The European Union is launching an investigation into Chinese subsidies for electric vehicles in a bid to ward off a flood of cheap imports, an escalation that opens the door to retaliation which would hit the bloc’s carmakers hard.
Given the size of the market and its rapid growth, potential tariffs from the probe could have a far bigger impact than any previous anti-subsidy actions against Chinese imports.
“Their price is kept artificially low by huge state subsidies,” the head of the EU’s executive arm said in her annual speech to the European Parliament. “This is distorting our market.”
Made without a complaint from the auto industry, the step is aimed at preventing a replay of what happened to Europe’s solar industry a decade ago, when local manufacturers failed to keep up with state-backed Chinese rivals.
Tensions between China and the EU have been simmering for months.The transition to cleaner technologies is a particular point of contention, with the bloc’s industrial core at risk of losing share to faster Chinese companies.
“The European Commission is recognizing the increasingly asymmetric situation our industry is faced with,” Sigrid de Vries, director general of the European Automobile Manufacturers’ Association, said in an email to Bloomberg. China’s “apparent advantage” is already hitting European markets.
The share of Chinese brands of electric vehicles in the bloc was 8% last year, according to an EU official. With Chinese models about 20% cheaper than domestic offerings, the expectation is that they will control 15% by 2025, the official said.
Following the announcement, shares in the European auto sector initially rallied on the prospects of protection, but then gave up those gains on concerns of a backlash with European carmakers heavily exposed to China and at times importers of EVs made there.
The investigation marks the first concrete step to beat back rival state support for green technologies after more than a year of ever larger subsidies in the US, China, the UK and Europe. Depending on the results, it could move the trading partners toward more aggressive, tit-for-tat protectionist measures.
Read More: How World Fell Into a Subsidy Race for Climate Goals: QuickTake
The EV probe against China is part of a broader EU effort to “de-risk” the relationship without “de-coupling.” This has played in out in several areas, including restricting sales of high-end semiconductors and implementing export controls related to quantum computing and artificial intelligence. The bloc has also put in place new instruments to address China’s coercive practices.
After European companies invested heavily in Chinese joint ventures for years, the country has become home to a slew of EV makers supported by government incentives for both industry and buyers.
With China the biggest market for Volkswagen AG and other German carmakers, tangling with Beijing could be risky. BMW AG imports its battery-powered iX3 from China, with Mini models due to follow. The Munich-based carmaker generated 33% of its operating profit from the country last year, followed by Porsche, VW and Mercedes-Benz, analysts at Citigroup Inc. estimated in a note late last month.
“Autos is especially sensitive for Europe, because it such a big employment provider,” said Evgenia Molotova, senior investment manager at Pictet Asset Management. “There is always risk of retaliation.”
While many of China’s upstart companies have yet to consistently generate profits amid a bitter price war, aggressive state industrial policy raises echoes of how China took control of solar-cell manufacturing a decade ago.
“We have not forgotten how China’s unfair trade practices affected our solar industry,” von der Leyen said. “Many young businesses were pushed out by heavily subsidized Chinese competitors.”
The Munich car show last week heightened alarm over the threat from China. Manufacturers including BYD, Nio and Xpeng were out in force, showing models aimed to woo European buyers away from brands from Volkswagen, Renault and Stellantis.
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China was the IAA Munich motor show’s dominant theme, in a double threat to BMW, Mercedes and VW given the slowing economy makes up about 30% of pretax profit and battery-electric-vehicle imports are mounting with BYD, Xpeng and MG prominent.
BYD, which this year dethroned VW as China’s top-selling auto brand, has expanded to around 15 countries in Europe. Its Atto 3 crossover SUV was the best-selling electric vehicle in Sweden in July. Its new Seal sedan will start from around €45,000 ($48,000) in Germany when it goes on sale later this year, making it a direct rival for Tesla’s Model 3 and several Volkswagen cars.
As part of its ambitious Green Deal plan to cut emissions, the EU has implemented an effective ban on combustion-engine cars starting in 2035. But the bloc’s carmakers could get priced out if China aggressively targets the segment, which is projected to dominate the market in the coming years.
The investigation is a win for France — home to the mass-market Renault, Citroen and Peugeot brands, which have relatively little exposure to China. President Emmanuel Macron’s administration has long warned of an influx of Chinese vehicles and has been increasing pressure for such a move in recent weeks.
“Europe must show that it’s determined to defend its economic interests, to defend its industrial interests,” Finance Minister Bruno Le Maire said in Berlin on Wednesday, where he was seeking to push Germany for tougher measures to protect European industry. “From that point of view, opening this investigation is a very good decision that I welcome.”
German Economy Minister Robert Habeck said the move isn’t about keeping cheap, efficient cars out of the European market but looking into whether China is providing companies with an unfair advantage.
“Should it prove that there is something in it, any further steps would need to be discussed and decided,” Habeck told reporters, alongside Le Maire.
