The European Commission has imposed punitive tariffs on Chinese manufacturers to protect domestic producers from competition. In short, China's "crime" can be summarized as taking the green transition more seriously and acting faster than European politicians. Meanwhile, innovative companies do not want this kind of "help" as they do not want to be excluded from the world's most important electric vehicle market.
According to a report by the International Energy Agency (IEA), the number of newly registered purely electric cars in 2023 approached 3.2 million units, representing a nearly 20% increase compared to 2022 and accounting for approximately 18% of total sales. Meanwhile,
with Tesla maintaining its leading position with a 19.9% market share, and the Model Y becoming the world's best-selling car with 1.23 million units sold. Three Chinese companies follow on the list: BYD with 17.1%, GAC Aion with 5.2%, and the SAIC-GM-Wuling joint venture with 4.9%. Volkswagen Group is only fifth with 4.6%, followed by BMW with a 3.6% share.
European car manufacturers have already responded to the new competitors under the surface. For instance, the French industry lobby is urging for EU protection, securing the support of the Paris government and seeking assistance from the European Commission. They claim that while European manufacturers were perfecting their diesel and turbo-petrol technologies, China, waking up in time, directed significant funds into e-car technology development through state subsidies and guided public procurements. The leading position of Chinese manufacturers in the entire value chain is unquestionable.
Under pressure, the European Commission launched an anti-subsidy investigation in September 2023 against Chinese electric car manufacturers on suspicion of market-distorting and unfair state subsidies. Although the procedure has not yet concluded, based on the subsidies revealed,
provisional countervailing duties on imports of Chinese electric cars will be imposed starting July 4, on top of the existing 10% tariff.
This measure benefits French companies like Renault and Stellantis by easing market competition for them.
In contrast, German companies favor a cooperative approach and are strengthening their presence in China instead of advocating for protective tariffs. Volkswagen is a major shareholder in the Chinese XPeng Motors, and Audi has entered into a technology transfer agreement with SAIC Motor. BMW exports the electric iX3 from China to Europe and will also export the electric Mini starting in 2025. China is now the most important unified market from which German manufacturers can catch up to remain competitive globally. It is not surprising that the German Chamber of Industry and Commerce (DIHK) has expressed concern about a potential trade war and that the automotive industry has argued for free trade.
First, let’s examine how the automotive stronghold reached a point where it must defend itself against Chinese competitors not only in terms of quantity but also technologically. If we recall the 2000s, China was already a significant force in the production of traditionally powered vehicles, but their quality fell far short of European market expectations. Chinese capital invested in Western companies, making significant efforts to learn "how to manufacture cars," but soon realized they would never surpass American, German, French, and Japanese automakers in internal combustion engine innovation. The race to develop hybrid vehicles was and still is dominated by Toyota.
This prompted the Chinese government to break away from established technology and invest in a completely new area: electric vehicles, aligning with the vision that China could be a pioneer in green technology.
The Chinese government took steps as early as 2001 to acquire the necessary technology, defining essential developments for electric vehicles as a key scientific research project in its five-year plan. The risk was extremely high at the time, as we were still over a decade away from the Paris Climate Agreement. Electric vehicles were merely experimental, with projects by companies like General Motors and Toyota eventually being halted due to the unrealistic prospect of developing suitable battery technology, establishing a supply chain, and building the necessary charging infrastructure.
The development and commercialization of the first lithium-ion battery suitable for modern vehicles, however, is credited to the American startup A123. The Obama administration provided hundreds of millions of dollars in support. However, at that time, there was no Elon Musk to elevate Tesla to a status symbol, so there was no demand for electric vehicles. A123 declared bankruptcy in 2012, becoming a symbol of government waste, and in 2013,
China's then-largest auto parts manufacturers, with state support, acquired and brought home the technology.
Meanwhile, in 2007, Wan Gang, an automotive engineer who had worked at Audi in Germany for a decade, became China's Minister of Science and Technology. Under Gang, the development of electric vehicles consistently received priority. Between 2009 and 2022, the government spent over 200 billion RMB ($29 billion) on subsidies and tax incentives. Local governments closely collaborated with electric vehicle companies to tailor policies that would foster their growth. For example, through the collaboration of BYD and the city of Shenzhen, Shenzhen became the first city in the world to fully electrify its public bus fleet and operate exclusively electric BYD taxis. The results of these subsidies: China accounted for more than half of global electric vehicle sales in 2022.
However, when discussing prohibited state subsidies, we cannot ignore that
For instance, buyers of electric vehicles replacing their gasoline cars could receive a subsidy of 10,000 yuan ($1,400) from the budget, regardless of the brand. In Shanghai, electric car owners could obtain license plates for free, which usually cost around 100,000 yuan ($14,000). The Chinese market is significant not only for domestic manufacturers but also for early Western entrants. The Shanghai Gigafactory is currently Tesla's most productive manufacturing center, accounting for more than half of Tesla's deliveries in 2022. Besides the mentioned BMW production lines, it is noteworthy that famous European brands like Volvo and MG are also Chinese-owned, with many cars now rolling off Chinese production lines. Although Geely has announced that in response to European tariffs, it will manufacture electric Volvos destined for the European market within Europe.
How do the above Chinese subsidies differ from the European approach?
The EU, through its Innovation Fund, provides €40 billion in non-refundable grants until 2030 for developments in energy-intensive industries, including technologies for renewable energy and energy storage, as well as maritime, road, and air transport.
Every EU member state offers some form of tax incentive or targeted support for electric vehicles, although there are significant differences and fragmentation between the systems of different countries. The most common measures are the exemption or reduction of registration and environmental taxes and value-added tax benefits for company cars. Only six member states do not apply, have not applied, or do not plan to apply direct subsidies for electric vehicle buyers. These subsidies range from €3,000 to €12,000, typically differing between private individuals and companies, with several countries rewarding the simultaneous retirement of older cars. Overall, it can be concluded that the Chinese incentive system is not particularly striking compared to the European one. It is also not fair to criticize the Chinese state for preferring Chinese manufacturers in public procurements, just as it is no surprise if a French company wins a French government procurement.
The question is whether we want e-mobility or a strong European automotive industry. How do tariffs help achieve these goals instead of fostering innovation to compete with more advanced rivals? Is it really sensible to introduce an even stricter Euro 7 standard when the average vehicle age is over a decade and steadily increasing?
Starting July 4, Chinese manufacturers cooperating with the Commission will face an additional 21% weighted average punitive tariff, including 17.4% for BYD, while non-cooperating manufacturers, such as SAIC, will face 38.1%. The European stance on "cheap" Chinese imports is particularly interesting, given that the EU plans to ban new internal combustion engines from 2035, while interest in purchasing electric cars seems to be waning in Europe. By May this year, the market share of electric cars in new car sales had fallen to 12.5%. Among major markets, sales increased in Belgium (+45%) and France (+5%), but significantly decreased in Germany (-31%) and the Netherlands (-12%). One reason for this is that Generation Z, which is most receptive to green issues, cannot afford the high prices of electric cars.
The 2035 target seems particularly misguided in light of a McKinsey survey published in the 2024 Mobility Consumer Pulse, which found that 29% of electric car users (24% in Germany, 18% in France and Norway) would return to traditional vehicles. Gasoline still tops the sales charts, followed closely by hybrids, with nearly one in three new cars sold in Europe being a hybrid. Meanwhile, electric cars are losing market share compared to last year, with their sales barely growing, while more diesel cars are sold than purely electric ones.
The explanation for the above survey can be read from the survey itself. According to consumers, the spread of electric propulsion is hindered by the state of the charging infrastructure (35%), the high costs (34%), and compatibility with long-distance driving (32%). Of these factors, the first two can be influenced by state or EU-level support and legal regulation. The EU's current response sounds like this:
you can use electric cars, but we don't promise they will be affordable.
However, the German example shows that if we want a strong European automotive industry, there would be a better chance by implementing technology neutrality and cooperating with often still capital-intensive Chinese companies.
