Europe helped teach China to make cars. Now the tables are turning

 Two decades ago, German engineers used to joke among themselves about the prototypes for new cars presented by their Chinese joint venture partners, which in at least one case were cut and pasted from advertisements of German models.

“They had no ideas of their own — they were just copying,” says a senior software executive at a German carmaker.

The same engineer was recently presented with a wish list for a future vehicle operating system his company wants to develop. Point for point, it mirrored features that have been unveiled by Chinese electric-vehicle manufacturers.

“We’ve come full circle,” says the executive, who declines to be named because of the sensitivity of the subject to the future of his company.

Rattled by the advance of Chinese companies, the EU last year imposed tariffs of up to 45 per cent on EVs from the country. But in a new approach that is being developed both by Brussels and by the auto industry, Europe is also now seeking to take advantage of Chinese expertise.

European companies are increasingly doing deals with Chinese rivals to prevent them from falling behind in the core areas — software, batteries and autonomous vehicle systems — that will drive the future of the automotive industry. Volkswagen, Mercedes-Benz, Stellantis and BMW have all signed agreements with Chinese groups to get access to technology.

A new EU policy framework seeks to give these companies greater leverage in their dealings with China. In an “action plan” for the industry published last month, the commission is looking to require Chinese companies entering the EU car market to enter joint ventures with European companies or license parts of their technology.

If these efforts are successful, they would represent a striking turning point in recent economic history. For the past four decades, China has tried to use the promise of access to its market as a way to get foreign companies to transfer expertise and technology to its own companies — often much to the angst of the would-be investors.

Now Europe is trying to use some of the very same tools to catch up with innovations from China.

“It’s a change in the sense that it welcomes investment from abroad in a sector that has been one of the prides of European industrial development,” says Elisabetta Cornago, senior research fellow at the Centre for European Reform think-tank.

“It’s also an acknowledgment that there is a gap between the European homegrown knowhow and what is available externally.”

Executives in the sector agree the EU’s action plan for the automotive industry is a frank admission that European carmakers need the technological expertise of companies established decades later.

“We overestimate ourselves but we definitely underestimated others,” says Robert Falck, founder and chief executive of Swedish start-up Einride, which became the first company globally to deploy a fully autonomous truck on a public road in 2019. “What we need to do is wake up to reality.”

Raymond Tsang, an automotive technology expert with Bain in Shanghai, says after losing a third of their market share in China since 2020, foreign automakers simply “have no choice” but to partner with Chinese technology companies to have even a chance of survival.

“Dig into why they are losing. Certainly the EV transition is the big thing. But they’re under-indexing on their infotainment systems and connectivity and ADAS [advanced driver assistance systems],” he says. “If they do not fix that, there’s no chance.”

European companies are reaching out to China at a time of intense turbulence in the industry. Demand for cars is stagnating in Europe, amid rising costs and regulatory pressure for cleaner vehicles, while China is grappling with overcapacity in its own car industry. And in the background, US President Donald Trump has launched a trade war against Beijing and other countries.

Some industry executives believe the EU is responsible for many of these headwinds. “Europe shot itself in the foot, then accused the Chinese of holding the gun,” one executive says, pointing to the planned phaseout of combustion engine cars, strict emissions penalties and the decision to cut itself off from cheap Russian energy.

They also warn that the EU’s imposition of tariffs on imports of Chinese-made EVs last year will make technology sharing far more challenging.

Ola Källenius, chief executive of Mercedes-Benz and president of European car industry body Acea, says Europe has the most to lose from an acceleration in protectionism because its companies have reaped the most from globalisation.

“When we came to China . . . there was a call upon us by the policymakers to ‘industrialise here if you want to come to the market’ and from my understanding, European policymakers have said the same vis-à-vis the Chinese,” he says.

“But that means that you would actually open up markets, create as much as possible a level playing field, and then let the best market actor win.”

No country captures the reversal of the global automotive order better than Germany.

The wealth of Europe’s largest economy was built in large part on exports to China as the country grew rapidly following its economic opening-up in the 1980s.

Germany’s automotive giants — Volkswagen, BMW and Mercedes-Benz — were in the vanguard and spent decades earning a significant share of their revenue and profit in China.

Volkswagen was one of the first western companies to enter the country, after rival Toyota famously snubbed an offer from Beijing and chose instead to produce cars in Taiwan.

The company formed a joint venture with Shanghai-owned SAIC in 1984 to build its Santana sedans for the local market. This early willingness to work with Chinese partners, a requirement for market access that was only recently lifted, paid off handsomely. VW’s position as China’s best-selling brand was only overturned last year when it was dethroned by BYD — a domestic rival that only began making its own cars in 2005.

For decades, German executives returning from the biennial Shanghai Auto Show would trade stories about local brands clumsily trying to imitate their best-selling models.

But the mocking stopped in 2023 — the first show held since the pandemic — as it became clear just how far Chinese EV makers had leapt ahead in software and battery technology during the years that the country was under strict lockdown and closed off.

In July of that year, Volkswagen announced a $700mn investment in Chinese EV maker Xpeng, giving it a 5 per cent stake and a seat as an “observer” on its board. The following year, the two companies said they would jointly develop “intelligent connected vehicles” for the Chinese market.

Hundreds of VW engineers have been working with Xpeng in Guangzhou and Hefei, learning first-hand from the Chinese group’s expertise in developing smart driving architecture.

The project is one of a flurry of similar tech-focused tie-ups and joint ventures, including between Mercedes-Benz and Hesai, a developer of laser-based object detection systems, Stellantis and Leapmotor, Tencent and Toyota and BMW has with Huawei.

Despite the ventures and the clear evidence of China’s advances, one European executive based in the country says “old tropes” of western technological superiority still linger in some quarters.

“Many have difficulty adjusting to the new reality of innovation in China,” the person says, adding that it may be due to “a form of arrogance or naivety” or a “belief in the assumption that only liberal societies can produce true innovation.” 

Christoph Weber, who leads the China business of Swiss engineering software group AutoForm, says that “when it comes to developing competitive software, [western brands] tried and basically failed”. But they have not “emotionally accepted” China’s ascendance.

“Some people want to believe that we can still kick the can down the road,” he adds, “ignoring that EV technology is absolutely superior, and the software-defined vehicle is coming.”

John Lawler, vice-chair and former chief financial officer at Ford, says the EU is being realistic in seeking technology transfer from Chinese companies that want to form battery joint ventures in the continent.

“I would say they had a focus [on electrification] before the rest of the world because they didn’t have a dominant position in internal combustion engines,” he says. “And so here we sit now. They’re leaders in electromobility and they’re leaders in battery technology.” 

“There are things to learn. So it’s a pragmatic approach to understand that you can’t just step back and refuse to look at what the reality is.” 

But critics such as T&E, an environmental campaign group, say the change in the EU’s industrial strategy has come too late. It contends that member states have used government subsidies to attract investment by companies such as CATL and Gotion to secure battery supply in the near term, without a regulatory framework for knowledge sharing and the transfer of intellectual property.

“Without European content requirements, we just won’t learn. We’ll just be an assembly plant,” says T&E senior director Julia Poliscanova. While the new requirements in the EU’s action plan are welcome, she adds that “timelines are not clear, despite the urgency”.

The pressure for more collaboration between Europe and China has become stronger since the Trump administration unleashed sweeping tariffs against America’s global trading partners, roiling financial markets and jeopardising deeply interconnected supply chains. 

Top EU officials fear the US levies will be a double blow for Europe’s carmakers — reducing their exports to the US and leaving them vulnerable to a surge in Chinese vehicle exports to Europe in the face of overcapacity in China.

But Brussels is also partly responsible for the industry’s travails. Its imposition of sanctions on Russia after the invasion of Ukraine left European industry without access to cheap gas and facing soaring energy prices.

In the early 2020s, as Covid-19 ravaged supply chains and reduced demand, the EU formulated and implemented rules setting out an ambitious emissions reduction road map culminating in a ban on new combustion engine car sales by 2035.

Progress towards adoption of electric cars has been slow because of their high upfront cost and consumer concerns about charging infrastructure. The rules were eased last month to give carmakers more flexibility in meeting overall emissions targets in the coming three years.

Chinese-made cars are cheaper, but Brussels has imposed a 45 per cent tariff on them, arguing that Chinese manufacturers have benefited unfairly from generous state subsidies.

In response, BYD and Chery have announced plans to build factories at sites in Hungary and Spain, while Leapmotor has partnered with Stellantis — owner of Peugeot, Fiat, Opel and other brands — to expand sales in Europe.

Beijing has always denied providing unfair or illegal support for its industries, but China’s economic planners have long viewed transport electrification as a key means to reduce dependence on imported oil and gas.

Ilaria Mazzocco, an expert on Chinese industry with the Center for Strategic and International Studies, a US think-tank, wrote in a recent policy brief that “it is difficult to distinguish where subsidies end and innovation begins”. She added that “even outside of China, the state is beginning to play a far more active role in supporting strategic industries”.

The CSIS estimates official state support for the EV industry at $230.9bn between 2009 and 2023. Though experts caution that subsidies are notoriously difficult to calculate given the many forms of implicit support for companies.

Falck, the Einride founder, believes China is in some ways “fiercely more market liberal” than Europe due to the vigorous competition between domestic players. More than 60 companies are fighting for a share of the Chinese EV market, although almost 80 per cent of sales are soaked up by 10 Chinese companies — including around 27 per cent by BYD.

“Europe tends to see China as the big red machine that controls everything,” he says. “But the most successful companies coming out of China are built by entrepreneurs.”

He adds that while Europe has the technology to compete in areas such as autonomous vehicles, it also has many structures and processes in place that make it difficult for companies to deploy and scale the technology as quickly as their Chinese competitors.

Western companies that once worried about intellectual property theft when doing business in China are now finding that their counterparties have similar concerns.

Executives in the sector say Beijing is pushing for assurances that technology developed in China will not make its way to Europe as a result of co-operation deals. Two people familiar with the matter told the FT last month that Chinese officials are also delaying approval for a BYD manufacturing plant in Mexico amid concerns that the company’s smart car technology could leak across the border to the US.

There is also a risk that Chinese-made components, systems and software within European-made cars could cause issues if those vehicles are then exported to the US.

Elisa Hoerhager, Beijing-based chief representative in China for the Federation of German Industries (BDI), says the US-China “decoupling saga” could ultimately mean western companies are forced to choose between access to the US market and their research and development efforts in China. “That is definitely a squeeze that German companies are feeling,” she says.

Despite the rising geopolitical temperature, industry executives say Brussels and Beijing will need to find a way to work with each other, given that the Europeans need to improve their competitiveness and the Chinese need new markets to soak up their domestic overcapacity.

Stefan Borgas, chief executive of London-listed RHI Magnesita, the world’s biggest producer of the industrial ceramics widely used in vehicle supply chains, says industry “suffered more in Europe than in the US and therefore, the realisation [for the need to work with China] is faster.”