After months of speculation, European Commission President Ursula von der Leyen made it final on Wednesday: Brussels will start an investigation into Chinese state aid for electric cars. This state support is the reason, according to Von der Leyen, that the price remains “artificially low” and the market is “flooded with cheaper Chinese electric cars”.
The investigation is only a first step, but could ultimately lead to Europe imposing new tariffs on China – with possible retaliation as a result. Six questions about Brussels’ striking step.
1 Why is Brussels making this announcement now?
Because the frustration has been building up for some time and people have become wise through trial and error. For months, France in particular has been lobbying in Brussels to tackle alleged unfair competition by Chinese car manufacturers. In recent years, the market share of these manufacturers has grown rapidly, at the expense of European automakers. And while Europe is traditionally strong in making cars and is trying to take the global lead in the green transition.
The fact that the European Commission is now acceding to the French demand cannot be seen separately from the protectionist wind that has been blowing through Brussels in recent years. Due to increasing competition with China and to a lesser extent the United States, there are also increasing calls in Europe to better protect the traditionally open economy. Von der Leyen himself referred on Wednesday to the way in which the European solar panel sector was completely wiped out in the previous decade by “unfair trade practices by China”.
Finally, the announcement is also a great way for Von der Leyen to show how firmly she wants to protect the European economy. That is not bad, in a European election year, in which she almost certainly wants to be a candidate for the presidency again. The fact that she is now reaching out to Paris will be remembered there.
2 What’s happening on the car market?
In the European Union, Chinese car brands such as NIO, Xpeng and especially BYD are rapidly gaining market share. Just two years ago, these names were completely unknown in Europe, but now their market share for electric cars is estimated at around 8 percent. Chinese brands sold in Europe between January and July this year according to estimates of the Financial Times 433,000 electric cars. In European capitals such as Amsterdam and Berlin, brands are rapidly opening showrooms in prominent locations.
The European Commission fears that this share could quickly rise to 15 percent. This is mainly because Chinese electric cars are generally much cheaper than their European counterparts. There is often a difference of several thousand euros between comparable models, while Chinese cars are not always inferior in quality to European brands. The European Commission estimates the average price difference at around 20 percent.
The developments in Europe fit into a broader trend, with China developing into the largest car exporter in the world. Until July, the country exported 2.8 million cars, making it… This year it is likely to overtake Japan as the largest global exporter. Meanwhile, European brands are seeing their market share in China decline. German brands such as BMW and Volkswagen, which has a handful of Chinese factories, have traditionally been popular in the country. However, Chinese people are increasingly opting for domestic electric cars. In 2019, German manufacturers could still count on a quarter of the Chinese total car market of approximately 25 million cars per year; in 2022 that was still 20 percent. This percentage is expected to decline sharply in 2023.
Also read this piece: In their own country, the Chinese brands have already overtaken Volkswagen
3 What indications are there of Chinese state aid?
Many analysts, despite a lack of clear figures, agree that in recent years the Chinese state the equivalent of tens of billions of euros has pumped into the automotive sector to develop electric cars. There are also large purchase subsidies of thousands of euros available in China to buy such cars. The government has never made it a secret that the car industry must be one of the pillars of the future economy.
There is not much more clarity. But within the automotive world, many assume that there is still financial support from the government to keep cars cheap, given the low prices for which these cars are offered. This also includes, for example, lower energy costs for factories, or advantages when purchasing batteries and raw materials. China controls a large part of the chain of raw materials for battery technology.
4 How is the European car industry responding?
Sigrid de Vries, chairman of the European trade association for car manufacturers (ACEA), called the announced investigation a “positive signal”. According to ACEA, it is good that the Commission is taking the Chinese rise seriously.
In practice, there are different views within the automotive industry on how to deal with Chinese entrants. This also became clear on Wednesday afternoon from a statement from the German trade association VDA. “Attention must be paid to possible retaliation from China,” it said.
The German automotive industry, despite its shrinking market share, has a large presence in China and is highly dependent on the country. It earns Volkswagen several billion euros per year, about half of its profits. For these manufacturers, a good relationship with the Chinese government is crucial.
This is much less of an issue for French manufacturers: they have a market share of barely 0.4 percent in China. Carlos Tavares, CEO of Stellantis (of Peugeot and Citroën), has repeatedly been critical of the EU’s lack of action. “We roll out the red carpet for these brands,” he said in July about the Chinese cars. In that sense, it is certainly no coincidence that France has long been calling for action within the European Union, although German Economic Affairs Minister Robert Habeck also supported the investigation on Wednesday.
5 How does China respond?
“Very concerned and highly dissatisfied,” said a statement from China’s Ministry of Commerce on Thursday. In a fierce condemnation, the Chinese state speaks of a “purely protectionist act” that will not only “disrupt” the car industry but also have a “negative effect [zal] on economic and trade relations between China and the EU”.
It is not a reassuring message for Europeans who feared retaliation in advance. In a week and a half, European Commissioner for Trade Valdis Dombrovskis is scheduled to travel to Beijing, where the issue will undoubtedly be discussed. Nevertheless, there are fears in Brussels that the visit could be cancelled.
6 Is this the start of a trade war?
It’s still a bit early for that. But it is a very clear signal that Europe is prepared to take this step and thus dares to put pressure on relations with China. An investigation normally takes about a year, so it will only become clear next year whether Brussels wants to take measures and, if so, which ones.
It is also clear that Europe is not averse to state aid and is increasingly using it to stimulate the green industry. In response to a wave of state aid in the US, the European Commission also significantly expanded European state aid rules earlier this year. This support does not go directly to the car industry, but to the production of batteries, for example.
French President Emmanuel Macron also announced a few months ago that purchase subsidies for electric cars will be increased, but will only apply to vehicles that have been produced relatively cleanly – for example in factories with green energy. In practice, this means that only electric cars produced in Europe are eligible.