SHANGHAI (Reuters)

Automakers in China are ramping up exports of hybrid vehicles to Europe and planning more models for the key market, exposing the limits of the European Union's electric vehicle tariff scheme.

The bloc's latest EV tariffs to protect its auto industry from a flood of cheap Chinese imports do not apply to hybrid cars. This could allow major brands such as China's top EV maker BYD (SZ:002594) to continue expansion in the region, analysts say.

Some manufacturers are also shifting production and assembly to Europe to lower costs related to tariffs.

> "The increase is driven by Chinese OEMs shifting toward PHEVs (plug-in hybrids) as a way to sidestep the new EU tariffs on BEV (battery-powered EVs) imports from China," said Murtuza Ali, an analyst at Counterpoint Research.

He expects China's hybrid exports to Europe to grow 20% this year and accelerate next year.

EU tariffs of up to 45.3% on Chinese EV imports came into effect in late October to counter what the European Commission describes as unfair subsidies that helped create a spare production capacity of 3 million EVs per year in China, which is twice the size of the EU market.

The anti-subsidy investigations on Chinese EV imports, initiating in October 2023, alongside slowing car sales in China due to an economic downturn, have led some automakers to adjust their European strategy, focusing more on hybrid exports.

Hybrid cars, which run on a combination of gasoline and electricity, are gaining popularity as buyers see them as an affordable compromise between combustion and electric vehicles.

From July to October, hybrid exports to Europe surged more than threefold to 65,800 units compared to the same period last year, reversing a trend of declining sales until earlier this year and in 2023, according to the China Passenger Car Association. This helped plug-in hybrid and conventional hybrid exports account for 18% of China's total vehicle sales to Europe in Q3, up from 9% in Q1. However, the proportion of EV shipments fell from 62% to 58% during that period.

The trend is likely to gain further momentum.

China, which overtook Japan as the world's largest auto exporter last year buoyed by its EV dominance, is boosting its exports to tackle overcapacity at home, analysts say.

With 100% tariffs on Chinese-made EVs in the United States and Canada, Europe is one of the few viable markets for Chinese automakers.

The European Commission did not immediately respond to a request for comment on rising hybrid imports from China.

MORE HYBRID MODELS

Major Chinese automakers could disrupt the European plug-in hybrid market, currently dominated by European and Japanese firms, by meeting rising demand for affordable vehicles with better fuel economy amid inflation.

BYD is challenging Volkswagen (ETR:VOWG_p) and Toyota (NYSE:TM) in Europe with its first plug-in hybrid model for the region, the Seal U DM-i. The model is priced from 35,900 euros ($37,700), which is 700 euros lower than VW's best-selling PHEV model Tiguan and 10% cheaper than Toyota's C-HR PHEV. Additionally, BYD is considering producing both EVs and hybrids at its Hungarian plant, according to China Auto News.

> "The segment could see bigger growth potentials with Chinese automakers bringing more affordable options to Europe that are attractive to cost-sensitive consumers," said Yale Zhang, managing director at Automotive Foresight.

SAIC, whose EV exports to the EU face the highest additional rate at 35.3%, plans to offer products with various powertrain systems for the European market. Geely, China's second-largest automaker by sales, launched a new plug-in hybrid under its Lynk & Co brand for Europe last month.

> "The recent increased introduction of electrified hybrid models to markets around the world by global automakers aligns with consumer demands and purchasing trends," Geely said in response to Reuters inquiries, though it did not comment on trade restrictions.

Japanese automakers are also capitalizing on the conventional hybrid growth in Europe this year while addressing their overcapacity issues in China. Honda (NYSE:HMC), which saw a 29% drop in vehicle sales in China in the first nine months of this year, exports two conventional hybrids, one plug-in hybrid, and one pure EV model from China to Europe.

While increasing exports from China could intensify price competition in Europe's hybrid vehicle market, some experts warn that Chinese firms may tread carefully to avoid triggering further EU tariffs.

> "If BYD takes Qin Plus to Europe at a price of 20,000 euros, I am sure it would trigger another earthquake," Zhang remarked, referring to its hybrid sedan.

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