Are major changes taking place in China's hybrid electric vehicle sector that will cut its exports to Europe by half?

In October 2024, the European Union imposed additional anti-subsidy duties on pure electric vehicles imported from China.

In July 2026, the EU imported 50,400 hybrid electric vehicles from China in a single month, which is more than 13 times the figure recorded in October 2024.

Over the two-year period, Chinese automakers did not force their way through the tariff wall for pure electric vehicles, but shifted their product focus to hybrid vehicles.

Brussels soon found that there was a loophole left in the tariff code.

On October 9, the second regular meeting of the China-EU trade and investment consultation mechanism concluded in Beijing, and the two sides reached a memorandum of understanding on hybrid vehicle trade.

On October 10, Bloomberg revealed that the EU plans to use trade safeguard measures to reduce the annual import volume of Chinese hybrid vehicles from the estimated 800,000 units in 2026 to about 400,000 units per year.

On October 12, the Paris Motor Show opened, with 20 Chinese automotive brands participating, outnumbering the total number of German and French automakers combined.

From these pieces of news, we can actually see the underlying change: Europe has begun to use quotas in exchange for time, and Chinese automakers must use localization in exchange for development space.

Why is the EU targeting hybrid vehicles?

The EU's anti-subsidy investigation into Chinese pure electric vehicles started in October 2023, and the final ruling took effect at the end of October 2024. In addition to the 10% basic tariff, the EU imposed additional anti-subsidy duties ranging from 7.8% to 35.3%, with SAIC subject to the highest applicable tax rate.

Plug-in hybrid models were not included in the investigation, and continued to pay the conventional 10% tariff.

The policy difference soon changed the trade flow.

In October 2024, the EU imported only about 3,800 hybrid vehicles from China. By July 2026, the monthly import volume had reached 50,400 units, a year-on-year increase of 163.2%. In the first four months of 2026, the EU's import value of hybrid vehicles from China reached 3.176 billion euros, surpassing the 2.808 billion euros of pure electric vehicles for the first time.

The situation in the UK market is different.

The UK is not covered by the above EU tariff arrangements, and there is no direct purchase subsidy for plug-in hybrid models. However, the sales volume of plug-in hybrid models of Chinese brands is still about 21,000 units higher than that of pure electric vehicles.

Prices, refueling/recharging methods and ease of use jointly support the market demand for such products.

The EU is now preparing to implement safeguard measures.

Such measures usually take the form of tariff quotas: allowing a certain quantity of goods to be imported at a lower tax rate, and imposing higher tariffs on the part exceeding the quota.

The target revealed by Bloomberg is about 400,000 units per year, while the estimated import volume in 2026 is about 800,000 units, which is equivalent to a 50% cut.

Shevchovich told the media that this memorandum of understanding will reduce China's exports of hybrid and plug-in hybrid vehicles to Europe by "millions of units" within four years, which is equivalent to halving the original expected scale.

Overseas media previously reported that the European side had discussed reducing the market share of Chinese brand plug-in hybrids in Western Europe to around 15%.

A member of the Expert Committee of the China Automobile Dealers Association mentioned that industry data shows that the current share of Chinese brand plug-in hybrids in Western Europe is about 29%, and when it drops to 15%, the quantity change is close to halving.

The two statements may come from the same set of calculations.

Here we need to popularize a key difference.

Anti-subsidy duties target "unfair subsidies", which need to prove the existence of subsidies, damage and causal relationship.

Safeguard measures target "serious damage caused by fair trade but surging imports", which only need to prove the surge in imports and industrial damage.

The latter has more room for political manipulation, and the WTO compliance threshold is also lower.

The EU's shift from anti-subsidy to safeguard measures shows that it prefers to use administrative means to quickly limit the inflow, rather than getting caught up in lengthy subsidy proof procedures.

But why are hybrid vehicles the specific target?

China and Europe have different hybrid technology routes. Chinese plug-in hybrids are dominated by electric drive, with larger battery capacity, mature lithium iron phosphate route, and obvious price advantages brought by large-scale production and supply chain efficiency.

The plug-in hybrids of European automakers are more of a transitional solution, with high costs of ternary lithium batteries, higher costs in vehicle manufacturing, channels and brand premium.

In the German market, the starting price of BYD Seal U DM-i is about 16,000 euros lower than that of the Volkswagen Tiguan eHybrid.

The two cars have similar battery capacity, with a WLTP pure electric range of about 125 kilometers.

The difference lies in the battery type: Seal U uses lithium iron phosphate, while Tiguan uses ternary lithium. According to the average global battery pack price in 2025, the cost gap between the battery packs of the two versions is about 1,100 to 1,800 US dollars.

The remaining terminal price difference of about 14,000 euros comes from vehicle manufacturing, configuration, brand pricing, channels and profit margins.

This shows that the competitiveness of Chinese hybrid vehicles is caused by a systematic cost structure, including battery route, electric drive architecture, supply chain scale, manufacturing efficiency and product definition. If the EU wants to reduce the share of Chinese brand plug-in hybrids in Western Europe from 29% to about 15%, the corresponding quantity reduction range is roughly half. Members of the Expert Committee of the China Automobile Dealers Association regard this magnitude adjustment as the European side's estimation of market competition intensity. If the European side wants to align the price competition conditions, the corresponding quantity reduction range is roughly half.

There is an important concept in quota economics called "quota rent". If the quota is managed by the exporting party, the rent may go to Chinese automakers; if it is managed by the importing party, the rent will go to European importers or distributors.

In either case, quotas will increase scarcity and push up unit prices.

Chinese automakers may reduce exports of low-margin models, shift to high-configuration and high-profit models, and earn more money with fewer vehicles.

European consumers will face fewer choices and higher prices, which is a typical welfare loss of trade protection.

But the real loss of Chinese automakers is not just sales volume.

Scale dilution, channel layout, user data and brand penetration will all be restricted. The EU's average daily trade deficit in goods with China exceeds 1 billion euros. The European automotive industry is in the period of electrification transformation, and local manufacturers are under pressure such as weak demand, high energy and labor costs. The rapid growth of hybrid vehicle imports has been included in the European side's agenda for trade rebalancing.

Shevchovich regards this memorandum of understanding as "China's first agreement to adjust its automobile exports to Europe", and revealed that the results of the talks will be submitted to the EU Summit to be held from October 15 to 16.

Halved sales volume does not mean being out of the game

If the 15% share target is implemented, companies with the largest hybrid vehicle sales in Europe such as Chery, BYD and SAIC will be most affected. According to data from Dataforce, an independent German market research institution, the top three plug-in hybrid sales in Europe in the first half of 2026 are all Chinese models, namely BYD Song PLUS DM-i with about 44,700 units, Yuan UP DM-i with about 31,600 units, and Chery Explore 06 C-DM with about 29,900 units.

A considerable proportion of Chery's sales in Western Europe come from the UK.

In 2025, the cumulative sales of Chery's three brands, Jaecoo, Omoda and Chery, in the UK reached 53,600 units, accounting for 2.7% of the UK market share.

The UK is not within the EU tariff and quota framework, which objectively leaves a buffer space for Chery.

BYD's Hungary factory has taken the lead.

The factory has an investment of 4 billion euros, with a planned annual production capacity of 150,000 units in the first phase and a long-term peak of 300,000 units. Li Ke, Vice President of BYD, said in June 2026 that the factory will start vehicle assembly production in the fourth quarter of 2026, about one year later than the original plan.

After it is put into operation, BYD's dependence on exports from China will decrease to some extent, but the proportion of local procurement will determine whether the factory can maintain its original cost advantage.

The situation of SAIC is more complicated. As the company with the highest tax rate in the pure electric anti-subsidy duty, the MG brand's sales in Europe still exceeded 300,000 units in 2025, of which the sales volume of the MG Hybrid+ family reached 137,000 units, a year-on-year increase of 300%.

If plug-in hybrids are also included in the control, SAIC's adjustment space in the EU will be further narrowed.

After the export space narrows, European production capacity will definitely begin to take on a greater market role. Chinese automotive enterprises adopt multiple local modes including direct export, cooperative OEM, equity participation in existing factories and new plant construction, with different capital investment, production cycle and depth of local supply chain. Zidan Sherritt, Senior Director of European Corporate Ratings at Fitch Ratings, judged that real localization depends on the establishment of local procurement and supply networks.

Chinese brands can assemble imported parts in Europe, but this alone cannot build a solid European industrial layout.

This is also the biggest bottleneck.

It is the most difficult to replicate a supplier ecosystem in Europe that is as efficient as that in China, but this is precisely the field where Chinese automakers can exert their greatest efforts directly.

The high energy and labor costs in Europe are structural problems that cannot be solved by a single enterprise.

At the operational level, the test lies in pricing and channels.

Sherritt said that with the deepening of localization, more decision-making power is being transferred to the European team. Due to different tax systems, subsidies and competitive environments in various countries, the pricing power has to be moved to the front line.

For distributors, long-term investment in a new brand relies on reliable parts supply, credible warranty, consistent pricing and residual value protection. If distributors are faced with large discounts, uncertain supply or low resale value, relying solely on rapidly expanding the dealer network is far from enough.

The key point is that what Chinese automakers lack most in Europe may not be factories, but automotive finance and residual value management capabilities.

Residual value management, leasing schemes, battery warranty, used car certification and buyback commitments, these seemingly back-end tools are actually the key to opening the front-end market.

European distributors will not risk their brand reputation just for a temporary sales boom.

Whoever can help distributors manage residual value risks can lock in the channels.

However, European distributors have already taken action. According to a report by the German newspaper Die Welt, as Chinese automaker Xiaomi prepares to enter the German market, well-known local auto distributors are actively seeking cooperation opportunities.

The Weller Group, which has 42 outlets and has long operated BMW and Toyota, now sells BYD at 12 outlets and MG at 10 outlets. Burkhard Weller, head of the group, told Deutsche Presse-Agentur that he is satisfied with the sales performance of Chinese brands.

Many consumers have already learned about the relevant models actively before stepping into the showroom. Weller also revealed that both BYD and MG took the initiative to contact the group for cooperation.

Taking Spain as an example, BYD Spain announced in September this year that it had newly absorbed 11 local auto dealer groups, bringing the total number of official dealerships to 107, and planned to expand to 130 sales outlets and 120 maintenance service points by the end of 2026.

The Guardian of the UK reported on October 4 that according to local automotive industry data, the combined share of Chinese brands such as BYD, Omoda and JAECOO in the UK new car market reached 12% in the first 8 months of this year.

Even the mentality of European consumers has undergone huge changes.

OC&C Strategy Consultants, an international strategic consulting firm, recently launched a survey of more than 8,000 drivers from Australia, Canada, China, France, Germany, Italy, the Netherlands, the UK and the United States. The results show that among people who are considering buying electric vehicles recently, 40% of the respondents said they are willing to pay the same price for a Chinese car with the same configuration as a Western brand, and 13% of the respondents said they are willing to pay a higher price for a Chinese brand.

44% of the respondents believe that the quality of some Chinese electric vehicles is equivalent to or even better than that of Western models.

This proportion rises to 48% in France and Italy, and 35% in Germany.

European distributors are market-oriented, their interests are consistent with consumer surplus, and there is a conflict with the protectionist demands of local manufacturers.

For distributors, introducing new brands is first and foremost a business decision.

The European automotive market is highly competitive. Traditional brands adjust their product and sales strategies, and distributors need to find new sources of revenue.

When Chinese automakers enter Europe, they also need local enterprises to provide showrooms, maintenance facilities, customer relationships and market experience, so the two sides have formed practical cooperation needs.

At the same time, European automakers are now playing a clear "double standard" game.

On the one hand, the EU is trying to add a "Made in Europe" clause to a new piece of legislation; on the other hand, European automakers also hope to profit from China's rise by selling their underutilized factory capacity to Chinese enterprises and using their technologies. This provides Chinese automakers with opportunities for reverse joint ventures.

Europe provides brands, channels and factories, while China provides electrification platforms, cost control and supply chain. If this cooperation can be built into a long-term community of shared interests, it means that the European market share can be retained in the quota era.

The next contest is about who is qualified to "Manufacture in Europe"

According to the current trend, it is obvious that the EU's trade barriers are beginning to shift from tariffs to rules.

Local content, carbon footprint, battery passport, data compliance and rules of origin will all become new "soft quotas". Although the UK is not within the EU tariff framework, with the EU strengthening local production requirements, the British automotive industry is also facing the problem of how to balance exports to the EU and attract Chinese automotive investment.

The tension between market demand and trade policy is becoming a new challenge for the British automotive industry.

JPMorgan's forecast in the first half of this year shows that by 2028, Chinese automotive brands are expected to occupy 20% of the Western European market.

This forecast is still likely to come true, but the structure will be drastically differentiated.

The share of leading localized brands will rise, while pure export brands will be squeezed out.

The next round of competition for Chinese brands in Europe will revolve around who has the ability to be jointly recognized as "Made in Europe" by the local market, regulators and the industrial chain.

China and the EU may use hybrid vehicle quotas in exchange for a negotiation channel for price commitments in the pure electric anti-subsidy case. China's position is "making concessions in order to move forward": using an predictable quantity arrangement to exempt hybrid models from additional tariffs, and reserve a channel for pure electric vehicle negotiations.

This not only sets a compliance boundary for the memorandum of understanding, but also retains the right to resort to the WTO dispute settlement mechanism.

The head of the European Department of the Ministry of Commerce of China emphasized when interpreting the negotiation results on October 10 that the two sides conducted in-depth discussions on the trade of electric vehicles and hybrid vehicles based on the basic principles of respecting facts, non-discrimination and compliance with WTO rules, avoiding the escalation of the situation, and "effectively safeguarding the actual export interests of Chinese enterprises and the stable development of China-EU hybrid vehicle trade".

Therefore, I actually have several judgments about the next three to five years, for your reference.

First, around December 2026, the EU safeguard measures will most likely be implemented in