China EV – Latest EU Trade Policy Prompts Faster Localization

The Financial Times reported that the EU is asking China to voluntarily limit China-made hybrid vehicles to around 15% of the EU market, down from more than one-third currently, or potentially face further trade restrictions. Chinese hybrid imports have surged from around 3,800 units in October 2024 to 50k units in July 2026. China-made BEVs are currently subject to the standard 10% import tariff plus additional anti-subsidy duties of up to 35.3%, while hybrids still face only the standard 10% tariff.

Product Competitiveness Drives the EU Market Share of Chinese Brands to New High: Near-term trade restrictions are likely to put pressure on exports of China-made vehicles.  This potential policy shift comes as no surprise as the market share of Chinese automakers rose from around 2% in 2020 to 8% in 2025, while European manufacturers saw their split declined from 72% to 67%. Moreover, Chinese brands have further increased their EU market share to around 9% in 1H26.

Chinese OEMs remain particularly competitive in NEVs, supported by strengths in batteries, electric powertrains, intelligent driving, integrated supply chains and cost efficiency. Hybrids also fit European demand well, as they rely less on charging infrastructure and offer greater convenience in markets where charging networks remain uneven.

Expecting Acceleration in Local Production: It is clear that the EU’s intention is to encourage Chinese automakers to allocate part of their production capacity to Europe.  The impact on Chinese manufacturers is likely to be short-term, as Chinese OEMs are already pursuing multiple localization models. For instance, BYD is already building a plant in Hungary, while XPeng is partnering with Magna to assemble cars in Austria. Given Europe’s substantial market potential, the region is likely to attract more Chinese brands to establish local production.

Our Views: We believe BYD (1211.HK, HK$81.15, HK$740bn) and XPeng (9868.HK, HK$41.18, HK$79bn) are two companies that are pretty ready for localization.  BYD’s Hungary plant is expected to commence production in 4Q26 with an annual capacity of around 150k units. Supported by its production scale and competitive BEV and hybrid product portfolio, it is believed that its local production can quickly ramp up.

XPeng is taking a more asset-light approach through contract manufacturing at Magna’s Graz plant in Austria, where two BEV models entered production in 3Q25. Overseas deliveries reached over 20k units in 2Q26 (+84% YoY), with BEVs accounting for the majority. Several models have also ranked among the best-selling Chinese emerging EV brands in selected European markets. With overseas ASP above EUR40k, stronger overseas sales will support a better product mix and profitability. Looking ahead, the rollout of its next-generation VLA overseas could further strengthen XPeng’s differentiation through intelligent driving and software capabilities. These two counters are trading at 16x FY26E P/E and 0.8x FY26E EV/Revenue, respectively. (Research Department)