Europe set to crack down on Chinese electric cars

European Commission president Ursula von der Leyen has used her State of the Union speech to announce that the organisation is launching an “anti-subsidy investigation into electric vehicles coming from China.”

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%.

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 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.