When historians look back on the electric vehicle industry, they may very well point to this past month as the turning point marking China’s emergence as a global player in the auto industry.
First its electric vehicle manufacturers dominated media coverage of Munich’s biennial IAA auto show, relegating Europe’s carmakers to second fiddle on their own home turf for the very first time.
Only days later, EU Commission president Ursula von der Leyen announced China's EV exports into Europe would be the target of a new investigation, escalating tensions with a country that was once seen just as much as a partner as a rival.
Now Tesla, the world’s largest EV maker largely thanks to its factory in Shanghai, could be drawn into the probe. Were it found to have accepted state subsidies from China that are large enough to have distorted the competitive playing field, Elon Musk’s company may face punitive tariffs that render exports to the EU from its flagship plant economically unviable.
“It’s not limited only to Chinese brand electrical vehicles, it can be also other producers’ vehicles if they are receiving production-side subsidies,” EU Trade Commissioner Valdis Dombrovskis said in an interview with the Financial Times, justifying the investigation by citing “sufficient prima facie evidence”.
Tesla did not respond to a request for comment.
This is potentially unwelcome news for some European brands’ EV models: the Polestar 2, BMW ix3, and Cupra Tavascan are all built exclusively in China for export.
But Tesla may stand to lose the most. Whereas Tesla's factory in Fremont, Calif., once belonged to a GM-Toyota joint venture, GigaShanghai was its first built from scratch and employing the latest in advanced manufacturing tools from the outset.
Since low-cost Chinese laborers assemble around 80,000 vehicles a month in only two versions, it’s widely believed to be Tesla’s most profitable factory—and potentially the most efficient worldwide due to its sheer scale. Roughly two-fifths of its volume is shipped abroad, many of them Model 3 sedans destined for the EU’s Single Market.
Dombrovskis just concluded a week of high-level meetings in China, where he is sending a different message than in the past. Thanks to China’s support for Russia in the Ukraine war, a yawning €400 billion trade deficit, and a strategic dependence on Beijing for rare earths, refined lithium, and solar cells, the buzzword around Brussels is “de-risking.”
Policymakers are reassessing the EU's relationship with China through the lens of its disastrous dependence on Vladimir Putin for the bulk of its energy imports, insisting they won't decouple from the world's second largest economy but be more forthright in asserting its interests.
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The scale of the EV problem becomes clear when one looks at the data. “Chinese auto manufacturers accounted for just under 3% of western Europe’s new passenger car registrations,” wrote Germany-based EV market analyst Matthias Schmidt this week.
That may seem like very little, but that is out of a highly fragmented auto market, combustion engine cars included. Tesla also sells roughly that number, and well-known brands like Nissan and Honda fall short of that mark.
The success of China moving into new markets is even more apparent in the U.K. It tops the list of European destinations for Chinese EVs, with almost one-third exported to the right-hand-drive market, according to Schmidt.
The threat of Chinese carmakers eventually flooding Europe’s market has long been based on the pattern established first by Japan and later South Korea. Both started out in the low-end market and needed decades before finally being perceived as on par with incumbent players.
China already has a highly mature auto industry with major brands like BYD, Nio and XPeng now exporting models that have no need to compete for the bottom dollar. Their focus on affordable high-tech cars powered by electric drivetrains make them a threat for every automaker, premium brands included.
In her State of the Union address this month, Von der Leyen likened the threat from China's rapidly growing EV industry to Europe's experience during the aughts, when its burgeoning solar cell industry was crushed by cheap imports from China.
“We have not forgotten how China’s unfair trade practices affected our solar industry,” she said, justifying the probe. "Europe is open for competition. Not for a race to the bottom."
