Wednesday, 2024 July 24

Europe adopts defensive stance against influx of Chinese electric vehicles

On September 13, Ursula von der Leyen, president of the European Commission, announced the formal initiation of an anti-subsidy inquiry into electric car imports from China while delivering her annual State of the Union address to the European Parliament.

In her speech, von der Leyen said that electric vehicles are a “crucial industry for the clean economy, with a huge potential for Europe. But global markets are now flooded with cheaper Chinese electric cars. And their [prices are] kept artificially low by huge state subsidies.” She added that this distortion of the European market is unacceptable, whether from within or outside of the market.

The anti-subsidy inquiry

The EU’s anti-subsidy probe is based on two regulations: an anti-subsidy regulation for products imported from non-EU countries, and a separate regulation on foreign subsidies distorting the EU’s internal market. In such investigations, the EU examines individual companies rather than countries, and if a positive conclusion is reached, trade sanctions involve imposing tariffs on the products exported by the investigated companies, rather than levying tariffs on all similar products from a specific country.

Under the former regulation, a preliminary decision needs to be made within nine months after the formal initiation of an inquiry, and a final decision within 13 months, without retrospective application to goods imported before the investigation. However, the European Commission retains the right to investigate foreign subsidies within the past ten years.

Regarding subsidies obtained before the implementation of the regulation, they can be investigated as long as the subsidy was received within the five years preceding the implementation of the regulation, and if it has continued to distort the EU market afterward. This means that the EU’s anti-subsidy investigation against Chinese EVs can be retroactively applied for up to five years, going back to 2018. It’s important to note that “subsidy” in the context of the current anti-subsidy investigation is a broad concept.

Ursula von der Leyen, president of the European Commission delivering her State of the Union address in September 2023. Photo Credit: European Union

According to Lei Song, senior counsel at Zhong Lun Law Firm, the definition of subsidies in the EU’s anti-subsidy inquiry is not limited to fiscal appropriations and tax reductions. The ability of Chinese companies to provide detailed identification and classification of subsidies is crucial for responding to this investigation. The process is tight, and once initiated, Chinese companies will be under intense scrutiny for the next 12–13 months, therefore requiring them to prepare in advance. Government support, cooperation from European importers and end users also play important roles in addressing the investigation.

Seeking recourse

From the viewpoint of Lei, Chinese car companies should actively participate in this inquiry, involve professional advisory teams early, and pay attention to the power of local partners in the EU. If the results turn out to be unfavorable, companies can seek judicial remedies in European courts. Based on past “double reverse” (anti-dumping and anti-subsidy) cases, companies that actively defend themselves can face tariff rates up to eight times lower compared to those that passively or do not defend.

Chinese car companies can also learn from industries with rich experience in similar cases in China, such as textiles and photovoltaics. The European Chamber of Commerce in China expressed strong concern and opposition to the EU’s announcement of initiating the anti-subsidy inquiry, stating that the Chinese electric vehicle industry has continually innovated and accumulated overall industry advantages, providing high-end, cost-effective, and customizable EVs to consumers globally, including European citizens. This advantage was not created through alleged massive subsidies, according to the organization.

The spokesperson for China’s Ministry of Commerce responded on September 14, expressing strong concern and dissatisfaction. Beijing believes that the investigation measures planned by the EU are a blatant act of protectionism under the pretext of “fair competition,” which will seriously disrupt and distort the global automotive industry supply chain, including the EU, and have a negative impact on economic and trade relations between China and the EU.

According to observations from Caixin, the anti-subsidy probe will not significantly impact Chinese car companies’ sales in Europe over the short term. In the next three years, this policy will have a more substantial impact on Chinese car companies’ efforts to expand their market share in Europe. However, in the long term, China’s competitive advantage in the global new energy vehicle market is unlikely to be shaken.

Current impact likely minimal

Chinese EVs sold in the European market are primarily vehicles from European brands that have been acquired by Chinese car companies, or vehicles with European brand backgrounds. Examples of these include SAIC Motor’s MG, Dongfeng Motor’s Aeolus, Geely’s Lynk & Co, and Smart. These brands, with the exception of MG and Smart, are primarily produced in Europe. Thus, while they are considered Chinese brands in terms of sales, they will not be significantly affected by the anti-subsidy investigation.

SAIC Motor, Smart, BYD, Great Wall Motor, JAC Motors, and Xpeng Motors are car manufacturers in China that export vehicles to Europe. They are therefore the primary targets of this investigation. Among these companies, only SAIC Motor and Smart have a significant share of the European market. The other brands currently have less than 1% of their total sales in Europe, so the impact is minimal.

MG 4 electric compact car. Photo courtesy of SAIC Motor / MG.

SAIC Motor’s MG is the brand most likely to be affected by the anti-subsidy investigation. It is produced in China and a significant percentage of its sales originates from Europe. In the first half of 2023, MG sold 45,000 units in the European market, and that figure is expected to exceed 100,000 units by the end of the year. However, MG has been selling its vehicles in Europe for several years, and its prices have remained stable, mostly unaffected by changes in Chinese new energy vehicle subsidies. Proving that its prices benefited from such subsidies will be challenging. Additionally, MG has an extensive local distribution network in Europe, and support from European importers, dealers, and customers can aid MG’s defense during the investigation.

Tesla also deserves special mention. Before 2023, Tesla’s Model 3 units sold in the European market were primarily imported from China, falling under the category of Chinese EV exports. However, with the help of the Chinese team, Tesla’s factory in the US has effectively increased its production capacity. Currently, orders for the Model 3 in the European market are primarily fulfilled by Tesla’s facility in the US, with products from the Shanghai factory mainly exported to Japan, Southeast Asia, and Australia.

From Q4 2023 to Q1 2024, the new Model 3 will be manufactured only at Tesla’s Shanghai factory. In the short term, this will significantly increase the number of Tesla vehicles exported from China to Europe. However, after its US factory has ramped up production capacity for the new Model 3, imports to the European market will likely originate from the US.

Tesla Model 3. Photo Courtesy of Unsplash

In summary, due to the low reliance of Chinese car companies on the European market, the anti-subsidy investigation is unlikely to have a significant impact on the operational status of Chinese car companies.

Regarding the European Union’s initiation of an anti-subsidy inquiry against the import of Chinese electric vehicles, viewpoints in the industry are not fully aligned. For one, legal experts consider anti-subsidy measures a regular trade policy tool, and the initiation of an investigation to be standard practice.

A senior scholar well-versed in the EU’s anti-subsidy regulations told Caijing Eleven that such anti-subsidy investigations that target a specific country or industry have occurred before in the past, typically during major price distortions in competition. Therefore, the EU’s actions in this case may not necessarily signify new geopolitical changes and should be interpreted from an economic and trade standpoint.

Moreover, it’s important to note that the initiation of the procedure does not imply a final decision has been made. China is not the only country offering subsidies for new energy cars, and as long as China’s subsidy policies are found to be reasonable and comparable to EU subsidies, it will be challenging to substantiate the allegations.

It’s also worth highlighting that the inquiry doesn’t solely aim to impose sanctions. During the investigation process, a significant objective is to clarify the status and intensity of Chinese EV subsidies in various countries. Additionally, the anti-subsidy investigation allows room for defense and is a standard procedure in international trade.

Long-term impact of the inquiry

As of now, Chinese car companies have limited dependence on the EU market. Even if the anti-subsidy investigation finds them liable, it is unlikely to have a significant impact on their business operations. However, in the coming years, this inquiry could adversely affect their efforts to expand their market share in Europe, potentially slowing down their entry into the European market. Speed is of the essence for European car companies, as they must accelerate their progress and commence the production of the new generation of intelligent EVs as soon as possible to compete with Chinese new energy vehicles.

The next two to three years represent a critical window. During this time, the market share that Chinese car companies can capture will determine the success or failure of Chinese automotive brands in the European market. The anti-subsidy inquiry is one of the few tools that the EU has to address the competition from Chinese car companies during this crucial window.

In the next three years, Chinese car companies won’t be able to establish production capacity in Europe. If they want to expand their market share, they will have to rely on imports from China. Even if local production becomes an option, at current costs, it may not be as cost-effective as importing directly from China.

During this year’s International Motor Show Germany, a report published by UBS on the BYD Seal (Atto 4) indicated that producing vehicles similar to the BYD Han locally in Europe would result in higher costs than manufacturing them in China. This remains true even after factoring in shipping costs and tariffs. For instance, Volkswagen’s ID series vehicles, imported directly from China to Europe by dealers, are priced one-third lower than locally manufactured Volkswagen ID vehicles, even when considering shipping costs and tariffs.

BYD Seal (Atto 4). Photo courtesy of BYD.

In this cost situation where European car companies lack competitive advantages, anti-subsidy measures, including the ongoing inquiry, are almost the only choice for European car companies to respond to competition from their Chinese counterparts before introducing their next generation of new energy vehicles to the market. If Chinese car companies are subjected to anti-subsidy taxes, it may accelerate the pace of Chinese car companies establishing production capacity in Europe, as they cannot afford to give up the European market.

China introduced subsidies earlier, but not at a higher intensity

It’s essential to consider that according to the EU’s regulation on foreign subsidies, the anti-subsidy investigation against Chinese EVs can be retroactively applied to 2018. China’s new energy car subsidies have been gradually decreasing since 2018, with significant changes in the subsidy policy. Subsidies for low-range vehicles were reduced, while those for vehicles with ranges exceeding 400 kilometers saw slight increases.

In 2019, subsidies began to decrease significantly, with the maximum subsidy amount reduced from RMB 5,000 (USD 683) to RMB 2,500 (USD 341), and the subsidy threshold significantly increased to a range of over 250 kilometers. From 2019 onwards, China’s new energy vehicle subsidies began to decrease rapidly, leading to a decrease in new energy vehicle sales in China in 2019.

From 2020 to 2022, China’s subsidies decreased by 30% each year, and starting from January 1, 2023, the subsidy policy was completely terminated, with only the policy of exempting new energy vehicles from the purchase tax remaining. In contrast, in the US, the Inflation Reduction Act offers a maximum subsidy of up to USD 7,500 per vehicle. European countries, starting from 2020, have increased their subsidies for EVs, with Germany providing over EUR 6,000 (USD 6,336) per vehicle, France offering EUR 5,000 (USD 5,280), and Italy providing EUR 3,000 (USD 3,168) (with an additional EUR 2,000, equivalent to USD 2,112, for trade-ins of old vehicles).

Based on historical data and current data, both individual vehicle subsidies and total subsidy amounts in China are not relatively high. In terms of total subsidies, data from China’s Ministry of Industry and Information Technology shows that from 2010 to the termination of subsidies in 2022, the central government granted over RMB 150 billion (USD 20.5 billion) in subsidies for new energy vehicles. Adding local government subsidies, over a 13-year period, the total subsidies for new energy vehicles in China range between RMB 200–250 billion (USD 27.3–34.1 billion).

Through the Inflation Reduction Act, the US provides more than USD 300 billion in subsidies for new energy vehicles. There is currently no statistical data on the total subsidies in the EU, but in 2021 and 2022, the German government provided EUR 3.4 billion (USD 3.59 billion) in subsidies for new energy cars. In Germany, the government covers two-thirds of new energy car subsidies, with companies covering the remaining third. The actual subsidies received by consumers when purchasing a car exceeded EUR 5 billion (USD 5.28 billion).

China’s subsidies may have been introduced early, but they are not high when considering the individual vehicle subsidy amount or the total subsidy amount, compared to China, the US, and Europe, which represent the main markets for new energy cars. However, such subsidies appeared more beneficial to Chinese car companies because they were introduced earlier, captured the market in its early stages of development, and had its standards adjusted multiple times during the implementation process, guiding car companies to develop more competitive products.

Chinese car companies now have substantial advantages in terms of product quality and cost, and EU and US efforts to help their own companies catch up will need to provide higher individual vehicle subsidy levels, given that new energy car sales have reached a certain scale and subsidy policies are not as effective as they once were.

This article was adapted based on a feature originally written in Chinese by Yin Lu and Gu Lingyu, and was published on Caijing Eleven (WeChat ID: caijingEleven). 36Kr Global is authorized to translate, adapt, and publish its contents.

KrASIA Connection
KrASIA Connection
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