Europe’s EV Troubles Run Deeper Than China
European auto industry is starting to resemble a deer in the headlights—of a Chinese electric vehicle. Tariffs may not be enough to solve problem.
China is speeding ahead in the electric-vehicle race. Europe’s antisubsidy investigation into Chinese EV makers reflects this new reality, but tariffs alone aren’t enough to keep Europe’s automakers in the fast lane.
The European Union has launched a probe into whether state subsidies have given Chinese EV makers an unfair leg up as they accelerate into European markets. That shouldn’t be surprising given the importance of the auto industry to Europe—and how rapidly Chinese rivals have emerged as global leaders over the past couple of years. It also fits with the broad trend of rising protectionism globally, particularly for high-tech sectors such as EVs and batteries.
Imports from China account for around 15% of battery EVs sales in Europe, according to Bernstein. But not all of those come from Chinese automakers: Tesla, shipping from its Shanghai factory, made up 30% of those Chinese exports, says the brokerage firm. Even European carmakers such as BMW and Mercedes have been selling their made-in-China EVs to their home continent.
Subsidies have indeed played a big part in the rise of China’s EV industry. China has grown to become the world’s largest EV market after years of providing financial support and favorable policies for carmakers and battery manufacturers. But some of that largess is now draining away. For example, the government used to pay generous subsidies for EV buyers, but that program expired this year. EV buyers still enjoy tax breaks, however.
And like many other industries in China, local governments still subsidize manufacturers. For example, Chinese EV champion BYD booked around 14.7 billion yuan of government grants, equivalent to $2 billion, in 2022. That’s equal to around 3.5% of its revenue last year. Most of those grants were asset-related, probably meaning things like subsidies for building plants. But such subsidies, amortized as income over several years, add up to only around 0.4% of 2022 revenue—or about 10% of net income.
Subsidies, and other policies, certainly helped to kick-start China’s EV industry. But its EV makers have now become globally competitive, especially since the growing Chinese market gives them a big advantage in scale. Around one in three cars sold in China are either battery EVs or plug-in hybrid—and all of the top-selling models are Chinese brands, apart from Tesla. China’s large cluster of suppliers, including battery manufacturers, have helped lower costs. Only 7% of the content for BYD’s Seal sedan came from non-Chinese suppliers, according to UBS.
Higher tariffs are one potential outcome of the investigation, although not foreordained. China-made EVs still generally sell for much more in Europe than they do back home.
But the threat of tariffs could still push Chinese EV makers to switch some domestic production to Europe. UBS estimates that switching production to Eastern Europe would mean 3% higher production costs for Chinese EV makers, on average, than shipping them from China with the existing 10% tariff.
Trade barriers can brake China’s EV ambitions in Europe—at least a little. Ultimately though, European automakers will need to accelerate themselves, rather than hoping the government can solve the problem by adding a bit of extra drag to the competition.