A deepening dispute over tariffs on electric vehicles (EVs) has led to escalating tensions between China and the European Union, as both economic giants struggle with the changing dynamics of the global car market. China, now the world's largest car producer, has rapidly embraced EV manufacturing, treating the automotive industry much like its electronics sector — innovating swiftly and maintaining tight cost controls. The tariffs imposed were designed to strengthen EU car makers. But as tariffs have come into play, Chinese consumers have backed away from high-end European brands – with devastating effects on the financials of Mercedes, BMW and others.
Chinese brands like Zeekr, BYD, Nio and Xiaomi are reshaping the global electric vehicle market, launching high-spec, affordable EVs that pose significant challenges to traditional European carmakers. By combining advanced features with competitive pricing, these companies have leveraged rapid innovation cycles, honed from their experience in the electronics sector, to appeal to both local and international consumers.
Their ability to bring cutting-edge technology to market quickly has intensified competition for established European manufacturers like Mercedes-Benz, BMW, and Volkswagen, who struggle to match China’s aggressive cost control and agile development pace. As European brands rely heavily on higher-priced, premium models, they face mounting pressure to either adapt their strategies to this fast-moving landscape or risk losing market relevance. Indeed, as we go to press, looking at the Mercedes online showroom, the question of ‘Do you want to only look at electric cars?', seems to be missing.
Mercedes-Benz, one of the companies heavily affected, is reporting its weakest financial performance since the COVID-19 pandemic, attributing the downturn largely to declining Chinese demand and fierce competition within China. Following disappointing third-quarter earnings, which saw the luxury carmaker’s profit margins halve, Mercedes is now aiming to cut costs and explore strategies to regain its footing.
“The Q3 results do not meet our ambitions,” Harald Wilhelm, Mercedes’ Chief Financial Officer told media. The brand’s luxury-oriented strategy – favouring ‘value over volume' – has proven ineffective in China, where consumers increasingly favour affordable EVs. Union Investment, a key shareholder, has urged Mercedes to adjust its strategy to reflect the changing market landscape, with representative Moritz Kronenberger emphasising, “Chinese demand is currently focused on affordable electric cars. And Mercedes has nothing to offer here.”
Anyone who has looked at Mercedes electric offerings, will have struggled to be compelled by the price/features/performance combination. The EQC, EQE and EQS models all felt large, heavy and expensive for what you got. The idea of paying £10-20,000 over the price of the petrol/diesel equivalent, left punters cold. When we looked at the EQC, the model we were shown was around £65,000 and still didn't have electric seats.
The tariffs imposed by the EU has deepened the divide between China and Europe – with Beijing cautioning that any attempts by the EU to negotiate individually with carmakers will ‘shake mutual trust' and impede the overall discussions. Instead, China has insisted on unified policies for all companies, stating that it would not tolerate selective arrangements. This stance was reiterated by China’s Ministry of Commerce, which has accused the EU of bad faith in its approach to negotiations.
The current tariffs, set to increase by November, are part of the EU’s anti-subsidy investigation, launched in October 2023, which aims to address alleged market distortions caused by Chinese EVs. European Commission Executive Vice President and Trade Commissioner Valdis Dombrovskis has held multiple rounds of technical negotiations with Chinese officials, with both sides acknowledging significant progress but also substantial gaps. In a joint statement, they reaffirmed their commitment to a solution that would ensure fair competition and comply with World Trade Organisation (WTO) rules. However, with Europe’s car manufacturing giants struggling to maintain profits, and German automakers considering plant closures for the first time in recent history, pressure is mounting for the EU to reach a compromise.
Mercedes-Benz’s troubles highlight the far-reaching impact of these tariffs on European brands reliant on China’s vast market. The brand’s luxury vehicle sales have plummeted as Chinese consumers reduce their spending on foreign high-end goods amid a weak economy and housing crisis.
Mercedes’ new model revamps, especially the upcoming G-Class SUV, have added to the company’s costs, creating further strain. Analysts have noted that the brand has already made substantial progress in reducing fixed costs since 2019, but options for further cuts are dwindling.
As Mercedes looks to cut costs even further, experts argue that the EU’s tariffs are imposing artificial barriers that disrupt the natural flow of market competition. Economists contend that these tariffs conflict with free-market principles by limiting consumer choice and driving up prices. Welcome to rip-off Britain. Without competitive pricing, European consumers may be forced into purchasing more expensive or lower-specified models, stifling innovation and slowing the shift to cleaner transport options.
European carmakers’ predicament is causing ripple effects across the sector, with the pan-European autos index down by 10% this year — the worst-performing sector in Europe. Despite efforts to regain Chinese market share, including a planned major model rollout in 2025, Mercedes’ share price has fallen by 8% year-to-date, underperforming Germany’s DAX index. Meanwhile, Volkswagen, another EU car heavyweight, is also facing financial pressures and is looking to implement its first plant closures in Germany. As the EU’s flagship automakers falter, political repercussions are looming, with German policymakers likely to face growing pressure to ease the tariff stance.
China has extended an invitation for further negotiations, urging the EU to send a delegation as soon as possible. However, some analysts warn that European automakers’ struggles will make it difficult for the EU to maintain its hard-line tariff approach. Mercedes-Benz CEO Ola Kaellenius has highlighted the cautious mood among Chinese consumers, who are wary of significant purchases amid China’s ongoing economic uncertainty and real estate issues. While Mercedes was focused on Tesla, the market overall has made a strong movement toward value.
Daimler Truck, a separate entity where Mercedes holds a 35% stake, has seen a boost from these challenges, with its shares rising as it benefits from Mercedes’ restructuring efforts. Yet, such gains offer little solace for the European consumer automotive sector, which is losing market relevance in China. Indeed, China's plans for electrified commercial vehicles remain ambitious.
The future of Europe’s tariffs on Chinese EVs remains uncertain as the EU seeks a solution that preserves its domestic market while acknowledging the growing consumer demand for affordable EVs in China. Although the European Commission has yet to announce a resolution, the continuation of these tariffs could weaken consumer choice and slow the transition to sustainable transport solutions across Europe. It will be interesting to see if high prices resonate with Americans in a tough economy.
The last time an American president imposed a ‘block' on outside brands, it led to China developing its own smartphone operating system and computer chips being produced using 3nm technology. EU tariffs hurt Mercedes and others badly. The markets wait to see what protectionist strategies will do in 2025 and beyond. Will they save local markets or be reflected in ways that cause more harm than they prevent?
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