[SMM Analysis] China and EU Agree on Halving Hybrid Tariffs: The Next Variable for Chinese Auto Exports

22 months, 13-fold.

In October 2024, the EU imported only around 3,800 hybrid vehicles from China in a single month. By July 2026, that figure had risen to 50,400 units. In the first four months of 2026, the EU's hybrid import value from China reached 3.176 billion euros, surpassing pure electric imports of 2.808 billion euros for the first time in history. Plug-in hybrids, a route that has been steadily squeezed by pure electric vehicles in the Chinese market, have instead become the most powerful engine of export growth for Chinese automakers in Europe.

Brussels could no longer sit still. On October 8 and 9, the second regular meeting of the China-EU Trade and Investment Consultation Mechanism was held in Beijing, reaching consensus on 16 outcomes, four of which are directly related to automobiles: hybrid trade to reach an understanding in a manner consistent with WTO rules; pure electric vehicles to continue advancing the price undertaking and review procedures in the anti-subsidy case, with approved car models exempt from anti-subsidy duties; China's rare earth and permanent magnet exports to the EU to continue through the green channel; and as a supporting measure, China to reduce tariffs on approximately 4 billion euros worth of EU goods exported to China, including auto parts.

What exactly did this understanding cover

First, let's look at the EU side's account. EU representative Šefčovič stated that the goal is to reduce China's hybrid exports to the EU by more than half over the next four years compared with the projected level under a no-agreement scenario. Bloomberg subsequently disclosed the possible mechanism: safeguard measures in the form of tariff-rate quotas, with EU hybrid imports from China in 2026 expected to be around 800,000 units, compressed to about 400,000 units per year, effective as early as December, still requiring approval from the 27 EU member states.

Now let's look at China's stance. What the EU initially wanted was a "voluntary export restraint," meaning an explicit cap on the number of vehicles Chinese automakers could export, a model that China rejected—on the grounds that quantity controls are inconsistent with WTO rules. The wording in the final joint document is "to reach an understanding through consultation in a manner consistent with WTO rules," which the Ministry of Commerce, in its interpretation on October 10, characterized as strongly safeguarding the actual export interests of Chinese enterprises and the stable development of China-EU hybrid vehicle trade.

In other words: China did not accept a written quota, while the EU unilaterally set a goal of halving imports. How exactly this will be achieved—whether through tariff-rate quotas or a price undertaking model similar to the pure electric case—can only be confirmed once the measures take effect in December. Everything at this point is a framework, not detailed rules.

As for impact assessment, China's "stable development" leans toward preserving the existing volume while cutting growth; the EU's "halving" and "avoiding an impact of millions of vehicles" lean toward a total volume approach. SMM's current assessment is that the final plan will most likely fall somewhere between the two—the quota level set slightly above current imports, with limited growth and year-by-year reductions. The short-term impact would be close to the mild scenario, gradually converging toward the hard scenario after 2028.

The two months of Q4: an export rush will come, but battery cell production will not jump with it

The measures will take effect as early as December, and an export rush will most likely occur before they do. Automakers will concentrate shipments of hybrid orders bound for Europe, clear customs in advance for volumes already produced and in transit, and pull forward production originally scheduled for December.

So will the export rush drive battery cell production schedules? SMM's assessment is that it basically will not.

There are four reasons. First, the timeline is too tight. From battery cell orders to vehicles clearing customs for export, the entire chain takes about 5 to 8 weeks. The only window available now is the six to seven weeks before the end of November, so battery cells ordered now would barely make the last train and would only cover a very small marginal volume. Second, exports are already produced on an order-driven schedule. The vast majority of vehicles destined for Europe in Q4 are already in automakers' October production plans, so the export rush is drawing down existing production schedules and finished product inventories—it is shipments, not production. Third, there is no spare capacity. Supply of auxiliary materials such as copper foil is currently tight, and battery cell production is already constrained. What the export rush needs most is precisely the tightest LFP power production lines. Fourth, the mechanism details are still undecided, which actually discourages additional orders—if the final outcome is a mild volume-preserving plan, automakers that aggressively expand production now would be stuck with excess volume.

So the most likely data pattern going forward is that November exports will shoot up, but battery cell production will not keep pace MoM.

Three threads beyond the agreement: a shift back to BEVs, UK diversion, and accelerated localization

For 2027 and beyond, the impact of this memorandum should be viewed along three threads.

First, the structure of exports to Europe will be forced to shift back to BEVs. BEVs are not within the scope of the hybrid memorandum, and the price undertaking channel exempt from countervailing duties is already operational—the Cupra Tavascan produced by Volkswagen Anhui received its first exemption in February this year, with the commitment conditions being a minimum selling price, import volume, and European investment. Automakers will redirect channels and marketing resources originally allocated to PHEVs back to BEVs. On a longer time horizon, the share of PHEVs in China's new energy exports will most likely peak and pull back around 2027, while the BEV share will rebound.

Second, the UK has become a parallel market. This memorandum covers the 27 EU member states, while the UK, Norway, and Switzerland are outside the framework. Chery is already using the UK to absorb hybrid sales, and its Jaecoo 7 was the best-selling car model in the entire UK market in September this year. BYD and Leap Motor are also stepping up their presence in Northern Europe. After the EU’s restrictions, the relative value of the UK to Chinese automakers is actually rising. Markets in the Middle East and Latin America, where electrification is accelerating this year, will become new destinations for hybrid exports.

Third, and most fundamentally: local substitution is accelerating. Local production in Europe is not subject to import quotas—BYD’s Hungary plant has a Phase 1 annual capacity of 150,000 units and plans to start vehicle assembly in Q4 this year, timed to coincide with the implementation of the quota measures; Chery’s JV with Spain’s Ebro in Barcelona is already in production, with a production target of about 30,000 units this year; Leap Motor’s B10 will be produced at Stellantis’ Zaragoza plant; XPeng has commissioned Magna’s Austrian plant for toll processing, and within a year four car models have landed on European production lines; SAIC’s Spain project has also been sited, with plans to start construction in 2027 and begin production in 2028. Combined with the EU’s policy direction of promoting localization of EV parts, “produce in China, export to Europe” is shifting to “produce in Europe, sell in Europe.”

For batteries and materials: the pressure is on LFP, with essentially no impact on ternary.

Looking at the hybrid export models subject to this restriction, the battery structure is clear at a glance. BYD’s DM-i series uses blade LFP batteries, and the main hybrid models from Deepal and MG also use LFP. The Q4 rush to export and the quota constraints after December mean the vast majority of the volume falls on LFP.

Ternary exposure is very small. The ternary hybrid models currently with volume in Europe are mainly the plug-in hybrid versions of the Lynk & Co 01 and 08, with annualized exports of about 50,000 units, translating to battery cell demand of about 1 GWh—negligible relative to the monthly production of ternary power battery cells. In addition, MG switched its HS battery from ternary to LFP during the model refresh—plug-in hybrid exports are repeating the old script of “de-ternaryization” in China’s domestic plug-in hybrid market. Even without this quota, the contribution of hybrid exports to ternary was already weakening.

Instead, two offsets are worth noting. First, the export mix shifting back from plug-in hybrids to BEVs means higher vehicle battery capacity per exported unit—BEVs at 60-100 kWh versus plug-in hybrids at 20-40 kWh—so battery demand per unit of sales is growing, partially offsetting the volume suppression. Second, the high-end BEV export line, which has high ternary content, is not affected by the hybrid quota and actually benefits from the mix shift back.

High-end BEV models will increasingly be assembled locally in Europe with local batteries in the future, and battery demand will shift accordingly to European local capacity. The logic of China’s battery cell and cathode exports to Europe will depend on the ramp-up pace of European battery plants going forward.

Subsequent observation points

In Q4, there are four periods worth watching: this week’s EU summit will show the approval status of safeguard measures; in December, the mechanism details will be finalized, whether it is a hard quota or a price-commitment-style minimum selling price scheme; the commissioning progress of BYD’s Hungary plant in Q4 serves as the first real-world sample of localization substitution; and November’s export data will verify the actual extent of the export rush.

Wang Yizhou, SMM lithium battery analyst