On September 13, Ursula von der Leyen, president of the European Commission, announced the formal initiation of an anti-subsidy inquiry into electric car imports from China while delivering her annual State of the Union address to the European Parliament.
In her speech, von der Leyen said that electric vehicles are a “crucial industry for the clean economy, with a huge potential for Europe. But global markets are now flooded with cheaper Chinese electric cars. And their [prices are] kept artificially low by huge state subsidies.” She added that this distortion of the European market is unacceptable, whether from within or outside of the market.
The anti-subsidy inquiry
The EU’s anti-subsidy probe is based on two regulations: an anti-subsidy regulation for products imported from non-EU countries, and a separate regulation on foreign subsidies distorting the EU’s internal market. In such investigations, the EU examines individual companies rather than countries, and if a positive conclusion is reached, trade sanctions involve imposing tariffs on the products exported by the investigated companies, rather than levying tariffs on all similar products from a specific country.
Under the former regulation, a preliminary decision needs to be made within nine months after the formal initiation of an inquiry, and a final decision within 13 months, without retrospective application to goods imported before the investigation. However, the European Commission retains the right to investigate foreign subsidies within the past ten years.
Regarding subsidies obtained before the implementation of the regulation, they can be investigated as long as the subsidy was received within the five years preceding the implementation of the regulation, and if it has continued to distort the EU market afterward. This means that the EU’s anti-subsidy investigation against Chinese EVs can be retroactively applied for up to five years, going back to 2018. It’s important to note that “subsidy” in the context of the current anti-subsidy investigation is a broad concept.
According to Lei Song, senior counsel at Zhong Lun Law Firm, the definition of subsidies in the EU’s anti-subsidy inquiry is not limited to fiscal appropriations and tax reductions. The ability of Chinese companies to provide detailed identification and classification of subsidies is crucial for responding to this investigation. The process is tight, and once initiated, Chinese companies will be under intense scrutiny for the next 12–13 months, therefore requiring them to prepare in advance. Government support, cooperation from European importers and end users also play important roles in addressing the investigation.
From the viewpoint of Lei, Chinese car companies should actively participate in this inquiry, involve professional advisory teams early, and pay attention to the power of local partners in the EU. If the results turn out to be unfavorable, companies can seek judicial remedies in European courts. Based on past “double reverse” (anti-dumping and anti-subsidy) cases, companies that actively defend themselves can face tariff rates up to eight times lower compared to those that passively or do not defend.
Chinese car companies can also learn from industries with rich experience in similar cases in China, such as textiles and photovoltaics. The European Chamber of Commerce in China expressed strong concern and opposition to the EU’s announcement of initiating the anti-subsidy inquiry, stating that the Chinese electric vehicle industry has continually innovated and accumulated overall industry advantages, providing high-end, cost-effective, and customizable EVs to consumers globally, including European citizens. This advantage was not created through alleged massive subsidies, according to the organization.
The spokesperson for China’s Ministry of Commerce responded on September 14, expressing strong concern and dissatisfaction. Beijing believes that the investigation measures planned by the EU are a blatant act of protectionism under the pretext of “fair competition,” which will seriously disrupt and distort the global automotive industry supply chain, including the EU, and have a negative impact on economic and trade relations between China and the EU.
According to observations from Caixin, the anti-subsidy probe will not significantly impact Chinese car companies’ sales in Europe over the short term. In the next three years, this policy will have a more substantial impact on Chinese car companies’ efforts to expand their market share in Europe. However, in the long term, China’s competitive advantage in the global new energy vehicle market is unlikely to be shaken.
Current impact likely minimal
Chinese EVs sold in the European market are primarily vehicles from European brands that have been acquired by Chinese car companies, or vehicles with European brand backgrounds. Examples of these include SAIC Motor’s MG, Dongfeng Motor’s Aeolus, Geely’s Lynk & Co, and Smart. These brands, with the exception of MG and Smart, are primarily produced in Europe. Thus, while they are considered Chinese brands in terms of sales, they will not be significantly affected by the anti-subsidy investigation.
SAIC Motor, Smart, BYD, Great Wall Motor, JAC Motors, and Xpeng Motors are car manufacturers in China that export vehicles to Europe. They are therefore the primary targets of this investigation. Among these companies, only SAIC Motor and Smart have a significant share of the European market. The other brands currently have less than 1% of their total sales in Europe, so the impact is minimal.
SAIC Motor’s MG is the brand most likely to be affected by the anti-subsidy investigation. It is produced in China and a significant percentage of its sales originates from Europe. In the first half of 2023, MG sold 45,000 units in the European market, and that figure is expected to exceed 100,000 units by the end of the year. However, MG has been selling its vehicles in Europe for several years, and its prices have remained stable, mostly unaffected by changes in Chinese new energy vehicle subsidies. Proving that its prices benefited from such subsidies will be challenging. Additionally, MG has an extensive local distribution network in Europe, and support from European importers, dealers, and customers can aid MG’s defense during the investigation.
Tesla also deserves special mention. Before 2023, Tesla’s Model 3 units sold in the European market were primarily imported from China, falling under the category of Chinese EV exports. However, with the help of the Chinese team, Tesla’s factory in the US has effectively increased its production capacity. Currently, orders for the Model 3 in the European market are primarily fulfilled by Tesla’s facility in the US, with products from the Shanghai factory mainly exported to Japan, Southeast Asia, and Australia.
From Q4 2023 to Q1 2024, the new Model 3 will be manufactured only at Tesla’s Shanghai factory. In the short term, this will significantly increase the number of Tesla vehicles exported from China to Europe. However, after its US factory has ramped up production capacity for the new Model 3, imports to the European market will likely originate from the US.
In summary, due to the low reliance of Chinese car companies on the European market, the anti-subsidy investigation is unlikely to have a significant impact on the operational status of Chinese car companies.
This story is the first part of a two-part series discussing the EU’s anti-subsidy inquiry into electric vehicle imports from China. Read the second part here.
This article was adapted based on a feature originally written by Yin Lu and Gu Lingyu, and was published on Caijing Eleven (WeChat ID: caijingEleven). KrASIA is authorized to translate, adapt, and publish its contents.