Why is China buying Europe's zombie factories?

Added: 2026-05-30

[00:00:02]Good morning.

[00:00:04]The manufacturing industries in Europe are dying. Automakers and chemical companies are closing production and laying off in Europe to invest in new capacity and headcount here in mainland China.

[00:00:19]One of the primary drivers of that is the cost of electricity. Western Europe has some of the most expensive power bills in the world.

[00:00:29]Labor costs are also far higher in Europe compared to China and other countries in Asia.

[00:00:37]This is from the Reshoring Institute.

[00:00:39]The mission of the Reshoring Institute is to help companies set up in the United States and reshore or pull manufacturing back into the United States. This table is called China is no longer a lowcost labor country. And we can only wonder why they published it at all.

[00:00:59]Only Germany has higher labor costs for manufacturing workers than the United States.

[00:01:05]And China's salaries are still lower by more than half.

[00:01:11]It's hard to see why these data would serve as motivation to invest in new factory production in the United States or in Germany or in Spain.

[00:01:23]Ironically though, Chinese car makers are considering exactly that.

[00:01:29]Chinese electric vehicles are blowing up markets everywhere and taking over everywhere they're allowed to be sold.

[00:01:36]Chinese companies tend to be vertically integrated and their EV industry has monopolies on the supply chains for everything that goes into making the batteries for electric vehicles.

[00:01:52]Chinese car makers are crunching the numbers and concluding that they can probably probably make more money by buying up factories in Europe that automakers there are shutting down, cutting excess capacity.

[00:02:09]Volkswagen was previously building 12 million cars per year worldwide. They're cutting that down to 9 million. So VW capacity that was turning out 3 million cars a year will be idled and they're looking for their Chinese partners to move in.

[00:02:27]Ford Motor Company has a factory in Spain and Jile is planning on taking over one of those lines.

[00:02:36]To Chinese car makers, it's a complex math problem. European labor costs are a lot higher.

[00:02:44]European power bills are a lot higher.

[00:02:47]So these companies are trying to solve the problem of import tariffs on cars built in China and sent over to Europe.

[00:02:55]This document is the tariff schedules and rules for Chinese cars.

[00:03:00]It runs almost 200 pages and the summary is here.

[00:03:06]The base import duty on Chinese cars is 10%. And these are the counterveiling tariffs which are added to that 10% baseline number. So the new tariffs on J's car imports for example are 18.8% plus 10% for an effective tariff rate of 28.8.

[00:03:30]Leap motor is also expanding in Spain and they're at 30.7.

[00:03:36]Once again they're at 20.7 plus the original 10%. So that math is already part of the decisionm for these companies.

[00:03:45]Then there is this a proposed new regulation that says electric vehicles need at least 70% of their components excluding the batteries to be sourced in the European Union to qualify for government subsidies.

[00:04:00]So when that becomes law, car makers can still buy and ship the batteries from China while meeting the 70% requirement by building locally.

[00:04:12]By doing that, government subsidies can be applied to the purchase of Chinese electric cars. Here is a nuts andbolts example of how that works now compared to what's coming later.

[00:04:25]Leap Motor is offering this car for sale, the TO3.

[00:04:29]European buyers, lees sorry, don't need to pay a deposit.

[00:04:34]They can make a lease payment of $57 49 per month for 3 years.

[00:04:43]This car is built in China, all of it.

[00:04:45]So when those new rules go into effect, this will not work. 36 months time 49 mean that they can drive this car for less than they would pay for a high-end bike.

[00:05:00]This is an extreme example to be sure, but there's a big difference between driving off with a car for €49 a month versus a down payment of €6,000, then €49 a month. Then it's not like buying an ice bike. And that's the math that's driving some of these Chinese brands to buy up factory capacity from the Europeans who already can't make the math work in their own businesses.

[00:05:26]There are skeptics both here and in Europe. This auto industry analyst is dismissive of the whole idea.

[00:05:35]The cost will be going up a lot and the Chinese are going to find out how hard it is to do business in Europe.

[00:05:42]New higher labor costs and the cost to build out new supply chains in Europe to meet the 70% component requirements.

[00:05:51]In 2024, the labor cost for each car built in China was under $600.

[00:06:00]That's less than Poland.

[00:06:03]Less than efficiency obsessed Toyota.

[00:06:07]Spain was at $955.

[00:06:10]Per car labor cost in Germany is over 3,300, five times higher than China's.

[00:06:19]Poland's flag is upside down.

[00:06:22]foreign investment in these joint ventures is capped at 49%. So we do see a lot of these announcements at 5149 and that's true here in China too where it's the other way around. That's not the problem. But the proposed new regulations for Europe will mandate half the workforce be European and include technology sharing requirements.

[00:06:46]So theroup guy is saying that nobody should be too excited just yet and there is also hesitancy on the Chinese side.

[00:06:56]Chinese car makers are growing market share in Europe right now while just passing along the higher tariffs to end buyers.

[00:07:04]China is killing everyone else on EVs.

[00:07:07]And that was before the war on Iran doubled gas prices for everyone in the world.

[00:07:16]That may be what industry insiders here are wondering. It is true that buying an existing factory saves time and saves upfront costs compared to just building one from scratch.

[00:07:29]But what if European car makers shut down capacity even faster now that internal combustion engine cars are falling even faster out of favor?

[00:07:40]Could Chinese companies just wait until prices fall some more? Or wait and see if the European Union decides that it's more important to get car buyers into electric vehicles, no matter where they come from, instead of buying fuel burning cars made in the EU.

[00:07:58]And the upfront cost savings shouldn't be assumed either. Elvis Chang is head of Xiaoong, and that is probably not the name his parents gave him.

[00:08:10]And he's got another problem. Shiaoong wants to expand production in Europe and is talking to VW and other European companies, but the factories are so outdated that Shiao Pong may be better off just building a new one.

[00:08:26]All of these developments and in automotive in particular are counterintuitive at first glance. Europe is de-industrializing and companies there are moving to China. Yet, Chinese companies and investment are also heading the other way.

[00:08:43]Chinese investment in the EU was at a 7-year high last year and it was 25% of total Chinese outbound investment.

[00:08:53]It was a 67% increase over 2024 and a big chunk of it went to the supply chain for electric vehicles.

[00:09:04]Green field investment is what Elvis atong is thinking about building facilities from the ground up. That number was up 51%.

[00:09:15]Looking at some of those data here, large green field investments for EV battery plants from CL and CLB.

[00:09:26]BYD opened an EV plant in Hungary. And going back to the tariff table, BYD enjoys the lowest tariff rate of all the Chinese car brands.

[00:09:40]Hungary was also the first European country to join China's belt and road initiative. And so factories there can easily plug into mainland China's supply chains, logistics, and banking systems.

[00:09:54]That's over 12 billion euro in new green field FDI just for Hungary.

[00:10:03]There are a lot of moving parts here and the skeptics are right to wonder just how much will result from all these discussions and negotiations because going back to that example again right now the German subsidy is €6,000 paid directly to Leap Motor.

[00:10:23]Then drivers sign a 36-month lease for €49 a month.

[00:10:29]But spreading out €6,000 over 36 months plus that 49 would mean about €220 a month.

[00:10:38]I know it's not apples to apples, so don't write me and tell me so. But that's still a lot less than anything coming out of a VW or a Stellantis factory in Europe right now.

[00:10:49]But how much will that car cost Leap Motor to build in Europe given all the new higher costs and mandates?

[00:10:59]This is Shiao.

[00:11:01]Be good.