[SMM Analysis] China and EU Reach Agreement on Hybrid Export Arrangements: The Next Variable in Chinese Auto Exports

Twenty-two months, a 13-fold increase.

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 under relentless pressure from pure electrics in the Chinese market—have instead become the fastest-growing engine for Chinese automakers' export growth 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, yielding 16 consensus outcomes, four of which are directly related to automobiles: a hybrid trade understanding reached in a manner consistent with WTO rules; continued progress on price undertakings and review procedures for pure electric vehicles under the anti-subsidy case, with approved car models exempt from countervailing duties; continued green-channel access for Chinese rare earth and permanent magnet exports to the EU; and as a supporting measure, China reducing tariffs on approximately 4 billion euros' worth of EU goods exported to China, including auto parts.

What exactly did this understanding cover

First, the EU side's account. EU representative Šefčovič stated that the goal is for China's hybrid exports to the EU over the next four years to be reduced by more than half compared with the projected level under a no-agreement scenario. Bloomberg, citing informed sources, reported that safeguard measures—namely tariff-rate quotas—may be adopted, with a quota level of around 400,000 units per year, effective as early as December, still subject to approval by the 27 EU member states. However, these figures were all cited by media and did not appear in the official documents of either side.

Next, China's official position, which is key to understanding this understanding. The Ministry of Commerce's statement emphasized three fundamental principles. First, respect for facts: according to Eurostat data, the EU imported 107,000 hybrid vehicles from China in 2024 and 302,000 in 2025, and the two sides reached an upward arrangement on the basis of the 2025 figure, ensuring export space and stable growth for Chinese enterprises. Second, non-discrimination: no measures will specifically target Chinese products, and the quota obtained by China will not be lower than that of any other source of imports to the EU. Third, compliance: the trade arrangement should conform to WTO rules, and China reserves all rights to resort to dispute settlement and seek trade compensation within the WTO framework.

The negotiation process also bears out this logic. The EU initially sought a "voluntary export restraint"—an explicit cap on the number of vehicles exported by Chinese automakers—a model rejected by China on the grounds that quantitative controls are inconsistent with WTO rules. The wording in the final joint document was "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 effectively safeguarding the actual export interests of Chinese enterprises and the stable development of China-EU hybrid vehicle trade. In other words, what China rejected was the model of unilateral restrictions, but the two sides clearly reached some arrangement on the volume framework—the baseline for this arrangement is the actual imports of 2025, with an upward direction. As for whether the specific mechanism is a tariff-rate quota or a price undertaking model similar to the BEV case, that will only be confirmed when the measures take effect in December.

The two narratives seem contradictory, but the denominators are different. The EU's "halving" uses the projected volume under a no-deal scenario as the denominator—a figure that linearly extrapolates this year's import momentum and is clearly inflated. China's "upward arrangement" uses the actual imports of 302,000 units in 2025 as the denominator. The same quota line looks like a halving against the inflated projection, but growth against last year's actual volume. SMM's understanding is that the real meaning of this arrangement lies in the growth slope: Chinese PHEV exports to Europe will not be pushed back to 2025 levels, but the growth rate will be notably lower than the natural extrapolation under unconstrained conditions. The specific quota levels and year-by-year arrangements will only be confirmed when the measures take effect in December.

Two months in 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 is highly likely before they do. Automakers will concentrate shipments of PHEV orders to Europe, clear customs in advance for already-produced and in-transit volumes, 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 full chain takes about 5 to 8 weeks. The only window available now is the six to seven weeks before the end of November, so any cell orders added now would barely make the last train and would only cover a very small marginal volume. Second, exports are already order-based production. Most of the 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 is precisely the tightest LFP power cell lines. Fourth, the mechanism details are still undecided, which actually discourages additional orders—how the quota baseline is set and how year-by-year levels are arranged have not been finalized, so automakers that expand aggressively now would be stuck with excess volume.

So the likely data pattern going forward is that November exports shot up, but battery cell production failed to keep pace MoM.

Three threads beyond the deal: BEV rebound, UK diversion, and accelerated localization

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

First, the growth center of exports to Europe is shifting marginally toward pure electric vehicles. Pure EVs are not covered by the hybrid understanding, and the price undertaking channel for exemption from countervailing duties has already been established—the Cupra Tavascan produced by Volkswagen Anhui first received an exemption in February this year, with the undertaking conditions comprising a minimum selling price, import volume, and European investment. Under quota constraints, hybrid export growth will be slower than natural extrapolation, and automakers will redirect some of the channel and marketing resources originally allocated to plug-in hybrids back to pure EVs. Over a longer time horizon, the growth slope of plug-in hybrid exports will be constrained, and the share of pure EVs is expected to rebound.

Second, the UK has become a parallel market. This understanding 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 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 imposes restrictions, the relative value of the UK to Chinese automakers is actually rising. The Middle East and Latin America, where electrification is accelerating this year, will become new destinations for hybrid exports.

Third, and most fundamentally: localization is accelerating. Local production in Europe is not subject to import quotas—BYD's Hungary plant has a Phase 1 capacity of 150,000 units per year and plans to start vehicle assembly in Q4 this year, timed to coincide with the implementation of the quota measures; Chery's joint venture plant with Spain's Ebro in Barcelona has already started production, with a production target of about 30,000 units this year; Leap Motor's B10 will be produced at Stellantis's Zaragoza plant; XPeng has commissioned Magna's Austrian plant for toll processing, and four models have already landed on European production lines within a year; 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, "produced in China, exported to Europe" is shifting toward "produced in Europe, sold in Europe."

Turning to batteries and materials: the constraint is on LFP, with essentially no impact on ternary

Breaking down the hybrid export models subject to this constraint, 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 export rush and the quota arrangements after December will see the vast majority of volume fall on LFP. According to the official Chinese position, the intensity of the constraint may be milder than the market initially feared based on media reports, but the direction of a slower growth slope remains unchanged, and growth expectations for LFP hybrid exports should be revised down accordingly.

The exposure on the ternary side 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, which is negligible compared with the monthly production volume of ternary power battery cells. Additionally, when MG HS underwent its model changeover, the battery was switched from ternary to LFP—PHEV exports are repeating the old script of “de-ternarization” seen in China’s PHEV market. Even without this quota, the contribution of hybrid exports to ternary demand was already weakening.

What deserves more attention is the offsetting effect from the “two major” policies. First, the export mix shifting back from PHEVs to BEVs implies a rise in vehicle battery capacity per unit—BEVs carry 60 to 100 kWh versus 20 to 40 kWh for PHEVs, so battery demand per unit of sales is increasing, partially offsetting the volume pressure. Second, the high-end BEV export line, which has high ternary content, is not affected by the hybrid quota and instead benefits from the mix shift back toward BEVs.

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

Subsequent observation points

In Q4, there are four periods worth watching: this week’s EU summit for approval of safeguard measures; December for the implementation details of the mechanism—whether it is a tariff-rate quota or a price-commitment arrangement, the level of the quota baseline, and how it is scheduled year by year will directly determine the actual constraint on hybrid exports in 2027; the commissioning progress of BYD’s Hungary plant in Q4 as the first real-world test of localization substitution; and November export data to verify the actual magnitude of the export rush.

SMM Lithium Battery Analyst Wang Yizhou