European Commission promises no repeat of solar for EVs

President Ursula von der Leyen used the occasion of her annual address to the European Parliament to announce that her European Commission is launching an anti-subsidy investigation into EV imports from China. Her words, and their reception from MEPs, suggest the investigation may be starting from an assumption of guilt.   

von der Leyen draws explicit parallels between the EV industry and the fate of Europe’s makers of photovoltaic panels. “We have not forgotten how China’s unfair trade practices affected our solar industry,” she says.

“Many young businesses were pushed out by heavily subsidised Chinese competitors. Pioneering companies had to file for bankruptcy. This is why fairness in the global economy is so important, because it affects lives and livelihoods,” the Commission president continues.  

Foregone conclusion?

“We have to be clear-eyed about the risks we face. Take the electric vehicle sector: it is a crucial industry for the clean economy with huge potential in Europe. But global markets are now flooded with cheaper Chinese electric cars. And that price is kept artificially low by huge state subsidies.

 “This is distorting our market. As we do not accept this distortion from the inside in our own market, we do not accept this from the outside,” von der Leyen concludes. And her words were met with sustained applause and nodding by the listening parliamentarians.

The language used may be instructive: “are now flooded”; “is kept artificially low”; “is distorting our markets”. No conditional tense pending the outcome of the investigation, but statements of fact, warmly received by MEPs.

This suggests that it is short odds that, at the investigation’s conclusions, EVs made in China will face far higher barriers to entry into European markets, if not outright bans. Chinese firms suspected of being propped by national or provincial governments may face the most punitive terms.

But the investigation will likely extend to probes into support levels for any Chinese factories making EVs for export to Europe, including those for Western OEMs such as Tesla.

State support

How accurate are von der Leyen’s words? There have been “extensive government interventions, including subsidies”, according to testimony before the US-China Economic and Security Review Commission last month, Ilaria Mazzocco, senior fellow at thinktank the Center for Strategic and International Studies, making “China’s initiatives targeting the EV industry over the past 15 years… one of the most successful cases of industrial policy in the country’s recent history”.

“A cornerstone of [China] EV policy was the deployment of subsidies that helped lower the cost of vehicles to consumers, combined with local government experimentation and support for producers,” Mazzocco continues. And she describes a “web of relationships between companies and local governments”.

“Not only have local governments supported companies every step of the way through various types of support mechanisms, including tax breaks, and preferential procurement contracts, but they also are quite literally invested in their success,” Mazzocco says.

“Several investment funds owned by local governments are stockholders or investors in EV companies. The Hefei city government’s intervention to save the start-up Nio in early 2020 when it was on the verge of bankruptcy is a good example of how this works.

“There are other sources of domestic financing that have and continue to benefit EV manufacturers in China. In addition to government investment funds, [so-called] guidance funds, which have been particularly important in the semiconductor industry, below-market credit is widespread, although challenging to quantify,” she says, while cautioning that access to below-market equity and credit is “not unique” to the EV industry.

And Mazzocco also confirms that it is not just China’s domestic EV makers that have accessed support, “especially at the local level”. “For example, Tesla’s gigafactory was granted a beneficial tax rate from the Shanghai government,” she points out.

“It is indicative that several Chinese EV manufacturers have been reporting losses for years,” Mazzocco says tellingly. Jun Jin, China and Hong Kong automotive industry leader at consultancy PWC, agrees, suggesting that “less than five” Chinese EV makers may be profitable out of over 100.