“We see the Chinese as the main competitor, not GM or Toyota. The Chinese are going to be the powerhouse, I think.”
These are the words that Ford CEO Jim Farley pronounced in late May 2023 at the Morgan Stanley Sustainable Finance Summit, and they represent a mounting reality that countries leading the automotive sector cannot ignore. In particular, Chinese EV firms might represent a substantial threat specifically to the European Union for multiple reasons that will be addressed in this article.
China's electric vehicle (EV) sector has witnessed an extraordinary surge, with sales skyrocketing from 1.3 million to 6.8 million between 2020 and 2022. This rapid growth cements China's status as the world's largest EV market—a title it has proudly held since 2015. The significance of this growth cannot be overstated, especially when compared to the United States' sales of around 800,000 EVs in 2022. These numbers are more than a statistic; they represent China's strategic emergence as a frontrunner in the global automotive and climate policy arena. The decade spanning from 2010 to 2022 was pivotal for the Chinese EV market. The Chinese government, acknowledging its position behind established automotive giants in the internal combustion engine (ICE) sector, made a decisive shift toward subsidizing the EV industry. This was a sector where China could not only compete but potentially lead on a global scale. The strategic pivot away from ICE was bolstered by the inclusion of EV technology in China's Five-Year Plan in 2001 and was further accelerated by the appointment of Wan Gang, an auto engineer who spent a decade working for Audi in Germany, as Minister of Science and Technology in 2007. China's investments in the sector have been robust, with over 200 billion RMB ($29 billion) injected into the industry by 2022, culminating in EVs comprising over half of the global sales in the same year, just as subsidies made way for a more market-driven approach. Moreover, China’s battery production capability stands out as a cornerstone of its success. The country has a comparative advantage in the production of rare-earth materials essential for battery manufacturing. Chinese firms, led by the likes of Contemporary Amperex Technology Co. Limited (CATL), have pioneered the lithium iron phosphate (LFP) battery technology. Their decade-long research has narrowed the energy density gap, propelling LFP batteries to constitute one-third of all EV batteries globally by September 2022. In addition to government subsidies, which allowed Chinese producers to reach economies of scale far earlier than their European competitors, and the wide availability of raw materials, China’s cheap labour and technological innovations help keep production costs down. The Chinese government's cohesive strategy starkly contrasts with the European Union's approach, which has lacked a unified subsidy program for EV adoption. Today, the competitive pricing of Chinese EVs in the European market is a testament to the effectiveness of China's long-term planning and market strategy. Even with the prospect of hefty EU tariffs, Chinese EVs could sustain their competitive edge. For example, the high-end BYD Seal, priced at €44,900, would still undercut with an additional hypothetical €10.000 tariff the EU's average EV price of €55,821 as of the first half of 2022.
The United States' approach, characterized by a significant 27.5% tariff on Chinese-made cars and protectionist tax credits, contrasts sharply with the European Union’s more open stance. The EU's relatively low tariffs on imported cars, set at only 10 %, and its generous national subsidies, which apply equally to imported and domestically produced electric vehicles, create a conducive environment for Chinese automakers. This openness is further amplified by the EU's bold legislative move to ban the sale of new combustion engine cars by 2035, mirroring the U.K.'s decision, thereby significantly amplifying the market for EVs. This regulatory framework essentially rolls out the red carpet for manufacturers like BYD, whose sales figures reached nearly 2 million cars last year, eclipsing competitors like Tesla. These policies present an invaluable opportunity for Chinese brands to establish a foothold in European cities. Although Chinese auto exports currently account for a modest 3.5% of European auto sales, projections by Transport & Environment suggest a potential surge to between 9 and 18 % of the all-electric car market by 2025. Such a rapid escalation would substantially impact the European automotive landscape, particularly when considering the industry's significant contribution to the continent’s economy. The automotive sector employs directly and indirectly 13.8 million people in the EU, representing 6.1% of total EU employment and generating over 7% of EU GDP. It's an industry that not only sustains a vast network of jobs but has also been a bastion of European economic strength, generating a trade surplus ranging from €70 billion to €110 billion annually over the past decade. The infiltration of Chinese EV products into this market, bolstered by their competitive pricing and China's efficient production of battery cells—the primary cost factor in EVs—poses a palpable threat to this economic mainstay. Europe's automakers face the additional burden of legacy costs associated with transitioning away from combustion engines—a challenge their Chinese counterparts are unencumbered by, thanks to China's vast domestic market and production scale. VW and other European giants, with extensive workforces dedicated to ICE vehicle production, could be forced into drastic restructuring to compete with the efficiency and innovation of Chinese EV producers. The looming prospect of a diminished trade surplus and the potential destabilization of an industry integral to the European economy is galvanizing discussions among EU policymakers. With pressures mounting, there's a growing call for the European Commission to reassess its trade policies and potentially increase tariffs on foreign cars to protect the continent's automotive sector. However, internal divisions within the EU underscore the complexity of this issue. French-backed automakers advocate for higher protective barriers, whereas German manufacturers, with significant stakes in the Chinese market, are wary of retaliatory measures from Beijing. These divergent interests within the EU reflect the broader challenge of formulating a cohesive response to the rise of China's EV industry—an ascent that has the potential to reshape the global automotive landscape significantly.
In conclusion, it is important to note that in October 2023, the European Commission formally initiated an anti-subsidy investigation that needs to be concluded within a maximum of 13 months, to determine whether Chinese electric vehicle firms benefit from governmental subsidies considered illegal in the framework of the EU and WTO legislation. The outcome of this investigation will be crucial to understanding the scale at which Chinese firms will be able to penetrate the European market and what will be the response of the EU to preserve its precious automotive sector.
Main sources:
- “Chinese EVs in Europe: A Threat to European Automakers?”, The International Centre for Defence and Security, 20 October 2023, by T. Anderson
- “How did China come to dominate the world of electric carts?”, MIT Technology Review, 21 January 2023, by Zeyi Yang
- “Miles apart: The US and Europe diverge on China car threat”, POLITICO, 23 June 2023, by David Ferris and Joshua Posaner
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