Europe wanted to give its prized auto industry a reprieve as the sector undergoes a wrenching, historic shift to electric vehicles. The EU executive obliged, slapping unexpectedly high duties on cheaper made-in-China EVs.
At risk is a sector that employs 12.9 million people, accounting for 7 percent of the bloc’s total GDP — and that is increasingly falling behind its peers.
The provisional duties, which take effect July 4, create a small window for European automakers to catch up to their Chinese rivals, as long as they don’t squander the opportunity.
“Without the imposition of measures, the EU industry would lose sales volumes and market share and its profitability would rapidly decline,” said a Commission official, who was granted anonymity due to the sensitivity of the case.
But the decision on tariffs comes as a faction within the European People’s Party (EPP) — the conservative grouping that came out on top in last week’s European election — looks to kill a plan to end the sale of new internal combustion engine cars in 2035, setting the stage for a showdown among parties.
EPP head Manfred Weber targeted the ban as soon as it was clear his party had won the most European Parliament seats on election night. His stance put him at odds with Commission President Ursula von der Leyen, who is seeking a second term at the helm of the EU executive as the EPP’s candidate.
To keep her presidency, von der Leyen may need to form a new coalition by striking a deal with the Greens, who staunchly oppose revisiting the ban.
“These measures are not the solution to making up for the German automotive industry’s backwardness in e-mobility,” Michael Bloss, a German Greens member of the Parliament’s industry committee, told POLITICO.
“A zig-zag approach to phasing out combustion engines is creating uncertainty and causing enormous damage to the automotive industry.”
Too cozy
Beyond politics, the combination of repealing the 2035 legislation and creating breathing room with tariffs would dramatically take the heat off automakers as they ramp up EV production.
“If you make this too cozy for existing automakers who still make the majority of their profits from internal combustion engine vehicles, then you’re going to see a situation where they are increasingly not competitive in other markets in the world,” said Colin McKerracher, head analyst on clean transport at Bloomberg NEF.
Many European manufacturers have already walked back their EV targets, citing high production costs and slowing adoption rates. Volkswagen, whose Chinese joint venture, SAIC, was hit with the highest duty on Wednesday at 38.1 percent, told an automotive conference earlier this year that it will rely more on hybrids to compensate for falling all-electric sales.
What is hindering a wider EV uptake, however, is the availability of affordable models costing €25,000 or less. Chinese companies can fill that gap, thanks to expansive supply chains and low costs, but their European and U.S. competitors have focused on larger models like SUVs that come at a higher price — and generate more profit.
As Europe debates how to move forward, Beijing and Washington are plunging ahead and creating their own EV behemoths. The Biden administration’s decision to slap a 100 percent tariff on made-in-China EVs has left Europe as the most lucrative market destination for the car brands.
Speed bump
The provisional duties erect a speed bump to Chinese automakers, but not a roadblock.
The brands will take a temporary hit to their bottom lines, but the Commission’s decision will only accelerate their plans to build production facilities within the bloc to skirt the tariffs. So far they have been welcomed by Hungary, whose Prime Minister Viktor Orbán has opened the door to automotive investments from Beijing.
In the interim, China’s largest brands, such as BYD, have enough of a cushion to absorb the duties and maintain their current consumer pricing.
They’re also eyeing markets outside the U.S. and Europe, such as southeast Asia, where they are quickly gaining market share. For example, Chinese brands accounted for 77 percent of EV sales in Thailand in 2023 compared to 46 percent in 2022, according to BloombergNEF’s annual vehicle outlook report.
In this context, if European automakers are permitted to continue their love affair with traditional combustion-engine cars, “they’ll get out of sync with the rest of the world,” McKerracher said.
Karl Mathiesen and Hans von der Burchard contributed reporting.