, Europe stood as the world’s third-largest global market with 19% of sales, with new energy vehicles comprising only 6% of its market share. Statistics from JATO Dynamics indicate that Chinese car models claimed a 2.2% market share in the European market in the first half of 2023; the figure rose to 4.8% when acquired and joint-venture brands such as Volvo, Polestar, and Smart were included.

Despite significant growth potential in both markets, challenges still exist. Currently, Chinese car manufacturers are in the early stages of expanding their exports, promoting their brands, and establishing their sales networks, requiring more work in local production layout, product localisation, supply chain, and service network in the European market. Meanwhile, European carmakers, despite decades of development and rich experience in the Chinese market, are still late comers to the EV sector, making it difficult for them to maintain their competitive edge in China. While Chinese players usually target Europe and the United States as major overseas markets, European businesses are accelerating their investments in China, as they believe the Chinese market is a more favourable environment for EV development. Data from Rhodium Group suggests that Europe's direct investment in China totaled around €7.7 billion in 2022, of which €6.2 billion (85%) was invested in the auto industry.

Complementary industries with individual strengths

China and Europe offer each other substantial prospects for collaboration, with complementary strengths in technology, production capacity, and supply chain. China excels in the production of new energy vehicles, with advanced expertise in electric technology, intelligent connected vehicles, and onboard software. In contrast, Europe leads in traditional fuel vehicles, especially in vehicle design, power systems, and onboard chips. Economically, China boasts exceptionally low costs in EV manufacturing, with the average cost of production of an electric vehicle around €32,000, which is 42.8% cheaper than Europe's €56,000, according to JATO Dynamics. A UBS study found that even after committing to local production in Europe, Chinese companies could still maintain a 1/4 cost advantage due to their advanced technology, vertical integration, and high-level integration compared with European counterparts. In terms of marketing and sales, meanwhile, the brand value of the three German automaker giants (Mercedes-Benz, Volkswagen, BMW) alone exceeds €150 billion, backed by their global sales and service network.

There are many successful examples of Sino-European cooperation in the auto industry. In 2010, Geely acquired Volvo Cars from Ford, maintaining its independent operation with headquarters in Stockholm. Since then, Geely has assisted Volvo in enhancing its R&D capabilities and global production layout, leading to increased production capacity in Europe. Notably, the number of Chinese suppliers for Volvo has surged from "almost zero" to over 1,700 currently, contributing to more than 30% of Volvo’s global procurement, thereby significantly reducing production costs. Recently, Volvo's successful public listing in Sweden further attests to the effective collaboration between Chinese and European automakers.

Co-developing a favorable business environment

Chinese leaders have reiterated their commitment to deepening mutually beneficial cooperation with Europe, emphasising the fact that there is no fundamental conflict of interests between the two parties. Premier Li Qiang's visit to Germany last year also marked a notable milestone in Sino-European auto collaboration, with the National Development and Reform Commission (NDRC) signing statements of intent with German automakers. European officials have also stressed shared economic interests expressing a desire to see Chinese prosperity and stability rather than a trade war or restrictions on development, despite the EU's anti-subsidy investigation into Chinese EVs. Intensified cooperation between Chinese and European auto makers has demonstrated the pragmatic and business-oriented approach of European companies in identifying opportunities and risks. The Business Confidence Survey 2023 released last June by the China-EU Chamber of Commerce further showed that nearly two-thirds of surveyed companies would expand their businesses in China if the country improves its market access mechanisms.

Sino-European collaboration is also conducive to an ability to jointly respond to trade protectionism from other countries and consolidate the position of the automotive industries of both parties. By leveraging their complementary strengths, both sides can focus on collaboration to foster healthy competition in R&D, cost control, and market sales, securing a greater EV market share and possessing stronger voices and influence in the global market.

Adapting to create a win-win scenario

Sino-European auto collaboration should aim for mutually beneficial models through ongoing exploration of innovative thinking and flexible approaches.

On one hand, it is in the shared interest of both Chinese and European automakers to establish a local supply chain in Europe. Although nearly 20 Chinese car brands are now expanding their presence in the European market, most of them are doing so on their own, which is neither cost-efficient nor resilient against macro risks. In fact, China has developed a new energy vehicle industry chain, featuring a range of competent suppliers in raw materials, core components production, system assembly, vehicle manufacturing, inspection, testing, and electric services. This paves the way for automakers to assume the role of "chain leaders", forging strategic alliances with suppliers throughout the chain to work in Europe. This model is not only conducive to building a local industrial chain in Europe, but also empowers Chinese companies to establish industry cluster advantages, therefore reducing resistance and potential risks while enhancing competitiveness in Europe. European suppliers can also benefit from helping Chinese counterparts in the localisation process. Bosch, for example, has established a sound partnership with Chinese automakers to support them in localised production, which provides new growth opportunities for Bosch's European business.

On the other hand, there’s great potential for Chinese and European automakers to collaborate in third-party markets, in areas such as climate change and energy security. Globally, Sino-European cooperation in markets like Southeast Asia and Africa reaps economic benefits and underscores their shared responsibility as key players in global governance. For example, the penetration rates of EVs are notably lower in regions like Southeast Asia (less than 5%) and Latin America (1%), compared with China (over 35%) and leading European markets such as Germany, the UK, and France (over 20%). In response to this discrepancy, governments worldwide have set targets and introduced favorable policies for EVs over the coming years, leading to a market potential of around 10 million units. Therefore, China and Europe can explore emerging markets and establish international industrial chains together by leveraging their respective strengths in branding, sales, and manufacturing.

To foster healthy collaboration and competition in the industry, both sides need to remove trade barriers and embrace their shared interests while weighing potential concerns up against their optimistic prospects. Entrepreneurs from both sides can expect to sustain win-win cooperation by seizing the moment and assessing opportunities and challenges wisely.

Li Mingjun is the President Emeritus and Professor of Management at CEIBS. Cynthia Pi is a Research Fellow at CEIBS.