EU PHEV tariff concerns trigger a pullback in Chinese automakers, but the market may already be pricing in the worst-case scenario

Overview

This report focuses on the market impact of a potential EU expansion of anti-subsidy duties to China-made PHEVs. Morgan Stanley notes that after the June 19 Handelsblatt report, Chinese auto OEM shares saw a notable pullback as investors worried that the strategy of shifting exports toward PHEVs after BEV tariffs could also be constrained. The report judges that the current sell-off looks more like worst-case pricing; even if tariffs are imposed, Chinese automakers could still adapt through short-term shipment acceleration, export-mix adjustments, localized European production, or supplying from plants outside China.

Core views

The core views are: first, if implemented, PHEV tariffs would raise the cost for Chinese automakers to enter the European market and weaken the export strategy shift from BEVs to PHEVs since 2024; second, after BEV tariffs took effect, Chinese automakers' overall export momentum was not meaningfully weakened, so PHEV tariffs may not necessarily change the industry's competitive landscape; third, because details may remain unclear over the next 1-2 months, automakers may accelerate channel stocking just as they did ahead of the 2024 BEV tariffs; fourth, SAIC, Chery, and BYD have relatively high EU PHEV exposure, followed by Geely and Leapmotor, while NIO, XPeng, and other EV startups have limited direct exposure; fifth, Morgan Stanley has a stronger preference for XPeng and SAIC, while also believing BYD and Geely have multiple production bases and adaptability.

Analysis framework

The report uses event-driven policy scenario analysis, comparing the potential PHEV tariffs with the 2024 BEV tariff experience, and combines MarkLines sales data to assess different OEMs' EU PHEV exposure. At the same time, the report continues its valuation framework and risk checklist for covered companies, using DCF, SOTP, and P/E scenario weighting to assess the fundamentals and share-price risks of Geely, BYD, SAIC, and XPeng.

Methodology notes

• Policy scenario analysisPHEV tariff scenario

  Potential impact of expanding tariff scope from BEVs to PHEVs

  Using the EU's 2024 imposition of an additional 7.8%-35.3% tariff on China-made BEVs on top of a 10% base tariff as a reference, the report analyzes the impact if PHEVs are brought into the anti-subsidy tariff scope on costs, export mix, channel stocking, and localized production decisions.

• Valuation frameworkDCF

  Base-case discounted cash flow

  The report uses a DCF base case for some covered companies; for example, Geely assumes a WACC of 11.2% and a terminal growth rate of 3%; SAIC assumes a WACC of 10.4% and a terminal growth rate of 2%; XPeng's base case assumes a terminal growth rate of 3%, a beta of 1.6, and a WACC of 12.8%.

• Valuation frameworkSOTP and P/E scenarios

  Multi-scenario weighted valuation

  BYD partly uses a blended valuation approach of 25% bull case, 50% base case, and 25% bear case; the bull case uses SOTP and implies 40x 2026E bull-case P/E, the base case uses DCF with a WACC of 14.3% and a long-term growth rate of 3.0%, and the bear case uses 12x 2026E P/E.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China Autos & Shared Mobility Industry

  Industry theme and target of policy shock

  Strengths

  Chinese OEMs as a whole still have strong export momentum and already have experience adjusting product mix after BEV tariffs.

  Weaknesses

  The rapid rise in PHEVs' share of EU exports makes the industry more sensitive to potential tariff expansion.

  Comparison

  The report notes that the companies with the sharpest share-price declines do not fully overlap with those with the highest direct PHEV exposure, and southbound-shareholding ratios also affected short-term performance.

  Risks

  Escalating EU protectionism, implementation of PHEV tariffs, channel front-loading pulling forward future demand, and rising overseas localization costs.

• XPeng Inc. (9868.HK)

  Covered company; one of the names the report continues to prefer

  Strengths

  The report is positive on its local partnerships; direct PHEV exposure is limited; upside drivers include more competitive new models, margin expansion, and a better in-car user experience.

  Weaknesses

  It still faces competition in the mid- to high-end market, cash-flow pressure from relatively weak profitability, and valuation pressure from slowing industry sales growth.

  Comparison

  Although EV startups also fell on sentiment, the report believes XPeng's direct PHEV exposure is limited, so the fundamental tariff impact is relatively small.

  Risks

  Intensifying mid- to high-end competition, profitability below expectations, cash-flow pressure, and sector valuation derating.

• SAIC Motor Corp.Ltd. (600104.SS)

  Covered company; a rerating opportunity the report continues to prefer

  Strengths

  The report sees rerating potential; the MG brand supports global expansion; domestic brand market-share gains, strategic investment income, and new-energy transition at joint ventures are potential upside drivers.

  Weaknesses

  A slowdown in domestic demand may offset restructuring efforts; the new-energy transition at joint ventures may bring additional costs; overseas expansion may be loss-making in the early stage.

  Comparison

  The report considers SAIC one of the companies with relatively high EU PHEV exposure, yet it remains one of Morgan Stanley's preferred names.

  Risks

  Protectionism leading to slower overseas sales, intensified competition, joint-venture transition costs, and unexpected losses in non-core businesses.

• BYD Company Limited (1211.HK)

  Covered company; high PHEV exposure but with response capability

  Strengths

  Multiple production bases help manage trade risks; ADAS adoption and continued trade-in subsidy policies may partly offset competitive pressure in the mass market; new models, overseas expansion, and global NEV demand are upside drivers.

  Weaknesses

  Competition in the mass market is intense, and gross margin is sensitive to price wars and overseas policy changes.

  Comparison

  The report says BYD may have more than 20% of overseas sales coming from PHEVs sold to the EU, implying relatively high exposure, but it is still viewed as capable of navigating the related risks.

  Risks

  Overseas expansion hindered by protectionism, weaker-than-expected global NEV demand, and lower-than-expected gross margin.

• Geely Automobile Holdings (O175.HK)

  Covered company; a responder with multiple production bases

  Strengths

  Continued gains in domestic NEV market share, reduced losses in the NEV business through scale effects, and improved profitability driven by overseas sales are upside factors listed in the report.

  Weaknesses

  The NEV business may see wider losses under price competition; fundamentals would be pressured if domestic demand slows materially.

  Comparison

  The report believes Geely's PHEV exposure is lower than SAIC, Chery, and BYD but still warrants attention; its multi-production-base layout helps address potential tariffs.

  Risks

  Slowing domestic auto demand, widening losses in the NEV business, and slower overseas sales due to competition and protectionism.

Key data

• Report date2026-06-22 09:29 GMTDisclosure time on the front page.
• Short-term sector reactionChinese OEMs down about 3%-5%, HSI about -0.5%The report believes the sector's excess decline versus the broader market mainly reflects PHEV tariff concerns.
• Existing BEV tariffs7.8%-35.3% additional tariffs, plus a 10% base tariffLevied by the EU on China-made BEVs since 2024; PHEVs had previously been exempt.
• Change in PHEV export share24%, versus 6% in 2024PHEVs' share in China's exports to the EU has risen significantly, reflecting export-mix adjustments after BEV tariffs.
• Potential confirmation timingDetails may remain unclear over the next 1-2 monthsBefore details are confirmed, automakers may accelerate channel stocking.
• PHEV exposure rankingSAIC, Chery, and BYD higher; Geely and Leapmotor next; NIO and XPeng lowerThe report says SAIC, Chery, and BYD may have more than 20% of overseas sales coming from PHEVs sold to the EU.

Impact & implications

If the EU formally imposes anti-subsidy duties on China-made PHEVs, the short-term impact would be reflected in rising export costs, advance inventory buildup in European channels, product-mix rebalancing, and faster localized production rollout. In the medium term, automakers with European local partnerships, overseas plants, or multiple production bases will be better able to buffer the policy shock; EV startups with low direct PHEV exposure but dragged down by sentiment may face a mismatch between fundamental risk and market sentiment.

Risks

• The EU formally expands anti-subsidy duties to China-made PHEVs, raising costs and changing export strategy in Europe.
• European protectionism continues to escalate, forcing Chinese OEMs to accelerate localized production or adjust supply chains.
• Short-term channel stocking may boost exports in the near term, but it may also pull forward subsequent demand.
• Slowing domestic auto demand and intensifying price competition compress automakers' gross margins and cash flow.
• Early-stage overseas expansion costs, new-energy transition costs at joint ventures, and losses in non-core businesses may weigh on company earnings.

What to watch

• Whether the EU formally comments on, launches a case on, or publishes details of PHEV anti-subsidy duties.
• Whether Chinese OEMs accelerate channel stocking and export pace to Europe over the next 1-2 months.
• Whether PHEVs' share of China's exports to the EU continues to stay above the 2024 level of 6% and approaches or exceeds 24%.
• Whether automakers accelerate localized production in Europe, cooperate with local partners, or supply the European market from factories outside China.
• Whether the share prices of automakers with high southbound-shareholding ratios continue to show amplified sentiment-driven volatility.
• Changes in new models, overseas expansion, gross margin, and cash flow for BYD, SAIC, Geely, and XPeng.