October 20, 2023

Chinese EVs in Europe: A Threat to European Automakers?

AP Photo/Matthias Schrader/Scanpix
Chinese battery electric vehicle BYD ATTO 3 at the IAA motor show in Munich, Germany. September, 2023.
Chinese battery electric vehicle BYD ATTO 3 at the IAA motor show in Munich, Germany. September, 2023.

Once a byword for poor quality, the label “Made in China” no longer carries the negative reputation it used to—especially with electric vehicles (EVs). Equipped with impressive technology and highly price-competitive, Chinese EV manufacturers are now setting their sights on the lucrative European market. Over 70 Chinese firms attended Munich’s annual auto show this year, which has set alarm bells ringing among European companies and policymakers. The increasing competition from China makes it that much harder for the European Union to remain competitive. European Commission president Ursula von der Leyen’s recent announcement of an anti-subsidy investigation against Chinese EV makers signals a turn in the EU’s stance towards Chinese EVs and the potential for escalation.

Before 2023, the EU had not taken much notice of the growing presence of Chinese EVs in Europe. However, with China on track to sell over 100,000 EVs in Europe in 2023, the sheer volume has become increasingly difficult to ignore.

The automotive industry is of critical importance to the EU, with exports amounting to 6.3 million vehicles per year and generating a €101.9 billion trade surplus for the bloc. The sector provides direct and indirect jobs to 13.8 million Europeans, representing 6.1% of total EU employment.

While the EU and the UK have both pledged to ban the sale of internal combustion engine (ICE) vehicles by 2035, China is well ahead of Europe in EV adoption. Since 2015, it has had the world’s largest EV market, and in 2022, it registered 5.9 million EVs, compared to the EU’s 2.59 million the same year. In the EU, Chinese EV market share has grown from 0.5% in 2019 to 3.9% in 2021, and to 8.2% in 2023.

As Chinese brands were eating up an increasing share of the market, European Commission president Von der Leyen said in her State of the Union speech on 13 September 2023 that global markets were being “flooded” with cheap Chinese cars. She reminded listeners of when Chinese solar supply outstripped EU demand in the early 2010s, causing many nascent European companies to file for administration. She announced that an investigation would be launched to assess Chinese EV subsidies, with tariffs to follow if unfair practices were found. The alleged practices include Chinese EV makers receiving cheap loans from state-owned banks, free or extremely cheap land, or state support in innovation activities, as well as protectionism. Within the bloc, France is a major backer of the move, with 40% of France’s EV incentives having gone to Chinese EV makers in the first quarter of 2023. Germany, on the other hand, has been less supportive of the move owing to its automotive exports to China, which could be severely affected by escalation.


China’s Reaction: EU Protectionism

In an official response, He Yadong (何亚东), spokesperson for the Ministry of Commerce of China (商务部), called the EU’s planned measures protectionist and said they would harm and distort the global automotive industry, as well as negatively impact China-EU relations. Much like their officials, Chinese netizens also view the move as protectionist and unfair. Chinese social media included comments such as these:

  • “It finally arrived—the intervening hand of the ‘free market’”.
  • “This [move] shows that Europe’s self-confidence is decreasing, [entering] a new era as a closed off market”.
  • “Chinese cars in Europe are already far more costly than in China; if this is [considered] dumping, let’s just increase the prices”.

Based on China’s recent history of introducing tit-for-tat tariffs in its trade war with the US, the EU should expect tariffs to be implemented on its own vehicle exports to China if it decides to escalate, regardless of whether there have been unfair practices on the EU side. Restrictions on exporting to China could exacerbate problems faced by the German economy; IMF forecasts suggest that it will be the only G7 economy which will contract this year.

Whether China has actually been dumping its EVs on the European market is disputable. “Dumping” in economics can be defined as selling a product made by a foreign company for less than its production cost in a domestic market. While automakers do not publish their per-vehicle production costs, we can assume that the production cost of a given Chinese EV is lower than that of its retail price in China, at least for companies manufacturing in high volumes, like China’s BYD, the world’s largest EV producer.

So let’s compare the prices of BYD EVs in China and Germany, taking the newly launched BYD Dolphin as an example. In China, the BYD Dolphin retails for €24,400. That is €11,590 cheaper than in Germany, where it retails for €35,990. Given that BYD is a profitable company, its production cost in China is certainly lower than the inflated retail price in Germany, meaning that this specific vehicle sale cannot be considered dumping by definition. However, less information is available on the practices of smaller Chinese companies who have not yet reached a high production volume.

Regardless of whether dumping is taking place, EU policy makers should note that adding tariffs to Chinese EVs will not necessarily make them uncompetitive. Taking again the example of the world’s largest EV producer, BYD, even if the BYD’s high-end €44,900 BYD Seal had a €10,000 tariff added, it would still remain below the EU’s average EV retail price of €55,821 in the first half of 2022.


Why the EU is Struggling to Compete

Unlike China and the US, the EU has yet to introduce a comprehensive subsidy programme to incentivise EV adoption across the bloc. Although China was well ahead of the US in launching subsidies, the US’s 2022 Inflation Reduction Act has spurred over $62 (€59) billion in EV investment since its launch. Meanwhile, a lack of incentives across EU member states has led to European manufacturers delaying their electrification efforts. BMW has requested that the 2035 ICE ban be pushed back, and VW has delayed its flagship Trinity EV project by four years.

Hindering the EU is not just a lack of incentives but also legacy manufacturing infrastructure, with local factories being optimised specifically for the production of ICE vehicles. This contrasts significantly with China, which has been building EV factories and production lines from the ground up, meaning that their infrastructure is geared towards the electric powertrain from day one. The same can be said for the workforce in both places; while China is newly training its engineers, the EU must retrain ICE engineers who have not only non-EV-related skills but also a love for the engines they have been working on their entire careers. Higher up in European auto companies, CEOs are also unwilling to give up producing ICE vehicles, hoping to extract as much profit as possible from existing production capacity, even though this means slower innovation.

Chinese EVs, on the other hand, are price-competitive for three main reasons. Firstly, China’s EV subsidies from 2010 to 2022 meant that local producers were encouraged to reach economies of scale well before European automakers. Whether these subsidies violated WTO rules will be the subject of the Commission’s investigation. Secondly, high production volume meant that China had critical mineral supply chains and EV infrastructure before the EU did, with localised supply chains naturally decreasing costs. Thirdly, China’s cheap labour and technological innovations help keep production costs down.


Better Late than Never

The real challenge for the EU is increasing its competitiveness in EV production, a challenge which will not necessarily be solved by potential punitive tariffs against China. While the EU should already have introduced a comprehensive programme to stimulate the development of a competitive EV production, it would be better late than never. At the same time, EU member states should not scrap existing EV subsidies, as Germany is already planning to do despite having introduced its subsidies only in 2016, six years after China. The broader question is how the EU can develop its industrial policy so as to stimulate a more competitive clean tech industry while adhering to the multilateral trade rules that China has allegedly violated.

If the EU does not act fast enough, 14 million European jobs could be at risk. Aside from the potential economic consequences, lagging in EV technology could also mean losing ground to China in military technology, as EVs and the military both increasingly make use of autonomous technologies for various applications.

What European manufacturers do have is strong brand loyalty, established infrastructure, and a skilled workforce. It is up to the EU to use these factors to its advantage and not use them as an excuse to rest on its laurels, which is what seems to be happening as more and more European manufacturers delay their EV targets.

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