Large government subsidies have been found to play a big role in nurturing the thriving and extremely competitive Chinese EV and battery industry today. (UBS)

Media reports have also flagged the potential for additional tariffs on Chinese EVs imported into the bloc. Despite an increased political focus on protectionism, with the US Inflation Reduction Act a recent example, there are many reasons for policymakers to think twice about such a move.

First, from a pragmatic standpoint, EU officials and the industrial sector will be mindful of tit-for-tat escalation. China is a major supplier of raw materials to Europe, and a key market for European brands, including the carmakers that any tariffs would claim to protect. That said, the current import tariff for Chinese cars entering Europe stands at just 9%, compared to the 15% China charges on the reverse, indicating room for potential harmonization.

More important, we believe protectionism would penalize consumers, and ultimately hinder decarbonization progress.

Large government subsidies have been found to play a big role in nurturing the thriving and extremely competitive Chinese EV and battery industry today, with the MIT Tech Review estimating over CNY 200 billion spent in 2009–20. As a result, the supply chain has developed lockstep within the vertical, and created global technological dominance. To quote Renault’s CEO following the auto show in Munich earlier this month, where Chinese EVs stole the limelight, Chinese EV makers “are a generation ahead of us.”

It is worth noting, however, that Chinese EVs sold in Europe are still priced around the regional average of EUR 50,000–60,000, according to JATO, an industry research group. Comparatively, the average selling price of an EV in China is around EUR 30,000. And while the European Commission reported that China’s share of EVs sold in Europe has risen to 8% and is projected to rise to 15%by 2025, this includes cars manufactured within China for international brands. JATO estimates Chinese brands’ market share in Europe as of 1H23 stands at below 1%.

In our view, the most aggressive EV brand when it comes to pricing has been Tesla, which cut selling prices in Europe in April, with the mass-market Model Y retailing from EUR 46,000. According to JATO, Tesla’s Model Y is now the best-selling EV unit in the bloc this year. This suggests that price sensitivity is high, and government subsidies are losing steam as the market grows. Germany has already reduced its EV subsidy from EUR 5,000 to EUR 3,000 per vehicle this year, and a similar-sized unit subsidy in the Netherlands is subject to a quota (which ran out midyear in 2022).

If China’s EV market is indeed “a generation ahead”, perhaps there are lessons to be learned, too. Unparalleled government support into the uncharted space two decades ago was crucial to China emerging as the largest EV market by cars sold. EVs are also approaching subsidy-free cost parity with internal combustion engines in China. Drivers are supported by the world’s largest charging network and uniform charging standards across brands. An accelerated transition requires holistic support, and China’s roadmap has delivered much visibility—if politicians in Europe can accept it.

Main contributors - Stephanie Choi, Michelle Laliberte

Original report - Car wars? Decarbonization and free trade, 2 October 2023.