The European Union has initiated an investigation into Chinese subsidies for electric vehicles, aiming to counter the influx of low-cost imports. This move signals a potential escalation, which could have significant repercussions for the EU’s automotive sector.
European Commission President Ursula von der Leyen’s announcement initially buoyed shares in the European auto industry, offering hope of protection against emerging Chinese competitors. However, concerns of a possible backlash later tempered those gains.
In a notably assertive stance, von der Leyen declared on Wednesday that the global market is saturated with inexpensive Chinese cars, and the EU is prepared to respond. “Their price is kept artificially low by huge state subsidies. This is distorting our market,” she emphasized in her annual address to the European Parliament. “And as we do not accept this distortion from the inside in our market, we do not accept this from the outside.”
Tensions between China and the EU have been brewing for months, with the Asian superpower adopting an increasingly confrontational approach towards both the US and Europe in matters of industrial policy and geopolitics. The shift towards cleaner technologies has emerged as a significant point of contention, jeopardizing the EU’s industrial core against swifter state-backed Chinese enterprises.
Sigrid de Vries, Director General of the European Automobile Manufacturers’ Association, hailed von der Leyen’s announcement as a positive indication of the European Commission recognizing the industry’s asymmetrical predicament. She noted that China’s “apparent advantage” is already eroding the domestic market share of European automakers.
This investigation represents the initial concrete step in countering rival state support for green technologies, following over a year of mounting subsidies in the US, China, the UK, and Europe. Depending on the inquiry’s findings, it could propel the involved countries toward more assertive and reciprocal protectionist measures.
Initially, European governments voiced concerns over the Inflation Reduction Act passed by President Joe Biden’s administration, arguing it violated free-trade rules. They subsequently shifted their focus towards securing carve-outs that would allow their companies to benefit from the incentives.
The probe against the Chinese electric vehicles sector is part of a broader strategy by von der Leyen to recalibrate the EU’s relationship with China without entirely severing ties. This strategy has been evident in various areas, including efforts to restrict the sale of high-end semiconductors to Beijing and the implementation of export controls related to quantum computing and artificial intelligence.
The EU has also called on Beijing to open up its market to rebalance bilateral trade relations and establish new mechanisms to address China’s coercive practices, particularly towards countries like Lithuania.
China’s generous government incentives for both the industry and buyers have led to the establishment of numerous electric vehicles manufacturers, supported by substantial investments from European companies in Chinese joint ventures. Given China’s status as the largest market for Volkswagen AG and other German automakers, engaging in conflict with Beijing carries inherent risks.
The Stoxx 600 Automobiles & Parts Index initially surged by as much as 2.2%, the most significant intraday increase since July 27, before subsequently retracting all gains to register a 0.3% decline. Volkswagen, Europe’s largest carmaker, experienced a similar fluctuation, swinging from a 3.8% increase to a 0.2% gain.
While many of China’s emerging companies in this sector have yet to consistently generate profits due to intense price competition, aggressive state-backed industrial policies evoke memories of China’s dominance in solar-cell manufacturing a decade ago.
Von der Leyen underscored this historical parallel, stating, “We have not forgotten how China’s unfair trade practices affected our solar industry. Many young businesses were pushed out by heavily subsidized Chinese competitors. Pioneering companies had to file for bankruptcy.”
The recent Munich car show intensified concerns regarding China’s growing influence. Manufacturers like China’s EV leader BYD, Nio, and Xpeng showcased models targeting European buyers, posing a formidable challenge to established European brands.
BYD, which recently surpassed VW as China’s top-selling auto brand, has expanded its presence to approximately 15 European countries. Its Atto 3 crossover SUV claimed the title of the best-selling electric vehicle in Sweden in July. The forthcoming Seal sedan, priced around €45,000 ($48,000) in Germany, positions it as a direct competitor to Tesla’s Model 3 and several Volkswagen models.
As part of the ambitious Green Deal plan to reduce emissions, the EU has effectively prohibited combustion-engine cars starting in 2035. However, EU carmakers could face pricing challenges if China intensifies its focus on the market.
France, home to mass-market brands like Renault, Citroen, and Peugeot, views the investigation as a victory. The French finance ministry is currently working on adjustments to state-funded bonuses for EV purchases in France, with the aim of favoring European production.
Finance Minister Bruno Le Maire emphasized the urgency of a more proactive and protective European industrial strategy in relation to China and the US, stating, “There isn’t a day to lose.” Le Maire is in Berlin to advocate for more robust measures to safeguard European industry.
Source: Bloomberg
