Volkswagen AG’s Chinese partner is in the initial stages of selecting a site in the European Union as part of its future plan to localize production, chief executive officer He Xiaopeng said in an interview with Bloomberg in its headquarters in Guangzhou, China, on Thursday. 

The company expects to build capacity in areas with “relatively low labor risks,” He said, adding that Xpeng also plans to set up a large-scale data center in Europe as efficient software collection becomes paramount for cars’ intelligent driving features. 

Xpeng’s broad plan of going global isn’t going to be impacted by higher levies, He maintained, although he noted that some “profits from European countries will be reduced after the tariff increase.”

Establishing a manufacturing footprint in Europe would see Xpeng join the growing ranks of Chinese EV makers, including BYD Co., Chery Automobile Co. and Zhejiang Geely Holding Group Co.’s Zeekr, looking to build out production in the region to minimize the impact of the European Union’s decision to increase duties on China-made EVs to as much as 36.3%. Xpeng is set to face an additional tariff of 21.3%.

Added European levies are just one aspect of a wider global trade dispute. The U.S. has imposed tariffs on Chinese EV imports that can top 100%, as the world’s two biggest economies spar over an industry that’s grown rapidly thanks partly to Beijing’s subsidies.

The trade actions have only added to the challenges facing the 10-year-old company in recent years. Xpeng has also struggled with tepid domestic sales, product planning disputes, and a prolonged price war in the Chinese market. Its share price has more than halved since January.

The carmaker delivered around 50,000 vehicles in the first half, only about one-fifth of BYD Co.’s monthly sales. Though its delivery outlook for the current quarter exceeded analysts’ estimates, its projected revenue fell well short of expectations, according to its latest quarterly report. 

One bright spot for Xpeng is its year-old partnership with VW. Hundreds of the German carmaker’s staff are now working at its headquarters in Guangzhou. Vice president-level managers from both sides meet at least once a week, He said, noting the company is “making every effort to ensure the partnership works well.” 

One example of how the collaboration is benefiting the Chinese company lies in managing complex supply chains. With Volkswagen’s help, Xpeng’s gross margin in the second quarter climbed to 14% from negative 3.9% a year ago. 

AI Advantage

Xpeng also sees its expertise in artificial intelligence and advanced assisted driving features as helping it make inroads into Europe. That’s one reason why it will have to set up a large-scale data center there before it can introduce those features in the region, He said. 

U.S.-listed Xpeng has also invested heavily in AI-related research and development, including its own chips, He said, noting semiconductors will play more of a critical role in “intelligent” vehicles than battery cells.

“Selling a million AI-powered cars per year will be a prerequisite for the companies that finally emerge as the winners in the next 10 years, in which the human driver will maybe touch the steering wheel less than once per day on average on their daily commute,” He said. “We are going to see companies rolling out such products from 2025, and Xpeng will be among them.”