China's $7.5b EU hybrid boom faces new curbs under China-EU deal

China's deal to curb hybrid vehicle exports to the European Union is set to deal a fresh blow to electric vehicle makers that ramped up hybrid ​shipments exempt from the bloc's tariffs on Chinese-made EVs as sales growth slows at home.

Beijing's exports of hybrids to the EU's 27 member states tripled to $7.5 billion ‌in the first half of this year from $2.5 billion a year earlier, according to Chinese customs data. The figure was nearly nine times the $845 million exported in all of 2021.

Since the EU imposed additional tariffs on Chinese-made EVs in 2024, automakers have increasingly turned to plug-in hybrids, which are exempt from the extra duties. Weak charging infrastructure in parts of Europe has also supported demand for plug-in hybrids, which are marketed for their long range and strong ​fuel economy.

SAIC, BYD and Chery accounted for more than 90% of Chinese hybrid sales volume in the EU, while hybrids represented more than half of their European sales, according ​to Jefferies.

"It's making life a bit more difficult for the Chinese, but...that's not going to stop them as it happened to the electric cars," said ⁠Felipe Munoz of Car Industry Analysis.

"Europe is going to a point where they will need to decide whether they're doing what the US is doing or just let the whole industry be ​bought by the Chinese."

Speaking to reporters at the Paris auto show on Monday, Changan president Zhao Fei said he was "not that concerned" by the deal, which he viewed as a preamble to 'Made in ​Europe' local content rules that could be dealt with by setting up production in the region.

"This actually provides opportunities for Chinese companies like Changan to enter the European market," he said, adding that the company is planning to produce its first cars in the region early next year.

Chinese brands captured a record 15% share of Europe's EV market in the second quarter, up from 9.5% in the first quarter of 2024, while Chinese plug-in hybrids accounted for ​more than a quarter of the segment, rising sharply from just 1.7% at the beginning of 2024, according to Schmidt Automotive Research.

‘Tariff risk off, quota risk on’

While European Trade Commissioner Maros Sefcovic ​said on Friday the agreement would cut the imports of "several million cars over four years," Brussels and Beijing have yet to disclose how the arrangement will be implemented.

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China's Commerce Ministry said on Monday that the arrangement would ‌allow continued export ⁠growth and guarantee China a quota no smaller than that granted to any other source of imports.

Renault CEO Francois Provost said on Monday the surge in Chinese hybrid imports was unsustainable for Europe, but added the agreement was preferable to a trade war and underscored the need to manage trade relations "sensibly".

Investors largely viewed the agreement as a de-escalation of trade tensions and a sign that tariffs on Chinese hybrids may be off the table for now. Shares in BYD fell 1.8%, while Chery and SAIC rose 1.4% and 0.5%, respectively.

"Overall, we believe it is a risk-relief rally story...as the implementation rules, ​volume caps, price floors, carve-outs are still pending technical ​negotiation," Citi analysts said.

The rapid growth of ⁠Chinese hybrid sales has increasingly challenged European manufacturers, including Volkswagen, long the region's leading plug-in hybrid seller, said Li Yanwei, an analyst at the China Automobile Dealers Association.

BYD, China's largest hybrid vehicle exporter to Europe, sold more plug-in hybrids than fully electric models in the first eight months of ​the year, with its Seal U SUV its best-selling model, according to data compiled by Li.

Together with Chery, SAIC and Geely, the company has ​narrowed the gap with ⁠Volkswagen, which still commanded a 31.8% share of the EU plug-in hybrid market.

"Let's see if China honours the agreement or finds workarounds, or temporary tariff exemptions," said Michael Dunne, a consultant who closely follows the Chinese automotive industry.

Analysts said the deal could ultimately accelerate Chinese automakers' push to build vehicles in Europe, even if some manufacturers attempt to frontload exports before any quota system takes effect.

"I would expect this to strengthen ⁠the incentive ​for Chinese automakers to manufacture in Europe," said Bill Russo, founder of Shanghai-based consultancy Automobility.

"If access through imports becomes more ​constrained, investing closer to the customer becomes more attractive. But localisation requires capital...smaller players may reconsider their European ambitions."

Jefferies analysts said the deal signalled "tariff risk off, quota risk on," potentially pushing Chinese automakers towards higher-priced models, increasing pressure on German ​premium brands and accelerating plans to build more vehicles in Europe.