In the previous part of this article, I presented the background that led us to the current political tension between China and the West. Against the backdrop of these developments, Europe as a continent and the EU as a bloc face the crucial challenge of dealing with the growing Chinese pressure on the Electric Vehicles industry. In this part, I reflect on the policy predicaments for the bloc and its member states. On one side, the bloc is committed to the competition and free market ethos, on the other hand, they are conscious of the alleged breach of regulatory requirements by the Chinese EV manufacturers. All these are being considered when the governments are willing to forge ahead with their climate targets and concurrent growing demand for EVs.
The EV market in Europe
The global demand for EVs has been on the rise lately. European market has experienced growth till 2023. However, the demand has stalled in the last year[i]. The earlier increase in demand is underpinned by a combination of customer preferences, market trends, and underlying macroeconomic issues such as post-COVID and post-Ukraine war inflation and the resulting cost of living crisis[ii]. With the growing concerns about climate change and air pollution, some consumers are actively seeking alternatives to traditional gasoline-powered vehicles. Electric Vehicles offer a cleaner and more sustainable mode of transportation, making them a popular choice among environmentally conscious consumers[iii]. The increase in petrol/diesel prices since the Russian invasion of Ukraine has also generated interest in EVs as a low-cost maintenance option. However, the main variable that could further beef up the sales is that European Governments are actively promoting the adoption of EVs as part of their efforts to transition to a low-carbon economy. Driven by government encouragement and (partially) customer demands, the European automotive industry has embarked on a significant transformation, with many traditional automakers investing heavily in EVs. This has led to increased competition and innovation in the market, further driving the growth of electric vehicles in Europe.
In 2024, the total sales volume of Electric Vehicles in Europe is expected to reach USD 182.9 billion, although the market shows some indications of slowing down in recent months. Furthermore, with a compound annual growth rate (CAGR) of 12.11% between 2024 and 2028, the market volume will be more than USD 280 billion by 2028, with unit sales reaching 4.83 million.
Germany is the largest EV market. The generous government incentives and well-established charging infrastructure, which hugely contributed to the accelerated EV sales in Germany, have been halted. On the other hand, China is expected to generate the highest revenue in the EV market, with an estimated revenue of USD 319,000 million in 2024. Almost a fifth (19.5%) of electric vehicles sold in Europe last year were made in China and this is on track to reach a quarter (25%) in 2024, according to a new analysis by Transport & Environment (T&E)[i]. 1 in 3 EVs sold in France and Spain in 2023 were made in China. More than half of those come from Western carmakers: 28% of all China-made EVs were imported by Tesla, with Renault’s Dacia adding a further 20%. But the Chinese homegrown brands are quickly catching up: from 0.4% of the EV market in 2019 to 7.9% in 2023. Brands such as BYD, MG, and others could reach 20% of the EV market by 2027.
Controversies surrounding Chinese EVs in Europe
Chinese EVs, despite technical limitations, are more affordable compared to the ones offered by European and American manufacturers. Hence, Chinese EVs can potentially sweep across the European market, while automobile manufacturers from other countries grapple with the high production costs that make their products less affordable in the market. As a result, European EV manufacturers will be less competitive in the market. This is particularly a matter of grave concern when we come across the allegation that Chinese Government subsidies enable Chinese VE manufacturers to underprice their products.
Accordingly, the European Commission formally launched an anti-subsidy investigation into the imports of EVs from China. The investigation attempted to determine whether EV value chains in China benefit from illegal subsidization and whether this subsidization could threaten economic injury to EU EV producers. Should both prove true, the investigation would examine the likely consequences and impact of measures on importers and consumers of Chinese-manufactured EVs in the EU member countries. Based on the investigation’s findings, the Commission is due to establish whether it is in the EU’s interest to remedy the effects of the unfair trade practices found by imposing anti-subsidy duties on imports of EVs from China.
In March 2024, the Commission started customs registration of Chinese EV imports. The investigation is due to conclude by November 2024. However, the EU could impose provisional duties in July. As a result, Chinese EVs could be hit by tariffs from that point if the trade investigation concludes they are receiving unfair subsidies. The decision has been criticized by some of the German automobile manufacturers. Volkswagen, Europe’s biggest carmaker, which also relies on China, warned that potential duties generally carry formidable risks. Likewise, BMW imports Chinese-made Mini EVs and the iX3 into Europe. BMW CEO Oliver Zipse said that the protection offered by the Commission is not what the manufacturers want. The German automobile giant is worried about the potential disruption in the seamless connectivity with their Chinese suppliers.
What are the options for the EU?
The EU has nurtured and championed the principles of fair competition. In an evolving and dynamic global system, it is rather difficult to expect that all countries will adhere to the ethos of fair competition. Many of these countries are no longer playing by the rules and are actively devising policies to enhance their competitive position. These policies are designed to re-direct investment towards their economies leaving the EU (proponent of competition) in a disadvantaged position. Furthermore, in certain industries, such unfair application of policies can make the EU dependent on those countries. Dr Draghi particularly cited the example of China, which aims to capture and internalize the supply chain in green and advanced technologies and is securing access to the required resources. This rapid supply expansion is leading to significant overcapacity in multiple sectors and threatening to undercut the industry.
Hence, it is about time for the EU to reassess its priorities and adjust its strategies. The EU is leaning towards ramping up tariffs on Chinese-made EVs. The proponents of this measure will argue that higher tariffs on Chinese-made EVs are necessary to protect a fair and competitive environment. More recently, the Biden administration has slapped higher tariffs on Chinese EVs[i]. The White House said the measures, which include a 100% border tax on electric cars from China, were a response to unfair policies and intended to protect US jobs. The measures from the US and EU also have strong geopolitical implications, amidst the increased tension between China and the West.
However, it remains to be seen, how much impact can be made by raising tariffs. The price difference between Chinese and European EVs is substantially large. Chinese local electric car prices can be as low as $10,000, while prices for EVs in Europe, even for so-called “affordable” ones, often start at around $27,000. Hence, a moderate increase in tariffs will not make much difference. The import tariff on Chinese sedans and SUVs is currently 10%. Furthermore, it is hard to guess what China’s response would be.
There is another policy dilemma for the EU – and that is in relation to their pledge to replace combustion engines with EVs by 2035. This will be a significantly tough ask to achieve that target without cost-effective innovation within the EV space. The EU didn’t seem to realize that Chinese manufacturers were about five years ahead of Europeans, and costs were about 30% lower, according to investment bank UBS[ii]. Last year Chinese brands sold just over 350,000 sedans and SUVs in Europe, mainly electric ones. MG led the way with 239,000 mainly EVs, about double 2022’s total. BYD sold about 16,000, but it is mounting a big European sales effort and plans to build a factory in Hungary. Based on the current average vehicle prices, it is expected to make medium cars (both sedans and SUVs) imported from China more expensive than EU equivalents, while compact SUVs and larger cars will remain slightly cheaper. It would also raise between €3-6 billion in additional annual revenue, most of it for the EU general budget that should be reinvested into scaling local clean tech supply chains.
While we have formidable ambiguity in the current and future direction of this problem, the policy predicaments and possible consequences have generated significant interest amongst various quarters. This is a complex and evolving situation. It is highly recommended that the EU draw a plan to tackle any eventualities, caused by the higher tariffs on Chinese EVs. Notwithstanding the current scenario, appropriate policy and infrastructural support are required to increase the affordability and availability of EVs in the member states to achieve climate targets.
PS: The article is based on the author’s opinions based on research and analysis.
References:
Dr Bidit Dey
Director of Accreditation
& Senior Lecturer (Associate Professor) in Marketing
Sheffield University Management School
The University of Sheffield
LinkedIn: Bidit Dey | LinkedIn