Xpeng: the latest Chinese OEM to plan European production

Xpeng is the latest Chinese vehicle company to consider European production to avoid the additional tariffs which the EU is imposing on Chinese OEMs. Company Chief Executive He Xiaopeng told Bloomberg that it’s in the early stages of looking for a potential European site.

Xpeng, part owned by Volkswagen, is currently due to face an additional tariff of 21.3%—roughly in the middle of the range of tariffs which the EU is imposing on China-made EVs. But when placed on top of the standard 10% EU import tariff, this additional tariff will eat significantly into any margin which it would otherwise make in Europe. In that regard alone the decision to look at European production is logical. More interestingly this announcement came with the proviso that it wanted a location free from labour problems. What this means is not clear however: does Xpeng want cheap labour? Guaranteed specific skills? No unions? No history of strikes or disputes in general? Or something else perhaps?

Also, Xpeng is a very small player in Europe, having just started selling in Germany, France and parts of Scandinavia, so committing to European production without a substantial base of customers and sales momentum is certainly interesting. The intensification of competition in China may well mean that a number of brands will fall by the wayside during the expected consolidation in the sector. The survivors will likely be those who manage to build a sustainable presence outside China, and this will inevitably mean establishing production facilities overseas. Exports from China will become more and more difficult as restrictions on trade in all sorts of manufacturing goods increases as protectionist policies are implemented across the world.

Xpeng is one of many Chinese OEMs, such as Chery and SAIC, already planning to open plants in south-east Asia, but it is Europe where the most significant action is likely to take place. BYD is already building a plant in Hungary and confirmed another one for Turkey. Chery is taking over the old Nissan factory in Barcelona and will likely build a new plant in eastern Europe too. Dongfeng has been linked with potential investment in Spain, Italy and Turkey; and SAIC’s MG unit is also looking to open a European factory. To this mix we can now add Xpeng which wants to open a data centre in Europe to support its vehicles’ intelligent driving features as well as building a facility in which to make vehicles.

Committing to European production without a substantial base of customers and sales momentum is certainly interesting

Xpeng’s intention to open a plant in Europe is interesting for a number of reasons, starting with its low sales volume in China, prompting the need to expand overseas. Ideally this expansion would take place by building on its existing link with Volkswagen. Reports suggest that over 300 Volkswagen engineers are working inside Xpeng, undoubtedly learning as much as they can from the company on its AI and ADAS capabilities, as well as helping improve the manufacturing side of the Chinese company’s operations. The VW-Xpeng cooperation in China includes a major shared sourcing operation and is due to deliver two new electric cars in 2026, based on the Xpeng’s G9 midsize crossover. Xpeng certainly needs these vehicles to be a success in China, as well as overseas, because its domestic sales are disappointing; at around just 50,000 units in H1/2024, they barely make a dent on BYD’s H1 sales of over 1.6 million.

But given Xpeng’s limited presence in Europe just now, can it justify the capital expenditure to build an entirely new factory? It may say it can’t afford not do so but perhaps something different is on the horizon. It could make more sense for Xpeng to use a company like Valmet, or Magna Steyr, to build vehicles for it under contract, a move which would likely be quicker to implement than building an all-new factory; it would also allow Xpeng to test the market more quickly and cheaply than through building a new factory. The collapse in Xpeng’s share price, following disappointing domestic sales, will almost certainly reduce its ability to raise funds for further expansion. And this in turn could mean that the company has to give serious consideration to another way of expanding in Europe, ie building on the link with Volkswagen. Several VW factories in Europe will have spare capacity over the next few years as EV sales have failed to take off as originally expected. The investment made to convert factories like Emden and Zwickau in Germany and Skoda’s in the Czech Republic to EVs means they could do with some additional income streams to generate a return on this investment.

Manufacturing Xpengs in Europe makes sense but making them in a Volkswagen group factory may well make the most sense of all the options the company will be considering. The link with Volkswagen has already helped improve the Xpeng’s gross margin in its last reported financials from a negative 3.9% to a positive 14%. Encouraging though that is, Xpeng will need a lot more volume to succeed; given the intensive competition amongst domestic brands in China, moving to Europe is logical move and exploiting the Volkswagen link offers a route to maximising this potential. For Volkswagen in return Xpeng could play a similar role, although at a more expensive price point, to that which Leapmotor, another relatively new Chinese brand, already plays at Stellantis. With that idea in mind, perhaps kit production at a VW plant in Europe will be the first step ahead of full-scale manufacturing perhaps two or three years later.