As the demand for battery-electric vehicles increases, European firms are at risk of losing their competitive edge as Chinese firms, who benefit from subsidies, can produce battery cells cheaper.
CNBC has heard from several CEOs that Europe's largest car manufacturers are concerned about the threat of new Chinese companies in the automotive industry as it moves toward electrification.
Europe's dominance in the automotive industry was built over decades by its ability to produce superior combustion engines. This competitive advantage is less important as battery electric cars become more popular and Chinese firms that receive state subsidies are able to produce cheaper battery cells.
Christophe Perillat of French auto parts maker Valeo told CNBC Monday that China was now their main market as the "barrier to enter" of the combustion engines has been removed. The combustion engine was once a barrier to entry for Chinese companies.
This development is a serious threat to Europe's auto giants such as Volkswagen and Renault, who are looking to expand their electric and hybrid fleets without the same support from state subsidies.
Valeo, an auto supplier, says that Chinese carmakers are booming under the EV revolution.
Renault CEO Luca De Meo said to CNBC on Monday at the IAA Mobility Conference in Munich that the French automaker continues to increase its investments in new technology, battery plants, and gigafactories, and hopes its new pure EV division, Ampere will allow it to compete in a 'different sport' from its traditional market.
De Meo said to CNBC's Annette Weisbach that Ampere has committed to cutting costs by 40 percent generation over generation. This involves a great deal of investment in technologies, development and manufacturing techniques.
We think we can do it. It will take time, because Chinese OEMs started a whole generation earlier than Europeans. This is because the market conditions in China were different.
Volkswagen CEO Oliver Blume acknowledged the challenge coming from the East. He said that the company has established a China strategy to develop technologies tailored to Chinese demands.
The German giant has already created the automotive software company CARIAD and partnered with Chinese EV startup Xpeng as well as joint venture partner SAIC, and autonomous driving company Horizon Robotics.
Blume added, "Competition can also be a good thing to help us improve. China is one our most important markets and we continue to invest heavily in it."
Volkswagen, he said, has taken "huge initiatives to reduce costs" and is looking at big opportunities for scaling up its EV manufacturing while reducing the battery production cost by 50%.
Blume stated that "we have a lot of experience with driving, high-quality standards, and a great heritage for all of our brands. These are huge advantages compared to the new competitors."
Volkswagen Group has taken the right decision because speed is what matters.
European leaders are moving too slowly
According to CRU Group metals researchers, China has built battery plants at an alarming rate over the past decade. The country's capacity pipeline for gigafactories is expected to reach 4,200 gigawatt-hours by 2030.
The Chinese highlighted that, even at the current level of capacity, the GWh needed to convert the entire fleet of Chinese vehicles into battery-electric vehicles is double the amount.
The biggest cost for a battery plant is electricity. This is where Europe has a long way to go. Skoda CEO Klaus Zellmer said on CNBC that our electricity costs are high compared to those in China and North America.
Xpeng's President says the Chinese EV maker will enter the German market
In the U.S. President Joe Biden’s landmark Inflation Reduction Act allotted $370 billion to climate and clean-energy investments. This included a significant expansion of tax credits and incentives for clean vehicle manufacture, as well as supporting the domestic BEV Supply Chain.
There are now a variety of subsidies and incentives available to European companies. However, Zellmer stated that these were not "anywhere near" the U.S. and China and that policymakers "were not moving fast enough" in order to keep up.
Skoda belongs to the Volkswagen Group. Zellmer said that PowerCo is a subsidiary of Volkswagen Group which produces battery cells. It also plans to build an enormous gigafactory to complement its existing facilities in Spain, Germany and Canada.
Porsche's development director: "We are in the middle a major transition."
Zellmer said: "I believe that in terms of the supply, we are in a great position, but in terms expanding our footprint through gigafactories at this time, Europe is not in an ideal situation."
While luxury automakers, such as Audi and Mercedes, who have traditionally produced affordable, mass-produced vehicles in the middle of the range, are wary of China's threat, they seem more confident about their ability to maintain a value proposition.
Michael Steiner told CNBC, the head of R&D for Porsche, that the German luxury car manufacturer, which went public last year, focused on high-quality components to differentiate itself from its Chinese competitors.
"China is the biggest competitor and its battery and cell technologies are growing rapidly." Steiner stated that Porsche is looking for better cells, or, as he put it, higher energy densities.
Cellforce Group is our daughter company, where we produce or will produce cells for performance cars that are better than mass-produced cells and batteries.