EV manufacturer Leapmotor is the largest auto market in the world by sales. Stellantis said on Thursday that it is investing $1.6 billion to acquire a 21% share of Leapmotor. This acquisition will give the smaller Chinese automaker a footing in Europe.

With the transition to electric vehicles, legacy international automakers are lagging, and this partnership allows Stellantis (STLAM.MI) to benefit from Leapmotor’s cutting-edge technology.

Meanwhile, many Chinese EV manufacturers are introducing more affordable versions in Europe.

The CEO of Stellantis, Carlos Tavares, told reporters, “The Chinese offensive is visible everywhere.” “With this deal we can benefit from it rather than being the victims of it.”

After Fiat Chrysler (FCA) and France’s PSA merged to establish Stellantis at the beginning of 2021, the company has had trouble selling automobiles in China and has looked to make a fresh start there. Dongfeng Motor Group (0489. HK) is one of its joint venture partners in China.

With brands like Fiat and Peugeot, the firm announced a year ago that it was ending its joint venture with Guangzhou Automobile firm (601238. SS), a Chinese manufacturer of Jeeps.

The transaction occurs at “complicated if not belligerent times” for ties with Europe and China, according to Massimo Baggiani of London-based Niche AM, which oversees a value fund focused on electric mobility. China has restricted shipments of graphite, a vital component for EV batteries, while the EU has begun an anti-subsidy investigation into Chinese electric vehicles. “I see this move as part of a strategy by Stellantis to gain a foothold in China before such an opportunity might disappear,” Baggiani stated.

Stellantis’ latest agreement comes after a partnership between Volkswagen (VOWG_p.DE) and Xpeng (9868. HK) was revealed in July. This partnership signaled the beginning of a new phase in Chinese auto alliances and demonstrated how China has become a hub for electric vehicle technology worldwide.

The Chrysler parent will have the only right to produce, export, and sell Zhejiang Leapmotor Technology’s (9863. HK) goods outside of Greater China as part of a joint venture that Stellantis will control 51 percent of.

As to the experts of Banca Akros, China is leading the way in electric vehicle technology and “enjoys a huge cost advantage.” “We believe that Stellantis’ relatively cheap move makes absolute sense and represents an intelligent “de-risking” step,” they said.

Certain experts harbored doubts over the ability of minority-stake agreements to assist international auto firms in turning around their declining sales in China. Such little expenditures will not be the “silver bullet they (international carmakers) are hoping it is,” according to Tu Le, the founder of Sino Auto Insights, a consulting business located in Beijing.

“Successful automotive partnerships are few and often dissolve when the interests diverge,” stated Bill Russo, CEO of Shanghai-based advising business Automobility. Stellantis’ earlier worries about the escalating competition from low-cost Chinese EVs in Europe sparked the EU investigation.

Previously an outspoken opponent of cheaper Chinese imports entering Europe, Tavares told reporters that Stellantis was not a “Trojan horse” due to the Leapmotor agreement and disagreed with the EU’s investigation. “We enjoy the rivalry. He stated that it is not the wisest course of action to begin an inquiry to address such issues.

Concerns over competition and the diluting of current shareholdings caused Leapmotor’s shares to drop 11% on Thursday, while Stellantis’ shares decreased by 0.6%.

In China, over 40 electric vehicle makers are engaged in a pricing battle that Tesla started earlier this year (TSLA.O). Automakers and their suppliers are facing margin pressure as sales are going down despite significant price reductions due to poor consumer demand.

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In the second half of 2024, the joint venture with Dutch incorporation is expected to begin exporting, and Stellantis will have two board seats with the Chinese company.

The alliance will assist Stellantis in growing its EV portfolio and achieving its 2030 goal of having half of its sales in the United States and all of its sales in Europe come from EVs.

To make money, Leapmotor, which came in ninth place in China for sales of new energy vehicles, has been trying to sell its EV platforms and other EV assets to well-known international automakers. In an EV sector that is consolidating, the company stated last month that it needs at least a five-fold rise in sales to stay in business. According to Yale Zhang, executive director of Shanghai-based consultancy Automotive Foresight, “We will certainly see more and more such partnerships as Chinese EV startups have a real urgency to survive, and they are open to having foreign shareholders.”