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With Xpeng’s current limited presence in Europe, can the company rationalize the capital investment needed to establish a completely new factory? By Ian Henry
Xpeng is the most recent Chinese automotive manufacturer exploring the possibility of producing vehicles in Europe, aiming to circumvent the additional tariffs imposed by the EU on Chinese OEMs. CEO He Xiaopeng disclosed to Bloomberg that the company is in the early phases of searching for a possible European location.
Partially owned by Volkswagen, Xpeng is set to incur an additional tariff of 21.3%—which falls roughly in the middle of the tariffs levied by the EU on electric vehicles (EVs) imported from China. This additional charge, combined with the standard 10% EU import tariff, could significantly erode any profit margins Xpeng might otherwise achieve in the European market. Thus, the decision to explore production in Europe appears to be a sensible one. Notably, this announcement included a condition that the chosen location must be free from labor-related issues. However, the specifics of these requirements are unclear: is Xpeng seeking low labor costs, assurance of certain skill sets, absence of unions, or a track record of stability without strikes and disputes?
Moreover, Xpeng is a minor player in Europe, having only recently begun sales in Germany, France, and parts of Scandinavia. This move to commit to European production without a concrete customer base and sales momentum raises questions. The intensified competition within the Chinese market may lead to the exit of several brands during the anticipated sector consolidation, while only those who establish a sustainable international presence are likely to survive. This will inevitably require setting up production facilities outside of China, especially as exporting from China becomes more challenging due to growing trade restrictions and global protectionist trends.
Like many other Chinese OEMs, such as Chery and SAIC, Xpeng is planning to open manufacturing plants in Southeast Asia, but Europe is expected to see the most impactful developments. BYD is currently constructing a factory in Hungary and has confirmed plans for another in Turkey. Additionally, Chery is taking over an old Nissan facility in Barcelona and is likely eyeing a new plant in Eastern Europe. Dongfeng is rumored to consider investments in Spain, Italy, and Turkey, while SAIC’s MG division is also looking to establish a production facility in Europe. Xpeng’s aspirations include not only setting up a factory for vehicle production but also establishing a data center in Europe to enhance its vehicles’ intelligent driving features.
Commitment to European production without a solid customer base and sales momentum is certainly intriguing.
The potential establishment of a European factory by Xpeng is noteworthy for several reasons, particularly its low sales volume in China, which underscores the need for international expansion. Ideally, this growth could leverage Xpeng’s existing partnership with Volkswagen. Reports indicate that over 300 Volkswagen engineers are working within Xpeng, gaining insights into the company’s AI and Advanced Driver Assistance Systems (ADAS) capabilities while also enhancing manufacturing processes. The cooperative efforts of VW and Xpeng in China encompass a significant shared sourcing initiative, which is expected to lead to the launch of two new electric vehicles by 2026, based on Xpeng’s G9 midsize crossover. Success for these vehicles is crucial for Xpeng, especially as domestic sales are lackluster; with only around 50,000 units sold in the first half of 2024, the figure pales in comparison to BYD’s over 1.6 million sales in the same period.
Yet, considering Xpeng’s limited foothold in Europe, can it justify the capital investment required to create a brand new factory? While the company may claim that it can’t afford to neglect this opportunity, other possibilities may lie ahead. It could be more advantageous for Xpeng to partner with a manufacturer like Valmet or Magna Steyr to produce vehicles under contract. This route would likely allow for quicker implementation than constructing an entirely new factory, enabling Xpeng to assess the market more swiftly and economically. Furthermore, the decline in Xpeng’s stock price, following disappointing home sales, is expected to hinder its ability to secure funds for expansion. Consequently, this might compel the company to seriously consider alternative strategies for growth in Europe, such as capitalizing on its link with Volkswagen. Several VW facilities across Europe will soon have surplus capacity, as electric vehicle sales have not surged as anticipated. The investments made to convert plants like Emden and Zwickau in Germany and Skoda’s in the Czech Republic will likely need additional revenue streams to recoup investment costs.
Manufacturing Xpeng vehicles in Europe certainly seems logical, but utilizing a Volkswagen group factory may prove to be the most practical option. The partnership with Volkswagen has already contributed to improving Xpeng’s gross margin from a previous negative 3.9% to a positive 14% in its latest financial updates. Although encouraging, Xpeng will require a much larger volume of sales to thrive. Given the fierce competition among domestic brands in China, expanding into Europe becomes a sound strategy, and leveraging the connection with Volkswagen presents an opportunity to maximize this potential. In return, Xpeng could fulfill a role for Volkswagen, albeit at a higher price point, similar to how Leapmotor operates within Stellantis. With this in mind, initial kit production at a VW facility in Europe might precede full-scale manufacturing in two to three years time.
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