EU Divided As China Takes Lead in EV Production

The world’s top electric vehicle producer, China, is developing new battery technology that promises to further accelerate EV adoption. The European Union, meanwhile, faces a major dilemma. Brussels wants to protect local carmakers, but European auto giants would rather have access to the lucrative Chinese market. 

Government subsidies and intense competition among Chinese manufacturers has driven down costs. Chinese brands have subsequently overtaken Tesla and famous European car brands in global sales. In response, Brussels has applied tariffs up to 35% on Chinese EVs. However, this strategy could end up hurting rather than helping the European producers.

Beijing claims its carmakers are simply more competitive and has lodged a case with the WTO in response to the tariffs from Brussels. In addition to the government subsidies (which the EU claims gives Chinese manufacturers an unfair advantage), competition between hundreds of Chinese EV makers has led to significant price reductions. Lower lithium prices and cost-saving material substitutions have reduced prices further.  

A major constraint on EV adoption is battery costs, so producing cheaper batteries has given China’s EV makers a significant competitive advantage. Lithium-ion batteries rely on expensive and geographically concentrated lithium resources and China has established itself as the top lithium refiner in the world, further consolidating the country’s electric vehicle supremacy.

However, new technology, like sodium-ion batteries, could disrupt lithium’s dominance. While sodium-ion batteries lack the energy density of lithium at present, sodium is a much cheaper and more abundant element. Sodium-ion batteries also possess a longer life cycle, boast faster charging times, and are safer than lithium-ion batteries because they are non-flammable.

Nevertheless, even with sodium-ion batteries, China is taking the lead. Chinese EV maker, BYD, is building a 30 GWh sodium-ion battery plant to capitalise on the cost-saving technology, and a sodium-ion battery powered EV has already been released in the Chinese market. This vehicle was produced through a collaboration between Volkswagen and JAC, further demonstrating the benefits of continued global co-operation.  

Internal Divisions

While Volkswagen is still the top-selling internal combustion engine car brand in China, the automaker has struggled to compete with its new Chinese rivals since the destruction of the Nord Stream pipeline cut off the supply of affordable natural gas from Russia to Germany.

Although strong labour representation on the VW board may prevent it, the German giant is considering shutting down some of its German factories for the first time in history. VW CEO, Oliver Blume, meanwhile, has spoken out against the EU tariffs. This is a sign of the troubles plaguing Germany, whose coalition government recently collapsed.

While Brussels claims tariffs protect European carmakers, individual member states want to attract Chinese investment and their manufacturers want to retain access to the lucrative and fast growing Chinese consumer market. This has led to disagreement within Europe about the EU Commission’s tariff policies and risks leading to a trade war between Europe and China.  

Although the tariffs might encourage Chinese firms to increase production within the EU as a workaround, Chinese consumers could retaliate at a time when patriotic citizens are already switching to local brands. We’ve seen this with apparel brands like Anta surpassing Nike and Adidas in domestic sales, while homegrown coffee chain Luckin Coffee has rapidly overtaken Starbucks, opening an astonishing 20,000 stores since 2017. Meanwhile, Volkswagen sales in China declined 15% year-on-year in the last quarter.   

As a result, several European carmakers have spoken out against the recently applied EU tariffs, including BMW, Volkswagen and Mercedes Benz, all of whom derive a significant share of their profits from the Chinese market. The German giants say tariffs will backfire by hurting their sales in China while making EVs more expensive for European consumers.

Trade War Fears

Fears that the tariffs on Chinese made EVs could spark a trade war appear justified, with Beijing having already responded with duties of their own. Beijing has imposed tariffs on French brandy while anti-dumping probes have been launched into European pork and dairy products.

France was one of ten EU member states that voted in favour of the levies against Chinese EVs and French brands account for almost all of China’s brandy imports valued at almost $2 billion. European distiller stocks plunged following the announcement and the EU has opened a case against Beijing at the WTO in response.   

Although Brussels claims tariffs are needed to protect EU carmakers from unfair competition, the EU’s largest car producing nation, Germany, voiced objections to the duties. Hungary also spoke out against the tariffs, warning against a trade war while calling for a negotiated solution.

Hungary was the biggest European recipient of Chinese foreign direct investment in 2023 and received nearly half China’s total FDI in the EU last year. BYD is building a factory in the country and a railway line between Budapest and Belgrade in Serbia is being funded by Beijing.   

Similarly, instead of decoupling, German foreign direct investment to China was higher in the first six months of this year than the whole of 2023 and the fortunes of Germany’s carmakers remain intertwined with the Chinese market where a third of all new German vehicles are sold.

Germany has already lost market share to its Chinese rivals in countries like Russia and South Africa and cannot afford further losses. Forbes ranked Chery as the largest foreign company in Russia by revenue in 2023, the Chinese brand emerging as the second best-selling car brand in Russia last year after Lada, with 11% of the market. EU carmakers used to top the Forbes list, with Volkswagen coming first in 2022, and Renault topping the table in 2020.

South African motorists are also moving away from German luxury brands like Audi, BMW, and Mercedes-Benz in favour of more affordable Chinese alternatives. It is estimated that Chinese manufacturers will have captured around 20% of the new car market in South Africa this year. Leading the charge among Chinese brands are Haval and Chery whose sales have skyrocketed while German vehicle sales decline.