Polestar is not the world’s biggest or most important carmaker. But its story does epitomise the choice Europe faces. Polestar used to be the performance brand of Swedish carmaker Volvo. Today, just like Volvo itself, it is owned by Geely, a Chinese carmaker. Last year 32,000 all-electric Polestars were shipped from China to Europe. These accounted for 40% of Volvo-Geely’s battery electric vehicle (EV) sales.
Polestar, just like Tesla, Nio and BYD, is a force for good, increasing consumer choice, bringing down EV prices, and forcing legacy carmakers to move further, faster in the transition to zero-emission vehicles. Our goal must not be to protect legacy laggards from competition. But the rise of the new players does throw up some tough questions for Europe.
The all-electric Sino-Swedish carmaker is now expanding its manufacturing base beyond China. From 2024 it will be manufacturing cars in South Carolina (US) serving the “US and European markets”. That makes it one of the first new players to explicitly set up shop in the US to sell EVs to the EU.
Polestar has excellent reasons for this. If it sources its batteries from US based battery makers – and they would be crazy not to – the Polestar 3’s massive 111kWh battery could get up to $5,000 in battery subsidies. This comes on top of cheap energy and other subsidies available to US-based manufacturers. According to Bloomberg at least 10.8 billion is being gifted to carmakers in “megadeals” designed to lure manufacturers to US states.
After pocketing these subsidies, Polestar & co. can then ship their vehicles to Europe where they can be sold into the very large, and generously subsidised, European company car market.
Whether and how the EU responds to Polestar’s move matters. Carmakers like Audi and battery makers like Northvolt are eying North American factory deals. If Europe signals it welcomes subsidised, made-in-America vehicles and batteries, they will take note.
Some will argue the EU has already done more than enough. It has loosened state aid rules, allowing governments to match US subsidies. It is also promising faster permitting and is proposing aspirational production targets for green tech and critical minerals. But the reality is that the EU’s plans are backed up neither by trade instruments nor by hard cash and thus fall well short.
So what is to be done?
First, the Commission has new powers to deal with “distortive (…) foreign subsidies”. Will it use them? It would seem only fair that EVs receiving foreign subsidies don’t line up for even more taxpayer funded subsidies in Europe. EU states should be given the possibility to exclude foreign subsidised cars from national purchase grants or company car tax credits. This is not as powerful as raising import duties or introducing EU local content requirements, but it would go a long way.
Second, the most meaningful clause in Europe’s proposed industry plan (NZIA) is to allow EU states to disqualify overly dominant players (>65% market share within the EU) from public procurement and subsidies. Its unofficial goal is to break China’s near monopoly on solar panels. It would be wise to act on batteries and EVs before China achieves a monopoly position. Chinese suppliers don’t sell >65% of batteries in Europe yet, but they do control 77% of global battery manufacturing. As long as one country dominates the battery supply chain in the way China does, it should be possible to disqualify their product from taxpayer funded procurement, subsidies and company car tax credits. There is a risk China would be upset, and that carmakers depending on Chinese auto sales, would object. This is Europe’s quintessential China question: what to do when the short term interests of European multinational corporations do not align with Europe’s long term economic and security interests?
The third point relates to whether the EU should replicate the US-style production aid for battery cells. A US-style programme subsidising 1,400 GWh worth of cell factories (our 2030 estimate) would cost €50 billion to €60 billion a year. This is not a good use of taxpayers’ money. A much more modest scheme, funded through ETS revenues, and targeting the battery supply chain, in particular battery minerals processing, may well be sufficient, especially if we act on the previous points. What is key is to disburse the money in a simple and predictable manner. The “hydrogen bank” model offers a good model.
Even combined these measures would not stop Polestar or anyone else from setting up shop in Europe or the US, or indeed stop them from exporting to Europe. And neither should they. Our goal should be to have intense but fair competition, prevent monopolies and retain Europe’s industrial base in the 21st century.
If that is also what EU lawmakers want, they should act much more decisively. As it stands Europe may well be on course to become a dumping ground for subsidised Sino-US EVs and batteries.