“The U.S. has not outright hung up a ‘Do Not Invest’ sign, but we have made it clear we are anxious about Chinese car companies,” said Scott Kennedy, an expert in Chinese economic policy at Washington’s Center for Strategic and International Studies. “Europe has been much less interventionist and more supportive.”
The U.S. imposes a stiff 27.5 percent tariff for Chinese-made cars — put in place during Donald Trump’s presidency — and has buttressed that with the protectionist tax credits of President Joe Biden’s Inflation Reduction Act, which put a premium on car and battery production in North America. In addition, hostility toward Beijing from leaders in both political parties would make it difficult for Chinese carmakers to penetrate the U.S. market, at least openly.
Meanwhile, Europe’s moves have, intentionally or not, provided a strategic opening for China’s startup car brands. The bloc’s tariffs on imported cars are only 10 percent, and European national subsidies for electric vehicles apply to imports as well as domestically made cars and trucks.
The attraction of the European market for electric vehicle makers is magnified by the E.U.’s recent decision to ban the sale of new combustion engine cars starting in 2035 — a decision the U.K. has also followed.
That’s why it’s possible to see a BYD-branded car in Dusseldorf, but unlikely in Dallas. BYD, a maker of both clean cars and the battery cells that power them, sold nearly 2 million cars last year (way more than Tesla). It’s one of many Chinese brands moving into the European market.
“Europe’s [electric vehicle] market is comparatively far more open than those of China and the U.S., where national or regional assembly is a prerequisite to qualify for purchase subsidies and import duties on foreign vehicles are higher,” said a recent report by the Allianz insurance company on the threat Chinese carmakers pose to the E.U.
The Chinese challenge
The reputation of China’s carmakers has rapidly shifted, from being seen as making low-quality knock-offs to becoming a true rival for Western brands. Its domestic market dwarfs any other, selling 27 million cars last year, compared with 13.75 million cars and light trucks in the U.S. and 9.25 million cars in the E.U.
The country’s lead in electric vehicles is even more pronounced.
Last year, 5.4 million battery electric vehicles — two-thirds of the world total — were registered in China. It also controls some 76 percent of global battery cell production capacity and has a fierce grip on the raw materials used to make them. That offers the country’s carmakers a strategic advantage and the ability to build EVs at a cost-slashing scale.
And it has already grabbed a foothold in the U.S. market, despite Washington’s trade barriers: The Chinese carmaker Geely owns the Swedish automobile manufacturer Volvo and its luxury EV affiliate Polestar, which is building a factory in South Carolina.
Ford CEO Jim Farley has no illusions about what China means for his industry.
“We see the Chinese as the main competitor, not GM or Toyota,” Farley said at a finance summit hosted by the investment bank Morgan Stanley. “The Chinese are going to be the powerhouse, I think.”
The fact that Ford — with auto plants in the U.S., Europe and China — is not preoccupied with Toyota (the world’s largest automaker) or General Motors (its leading domestic rival) is a clear signal of how the carmaker assesses the threat from Chinese mass market EVs.
Several trends back up Farley’s assessment.
Last quarter, for the first time in history, China surpassed Japan to become the world’s leading auto exporter, according to China’s General Administration of Customs.
“The quality and value for Chinese cars has improved by leaps and bounds, especially in the last three years,” said Michael Dunne, an independent automotive consultant active in the U.S. and China.
At April’s Shanghai auto show, Chinese EVs made global headlines, from the high end — the glitzy HiPhi Y SUV — to the low, like BYD’s Seagull, a hatchback with a minuscule $11,400 price tag.
“It reminded me of the heydays of the Tokyo auto show in the ‘80s,” said Joe Langley, an auto forecaster and analyst with S&P Global Mobility. He spoke of the era when Japanese automakers remade the global automotive order by producing small, reliable cars like the Toyota Corolla and the Honda Civic.
China’s potential for disruption is perhaps even greater — especially in Europe.
Europe’s friendly shore
The E.U.’s 2035 clean car mandate — echoed in the U.K. — is the opening Chinese brands needed. Sales are also driven by comparatively generous purchase premiums in some richer countries like France, Germany and the Netherlands.
Chinese firms plowed $24 billion into the EV ecosystem in Europe last year — representing more than half of all of China’s direct investment into the continent, according to a report by the global consultancy Rhodium.
“Europe has few major battery firms of its own and is still very open to Chinese investment in the industry,” the report said.
China’s auto exports are still tiny, representing around 3.5 percent of European auto sales last year, according to S&P. But Transport & Environment, a green nongovernmental organization, reckons that Chinese firms could grab 9 percent to 18 percent of the all-electric car market by 2025.
Germany’s national statistics office said in May that imports of China-made electric vehicles (from both domestic brands and Western carmakers like Volkswagen building in China) represented 28 percent of all its EV imports in this year’s first quarter. That’s three times higher than the same period in 2022.
China’s advantage is twofold. Its EV producers don’t carry European automakers’ legacy costs of transitioning away from combustion engines. And with its vast domestic market, China has cracked the code on inexpensive production of battery cells — the main cost of an EV.
“They are leveraging their specific product know-how over incumbent European brands that employ a lot of people to make engines,” said one senior automotive manager granted anonymity as they are not cleared to talk publicly. To match that kind of efficiency, “VW would have to lay off half of its staff.”
The risk to Europe’s economy is extreme. Cars are the continent’s largest industry and biggest employer and account for 10 percent of manufacturing activity.
Car exports have generated a trade surplus of between €70 billion and €110 billion every year over the past decade for the European economy, the Allianz report said.
The prospect of that trade surplus evaporating is leading to growing pressure on the European Commission — the executive branch of the E.U. that’s responsible for trade policy for its 27 member countries — to boost tariffs on foreign cars.
That’s creating divisions within the bloc. For example, French-backed carmakers are seeking a higher protective barrier, while German ones — reliant on car sales in China and worried about Beijing’s retaliation — hold their tongues.
The American moat
The outlook for China’s EV makers in North America is drastically different.
The tariff makes U.S. market access almost three times more expensive for China-built vehicles than the E.U.
And suspicion of China is so pervasive among both Republicans and Democrats that it is spilling over into related areas of policy. The specter of Chinese imports is one argument that U.S. carmakers are using to caution the U.S. government against creating E.U.-style clean car sales regulations.
“If U.S. regulators and policymakers move too fast on EV mandates over the next several years, I predict China gains a stronger foothold in America’s EV battery supply chain and eventually our automotive market,” said John Bozzella, America’s chief car lobbyist at the Alliance for Automotive Innovation.
Republican lawmakers in Washington have struck similar notes, seeing an opportunity to use the president’s climate goals against him. “Joe Biden’s obsession with electric vehicles … is turning over American power and money to China,“ Republican Sen. John Barrasso (R-Wyo.) said on the Senate floor in February.
But Biden is making his own efforts to blunt China’s influence over the U.S. auto industry, one of the aims of the Inflation Reduction Act he signed last year. The bill’s stringent sourcing rules include specific prohibitions on tax incentives for electric vehicles made outside North America.
An obvious solution for China’s automakers would be to set up factories on North American soil. That’s already happening in Europe, and some Chinese car companies, along with battery-makers, have explored that option for the Americas.
Polestar’s South Carolina factory aims to produce all-electric SUVs for the North American market — and the company notes that means they qualify for the IRA tax credit.
The bar is higher for Chinese car companies without a protective Swedish name.
“Mention the word ‘China’ to a member of the House or Senate, Democrat or Republican, the executive branch, they will give you the same look and say, ‘No, not welcome here,’” said Dunne, the independent automotive consultant.
The new instinct for many lawmakers in Washington is to jump at even the appearance of Chinese influence — a choice that paradoxically could hinder the development of a U.S. battery supply chain, a chief goal of the landmark climate law that Congress passed last year.
The most recent casualty of anti-China sentiment is Microvast, a Texas company that won a tentative $200 million grant from the Biden administration to build a battery component factory in Tennessee. The government said the goal of the award was “bolstering domestic supply chains for lithium-ion batteries and creating well paying jobs in the United States.”
But last month, Biden’s Energy Department announced with little explanation that it would not award the money after all. The proposed grant had drawn ferocious criticism from congressional Republicans because of the company’s ties to China, including a Microvast subsidiary there.
Ford got similar pushback in February when it said it would work with CATL, a giant Chinese battery-maker, to build a battery plant in Michigan. Ford insists it is just licensing the technology and that CATL will have no role in the factory.
Farley, Ford’s CEO, delicately objected to the criticism in his appearance last month at the Morgan Stanley conference. Like other automakers, Ford is working hard to deliver the features Americans demand in an EV, like longer range. Chinese companies may be best suited to deliver those advantages.
“They have some of the best battery technology,” Farley said of the Chinese. “If localizing their technology in the U.S. gets caught up in politics, you know, the customer is really going to get screwed.”
Similar concerns exist in Europe.
William Todts, the head of Transport & Environment, wants as many people as possible to switch to EVs, but not while gutting the continent’s most important industry.
“The goal is not to obstruct ambitious car and battery makers: the world sorely needs them. It’s to ensure intense but fair competition,” he wrote in a policy paper, adding that if the E.U. doesn’t act to block unfair competition from both China and the U.S., “Europe may well be on course to become a dumping ground for subsidized Sino-U.S. EVs and batteries.”
A version of this report first ran in E&E News’ Energywire. Get access to more comprehensive and in-depth reporting on the energy transition, natural resources, climate change and more in E&E News.