China’s electric cars are not Europe’s real problem

• By David Fickling / Bloomberg Opinion

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Europe’s attempts to protect itself from the onslaught of China’s car exports appears to be turning into an expensive game of Whac-A-Mole.

Tariffs in 2024 targeted Chinese electric vehicles with duties as high as 45 percent. The result has been rising imports of hybrids, which are exempt, in turn prompting demands for more restrictions. Carmakers appear to be lost. Europe already makes almost nine times as many plug-in cars as it did in 2019, while conventional vehicle production has fallen about 40 percent — but they are lobbying Brussels to water down emissions targets, while cutting 100,000 jobs. This does not look like the robust domestic industry that protectionism was meant to incubate.

That is because policy gets the problem back-to-front. Europe is restricting imports of Chinese-made electric vehicles, but allowing unrestricted trade in the batteries that power them. The set-up is congenial for the continent’s carmakers, which would rather use cheaper Chinese cells than invest in alternatives. If your aim is to support advanced European manufacturing, however, it is disastrous.

You only need to look at the history of China’s own auto industry to see why. National champions SAIC Motor Corp and BAIC Motor Corp, each founded under Mao Zedong (毛澤東) and still controlled by the municipal governments of Shanghai and Beijing, have lost 70 percent and 93 percent of their market values, respectively, since peaking in 2018. The biggest winners from the shift to EVs are privately owned companies that barely existed two decades ago. At this point, the entire listed single-focus Chinese car sector is worth less than Contemporary Amperex Technology Co, or CATL, the world’s biggest battery maker.

Chinese car brands are causing plenty of political tremors in the EU, but still make up just 6.6 percent of sales. Meanwhile, Chinese batteries, whose local market share has almost doubled in two years to more than 50 percent, are barely discussed. Imagine if Britain had spent the 1930s protecting its aircraft companies, while remaining dependent on Germany for the engines they needed to fly.

The goal here should be building a handful of European-owned battery champions capable of competing at global scale, without trying to exclude the Asian companies whose technology and expertise can help them get there. The moment is ripe for such a shift: Europe’s battery market is roughly as large as China’s was in 2022, giving the region the scale needed to drive down costs and foster essential know-how.

With Chinese EV growth slowing amid saturation and weak consumer demand, Europe might even have the edge. Over the five years through 2031, the continent’s passenger vehicles would likely require an additional 255 gigawatt-hours of batteries, compared to 250GWh in China, according to Bloomberg.

The problem is that Europe’s carmakers are funneling the benefits of this coming production boom offshore, allowing domestic expertise to wither. Automotive Cells Co, or ACC, a battery venture between Stellantis NV, Mercedes-Benz Group AG, and TotalEnergies SE, has been slashed to about a quarter of its planned size as its investors tied up with CATL instead. Volkswagen AG’s PowerCo SE has shelved four of its planned gigafactories in favor of working with CATL and Gotion High-Tech Co, another Chinese player.

Fortunately, many of the elements needed for a better policy are already in place. The EU’s Battery Booster program promises 1.5 billion euros (US$1.72 billion) to support gigafactories in their ramp-up stage. It should be expanded to 10 billion euros and remain available until a company hits 100GWh of capacity, roughly the level needed to compete globally.

Europe’s “resilience criteria” rules, intended to stop public support for clean technology deepening its dependence on dominant foreign suppliers, should help. In cases of clear subsidies, countervailing duties should be imposed on the Chinese-made battery, not the car as a whole, a distinction that has precedent in the US approach to aluminum automotive parts.

In general, Chinese investment should be welcomed. Outside expertise would be vital in resuscitating Europe’s battery industry, as ACC discovered when it had to bring in engineers from Guangdong-based Eve Energy Co to kickstart its troubled production lines. With sufficient protections in place for the power cells that really matter, finished Chinese EVs should be allowed in duty-free, to discipline local automakers.

Batteries lack the political salience of cars, but they are ultimately far more important, sitting at the foundation of an industrial ecosystem stretching far beyond passenger automobiles, into trucks, ships, drones, power grids and data centers.

Europe needs to recognize that the world is changing before it is too late. At the moment, it is applying infant-industry protection to incumbents who have been around since Queen Victoria was on the throne. Meanwhile, its actual infant industry — battery manufacturing — has been left exposed.

David Fickling is a Bloomberg Opinion columnist covering climate change and energy. Previously, he worked for Bloomberg News, the Wall Street Journal and the Financial Times.