The boom has finally been lowered on Chinese electric-vehicle companies. On September 13, European Commission president Ursula von der Leyen used her State of the Union speech to announce that the organization is launching an “anti-subsidy investigation into electric vehicles coming from China.”
The move—which could have serious ramifications for global automakers—has long been in the making.
In recent years, China has become a major exporter of cars, mostly thanks to the country’s dominance in producing EVs. MG, once a British sports car brand that has been owned and operated by a Chinese company since 2005, had the second-highest market-share increase in Europe in the first half of 2023, while other Chinese companies, like BYD and Nio, have also been making major gains in the European market. This growth has raised alarms for the domestic automobile industry on the continent, which is responsible for over 6% of total employment in the European Union.
“In my opinion, this announcement is just the first of several measures that Europe will consider taking in order to protect its local industry,” says Felipe Muñoz, a senior analyst at the London-based auto-industry consultancy JATO Dynamics.
Beyond competition, the investigation is also about politics, says Ilaria Mazzocco, a senior fellow at the Center for Strategic and International Studies and the coauthor of a recent report on China’s EV exports. “I think it’s coming as a response to concerns that Europe is too dependent on China,” she says, “and that the benefits of decarbonization are maybe flowing to China rather than staying in the European Union.”
No matter how it shakes out, an official inquiry could hurt the expansion of the Chinese EV business at a critical moment. This is the first time in history that Chinese auto brands have a decent chance at beating foreign brands on their home turf, as MIT Technology Review reported back in February. But the investigation, and potentially others to come from more countries looking to compete in the field of EVs, could very well halt their expansion before it really begins in earnest. Even in just the first 24 hours after von der Leyen’s speech, SAIC and BYD—the two Chinese auto companies that have performed the best in Europe—saw their stock prices drop by more than 3%.
A changing competitive landscape
The driving concern behind the investigation is the impact of Chinese EVs on Europe’s economy, particularly its world-leading auto industry.
Traditionally, Europe has exported many more cars to China than it has imported, but that trade surplus turned negative for the first time in December 2022. As China managed to get the upper hand in EV and battery technologies, both Chinese brands and Western ones, like Tesla, have ramped up their EV production capacity within China, and some of the products are then being shipped for sale in Europe.
Europe is currently an ideal export market for Chinese EVs, says Zhang Xiang, a Chinese auto-industry analyst and visiting professor at Huanghe Science and Technology College. Europeans tend to be more well-off than people in other markets and receive higher subsidies from the government to purchase EVs, he notes, and the subsidies make up for the heavy shipping costs to get the cars across the ocean. That’s why nearly half the cars exported from China are sold in the European market, Zhang says.
Given China’s pretty large head start in the EV auto trade, it seems unlikely that European automakers can quickly catch up on the technological front, so China’s advantage will likely only grow.
In the long term, it could get to a point where BYD will be able to sell its cars profitably in Europe while still keeping the price lower than the cost of production for European auto companies, says John Lee, a Berlin-based researcher and director of the consultancy East West Futures. And that would spell doom for them, he adds: “If you can’t sell at a price [that’s] competitive with your rivals without actually losing money on production, then that’s a death spiral.”
The threat from Chinese competitors feels so urgent that observers say this could be a life-or-death moment for well-known European brands like Volkswagen, the world’s largest automaker.
“[The fall of Volkswagen] is an extreme scenario, but it’s not implausible, and then you have the cascading effects,” says Lee. “The auto sector in Europe is quite transnational. Parts are made in Eastern and Central Europe, with Germany as a hub. That means there’s a potential flow of effects to Poland, to Hungary, and other places that make components.”
Allegations of unfair competition
So far, the only official details known about the investigation are what von der Leyen said in her speech: “Global markets are now flooded with cheaper Chinese electric cars. And their price is kept artificially low by huge state subsidies.”
The burden will be on China to demonstrate that the price of Chinese EVs is not subsidized. That will be a hard lift, since it’s well known that continued state support has been a big factor in the success of China’s EV industry.
While the most explicit Chinese government subsidy—a one-time purchase credit for consumers—ended in 2022, there are many other implicit subsidies still in place in the country, says Mazzocco. Examples include below-market credit, below-market equity, negotiated rates on land leases, and ad hoc tax cuts given by local governments.
“A year ago, we tried to quantify [EV] industrial policy spending in several countries, and we found that below-market credit was the most significant instrument used in China, and it was massive relative to every other country,” she says. “So I think if they want to find subsidies, they will find subsidies.”
If the investigation does find that Chinese companies indeed have an unfair advantage, European officials could institute a higher import duty on Chinese EVs. A full investigation may last about a year, says Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis, an investment management firm, who has advised the European Commission in the past.
The closest historic parallel is the 2012 EU investigation into Chinese state subsidies in the solar panel industry. It almost led to a 47% tariff on solar panels imported from China, but the trade dispute was settled at the last minute.
China might not be that fortunate this time, Garcia-Herrero says. Then, the Chinese government leveraged its impact on European companies and let them convince the politicians to pull back, she says. But European auto companies, more worried about their survival, are less likely to temper this investigation.
The dilemma for European car brands
European automakers would, broadly speaking, benefit from weaker Chinese competition, but targeting Chinese companies could also backfire in some ways; many European brands have significant investment in China or collaborate with Chinese brands.
Half the EVs exported by China are actually made by foreign companies or joint ventures, according to a data analysis by Mazzocco. In the first six months of 2023, 39.2% of China’s EV exports were Teslas, while joint ventures between European and Chinese companies accounted for 9.5% of them.
“Western companies that are producing in China represent a very significant portion of those exports. And at the same time, these are also the companies that these tariffs are supposed to protect. So it creates this very weird dilemma,” says Mazzocco.
Within Europe, brands also have different incentives because of varied relations with the Chinese market. German brands, including Volkswagen, have been increasing their investment in the country, including investments in making EVs; meanwhile Stellantis, which owns brands like Jeep, Chrysler, and Peugeot, is pulling out of the Chinese market.
The different levels of exposure are important because if the European Commission ultimately institutes tariffs, it’s almost certain that China will retaliate with some kind of countermeasures—which would in turn hurt European brands that have a deeper relationship with the Chinese market.
The political turning point
For a long time, Europe has been more friendly to Chinese companies than the US. This is part of the reason Chinese EV brands have chosen the continent as their first stop for expanding into Western markets.
“You can see it by the number of Chinese brands available in the US: zero. While in Europe, you already have more than 15 [Chinese brands],” says Muñoz, the London-based analyst. But that friendliness developed when Europeans didn’t see a threat from Chinese auto brands. “I would like to see how much of that friendship will continue when the Chinese brands continue to grab more market share,” he says.
The political environment in Europe has also become more hawkish against China, which “is forcing the politicians’ hands to adopt measures like this,” says Lee.
“There’s been a lot of souring on China across the board over the last few years,” he says, “and that’s relevant political context for taking more ambitious, forward-leaning measures regarding a particular industry, like EVs, that target China.”
Nevertheless, Europe hasn’t shut its doors to China to the same extent the US has, at least not yet—meaning the anti-subsidy investigation could lead Chinese companies down two very different paths.
If geopolitical tensions between Europe and China continue to grow, Chinese EV brands may simply be pushed away from investing in Europe, just as they have refrained from entering the US market for now.
“If the door to Europe is shut, Chinese EV brands will have to choose the smaller markets, like Southeast Asia, South America, and the Middle East,” Zhang says. “It will be a severe blow to the globalization process of Chinese cars.”
On the other hand, investigations like this one can actually be seen as an invitation for Chinese companies to set up shop in European countries. Some Chinese EV companies are already in the exploratory stage of building factories in Europe. Following through on those plans would not only show their contribution to local employment and taxation but allow them to avoid future tariffs. “There were announcements [about building Chinese factories], but we still need to see it happen,” says Muñoz.
Either way, the investigation could have a ripple effect, warns Garcia-Herrero. Other countries, like Brazil, have their own ambitions for a domestic EV industry—and they may take inspiration from European regulators in going after China. “At least for countries that can produce their own vehicles, they may start doing the same,” she says.
…. to be continued
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