Earlier this month Ursula von der Leyen sent shockwaves through the European and Chinese car industry by announcing a probe into illegal Chinese subsidies for electric vehicles (EVs). The Commission president is cleaning up the mess the German auto industry created.
The probe is a fateful step. If tariffs on Chinese imports are enacted, it could set in motion a sequence of escalation and retaliation that could fundamentally alter EU trade and industrial policy.
As so often, the story starts in Germany. Carmakers like Volkswagen went east in the 1980s. From the late 2000s German car sales in China boomed. Carmakers made fortunes for their shareholders. Now the party is almost over. Fully electric vehicles have risen to a quarter of Chinese car sales, and shockingly, German carmakers don’t even feature in the top 10 of EV sales. That does not bode well for their future market share. In fact, this is existential for German carmakers like Volkswagen. Not whether China might retaliate.
Europe’s Kodak Moment
The writing has been on the wall for a long time. Some readers will remember Angela Merkel lobbying China to slow down its pro-electric car policies back in 2017. In the same year, Maros Sefkovic, Europe’s newly appointed Green Deal Czar, said his aim was to avoid a “Kodak moment” for an industry as important as the European auto industry. And yet, despite his best efforts, this is exactly what we’re now seeing.
Arrogance is a major factor. German car execs thought no-one would ever act on their diesel emissions cheating. They dismissed Tesla and China as upstarts and niche players. After all, only Germans know how to build high quality cars.
While Chinese car makers innovated, drove down costs, and helped nurture a world class battery industry, German carmakers and suppliers enjoyed record profits, lobbied against, cheated, and then grudgingly complied with green laws. But at no point, not even after Merkel’s China visit, or Tesla’s meteoric rise, did they go “all in” on electrification.
But there’s more to the story. China is not some nice democratic trading nation with a smart climate and industry policy. It’s an Orwellian dictatorship bent on replacing the West as the world’s leading economic and technology power. Whether it’s chips, steel or batteries and electric cars, the Chinese play by their own rules. If ‘winning’ requires hundreds of billions of subsidies, the creation of state owned national champions, or restricting graphite exports to emerging battery competitors in Europe, China will do it.
Europe has turned a blind eye to this because we were paralysed by German carmakers’ dependence on Chinese profits.
Does an arrogant and shortsighted industry deserve protection? Should we restrict cheap Chinese EV imports when our own carmakers are only interested in ICE SUVs?
It’s a fair question but it misses a bigger point. This isn’t about shielding our carmakers from Chinese (or American) competition, it’s about ensuring Europe retains its industrial base.
We need to avoid a future where all our cathodes, battery cells, and electric cars are produced in China, and where hundreds of thousands of jobs are lost in Europe. This isn’t just about Chinese carmakers like BYD and Polestar though. Tesla is a major electric car exporter from China into Europe. Renault builds the popular Dacia Spring in Shiyan. BMW will build the electric mini in China for exports to Europe. These vehicles too should be the subject of the Commission’s investigation, and potential tariffs.
Similarly, it is not credible to accuse China of unfair subsidies and ignore the US Inflation Reduction Act (IRA). The reality is that the EU battery industry can neither compete with subsidised Chinese, nor with North American subsidised imports. We will need a much more comprehensive overhaul of our trade and local content rules if we really want a flourishing processing, cathode, cell and EV industry in Europe.
Tariffs would not prevent foreign manufacturers from coming to Europe. So Volkswagen & co will need to up their game. It starts with basic things. EU carmakers are underinvesting compared to Tesla and the Chinese and wasting money on dividends and share buybacks. That must change. Car execs like Oliver Blume should use their influence to end the embarrassing e-fuels nonsense. We need to focus on boosting EV sales all across Europe. The Commission’s corporate fleets initiative is a perfect opportunity to give a major boost to EV demand in Europe, which if paired with trade defence, should be a gift from heaven for EU carmakers.
None of this will happen without political leadership. Europe’s auto industry has a decades-long track record of doing too little, too late. Car execs can’t untie the Gordian knot they created by being so dependent on China. And so Ursula von der Leyen deserves a lot of credit. She is showing tonnes more vision and determination than any of her predecessors, or indeed the current chancellor of Germany, the ever absent Olaf Scholz.