Fengkou Zongheng | Is there a sequel to the EU's "pressure"? Experts: European government subsidies may be a "hidden mine", and "carbon footprint" is the key to solving the problem
2024-08-23
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Recently, the European Commission disclosed the final ruling on its anti-subsidy investigation into Chinese electric vehicles. According to the disclosed information, the anti-subsidy tax rates of the three sampled Chinese electric vehicle companies, BYD, Geely and SAIC, were 17.0%, 19.3% and 36.3% respectively. The anti-subsidy tax rate for Tesla was 9%. The average tax rate for cooperating companies was 21.3%, and the tax rate for non-cooperating companies was 36.3%.
In response to this, many automakers including SAIC, Geely, Chery, and Leapmotor have begun to take measures such as adjusting the structure of export models and building factories overseas to offset the adverse effects of the increase in tariffs as much as possible.
But this does not seem to be a perfect solution. Relevant experts remind that, based on Europe's past practices and some recent actions, the EU is not only targeting vehicle manufacturers, but also other "hidden risks" that will affect the entire new energy vehicle industry chain. In order to avoid being controlled by others, companies in the entire industry chain must take countermeasures in advance.
In response to "pressure", many car companies set up factories overseas
The tax rate proposed by the EU is far beyond the normal trade tariff range.
Under normal circumstances, the EU import tariff rate for passenger cars is 10%. The above additional tariffs are additional tariffs that car companies need to pay on top of the 10%. That is to say, after the tariffs are finally implemented, BYD, Geely, and SAIC need to pay tariffs of 27%, 29.3%, and 46.3%. According to a survey by the European Union Chamber of Commerce in China, for most Chinese car companies, the EU's additional tariffs of more than 10% are at a high level, which will have a direct negative impact on China's electric vehicle exports.
SAIC Motor was the most angry when facing the maximum tax rate. On July 4, the European Commission officially announced the preliminary ruling. On July 5, SAIC Motor issued a statement that it would formally request the European Commission to hold a hearing on China's temporary anti-subsidy tax measures on electric vehicles and further exercise its right to object in accordance with the law. Regarding the content of the objection, SAIC Motor summarized three points: First, the European Commission's anti-subsidy investigation involves commercially sensitive information, which is beyond the scope of normal investigation; second, the European Commission made mistakes in its determination of subsidies; third, the European Commission ignored some of the information and defense opinions submitted by SAIC Motor during the investigation, and inflated the subsidy rates of multiple projects.
SAIC Motor’s defense statement, source: SAIC Motor’s official Weibo
While fighting for justice in the face of injustice, SAIC Group has also taken a number of countermeasures. First, it plans to increase the number of economical small cars priced at around 20,000 euros in the EU market. Faced with the EU's tariff barriers, the price increase of economical small cars is lower than that of medium and large cars; secondly, it signed a new technical cooperation agreement with Germany's Volkswagen Group. In the future, a number of plug-in hybrid models and pure electric models will be launched in the European and Chinese markets; in addition, SAIC Group stated that it will definitely build a factory in Europe in the future.
In fact, after the EU wielded the "tariff stick", many Chinese car companies accelerated the pace of landing vehicle production capacity in Europe.
Chery, which was subject to a 21% tariff, said that the recently acquired Barcelona factory in Spain is not enough to meet its medium- and long-term plans in Europe. It will continue to increase the scale of factory construction in Europe and is currently considering the location of its second factory in Europe.
In addition, Leapmotor International, a joint venture between Leapmotor and Stellantis, has also begun producing Leapmotor electric vehicles at Stellantis' factory in the southern Polish city of Tychy, and the first batch of T03 small electric vehicles has been assembled and rolled off the production line.
Experts: Component companies need to be vigilant, European government subsidies may become a "hidden mine"
"The essence of the EU's imposition of tariffs is unilateralism and protectionism. Considering the West's previous practices, this deliberate containment is unlikely to be limited to the vehicle manufacturing end. In the future, it is very likely that pressure and restrictions will be put on the upstream and downstream of the new energy vehicle industry chain as well." Duan Zhiqiang, director of Wanchuang Investment Bank Research Institute, hit the nail on the head.
Duan Zhiqiang speculates that the ultimate goal of the Europeans is to bring the industrial chain back to the local area. If Chinese vehicle companies go abroad to build factories in large quantities in the future, the Europeans should hope to reduce their dependence on China as much as possible. "Of course, they are not willing to use Chinese-made parts. Referring to the Inflation Reduction Act officially implemented in the United States last year, the easiest thing to do here is government subsidies."
An ocean-going car carrier loaded with Chinese new energy vehicles sets sail for Europe. Image source: SAIC Motor’s official Weibo account
On January 1, 2023, the United States officially implemented the Inflation Reduction Act, announcing that it would provide a $7,500 tax credit to American consumers who purchased electric vehicles. At the same time, it imposed restrictions on vehicles that received subsidies, requiring that a certain percentage of the mining, processing, and recycling of battery raw materials and the assembly of battery components must be completed in the United States, Canada, Mexico, or countries that have a free trade agreement with the United States. This means that electric vehicles equipped with batteries produced in China will not be able to enjoy tax credits.
Affected by the bill, battery manufacturers including CATL have no choice but to build factories overseas. However, compared with domestic factories, not all countries have cost advantages in building factories, especially compared with developed countries. "On the one hand, the labor costs and management costs of developed countries are definitely high, and on the other hand, their employment regulations and breach of contract costs are also high." Duan Zhiqiang explained that developed countries have a set of strict standard systems for the environment, pollution control, electricity use, etc., which not only require more funds, but also technical processes.
This will put parts companies in a dilemma: if they don’t go overseas, they will lose the market, but if they go overseas, they will lose their cost advantage. With last year’s experience as a lesson, parts companies that want to enter the European market have to pay attention.
In fact, it is not difficult to see the clues through the recent practices of European companies. Just a few days after the EU announced that it would impose additional tariffs, Ampere, a subsidiary of Renault electric vehicles in France, signed contracts with two battery giants at the same time, namely CATL and LG New Energy of South Korea. Both giants will provide Ampere with lithium iron phosphate batteries. It is worth mentioning that LG is the world's second largest power battery supplier and is often seen as a challenge to CATL. The deep meaning behind signing with CATL this time has aroused heated discussions among industry insiders. "This is plan B. If one of them fails due to non-compliance, there is another one." Duan Zhiqiang said.
How can companies prepare for a rainy day? "Carbon footprint" is the key
The tariff issue has been resolved, but there is still the subsidy issue. In order to avoid being restricted by European subsidies at a critical time, upstream and downstream companies in the industry chain must prepare for a rainy day. Duan Zhiqiang believes that companies can at least start from two aspects to make early arrangements to reduce risks.
On the one hand, the compliance of the production process should be improved, especially the requirements for green production. Duan Zhiqiang said that at present, the subsidies given by European governments, such as France, refer to the "carbon footprint" standard. The "carbon footprint" refers to the total amount of greenhouse gas emissions generated during the production process of a product. If the "carbon footprint" does not meet the standard, no subsidy will be obtained.
Many Chinese companies, even if they have a carbon footprint tracking system, are likely to lack relevant certification. Duan Zhiqiang explained by giving an example, for example, the most commonly used material for car shells is steel. There are no steel mills in the UK, but in China, heavily polluting thermal power steelmaking is still the main method. These may become the key to obtaining European subsidies. "This is the difference in the production process between China and the West, and it will most likely be used to make a fuss," Duan Zhiqiang speculated.
On the other hand, acquisitions, mergers or joint ventures are also an effective way for domestic auto parts companies to go overseas. In recent years, there have been many examples of overseas capital operations by Chinese auto parts companies. For example, in 2021, CATL acquired Millennial Lithium Corp of Canada for RMB 1.92 billion. In 2023, it also stated that it would establish a joint venture with Stellantis Group, the world's fourth largest automotive group, to provide lithium iron phosphate batteries for Stellantis' production in Europe. In 2018, Weichai Power subscribed to 19.9% of the shares of Ballard Power Systems Co., Ltd. of Canada for US$164 million, becoming Ballard's largest shareholder.
"Whether it is focusing on 'carbon footprint' or achieving mergers and acquisitions, they are all manifestations of Chinese companies' localization and going overseas. The methods and measures taken in advance now may not all be used in the future, but companies must have this awareness," said Duan Zhiqiang.
(Dazhong News·Fengkou Financial Reporter Lv Hua)
