EU Commission may have painted a bull's eye on battery factories in Hungary
Ursula von der Leyen, President of the European Commission, sent an important message to two places on Wednesday when she announced in her State of the EU speech that she would launch an anti-subsidy investigation into Chinese electric vehicle manufacturers, according to EU sources speaking to Portfolio on the spot in Strasbourg. On the one hand, she signalled to French President Emmanuel Macron that Brussels was ready to take protectionist measures and that it was willing to make political concessions to the French head of state. France has been demanding the opening of an inquiry for weeks, and Brussels rumours suggest that this is the price to be paid for Macron's support for the re-election of von der Leyen as President of the Commission.
The other message was sent to China and its economic partners and allies within the EU:
the European Union will no longer allow its own economic interests to be violated and its domestic producers to be endangered on its internal market.
This could be a major problem for Hungary, even though Germany has been the biggest destination for FDI from the Asian country, and Italy has long sought Beijing's favour. By autumn 2023, however, Rome also realised the risks, and Giorgia Meloni's government backed out of the Belt and Road Initiative (the new name of the old One Belt, One Road support programme - ed.), turning its back on China.
While alarm bells are being sounded in Berlin about the growing Chinese dominance in the most important export markets for the German economy, it is mainly the automotive sector that stands to lose out. Pressure is therefore mounting on German manufacturers to drop their Chinese partners and on the government to aggressively protect the EU market from Chinese products.
And the reaction from Brussels fits precisely into this pattern of increasing independence from China in all areas, especially as the European Commission has recognised that while there are strict competition rules on state aid in the EU, Beijing can capitalise its companies as it wishes.
"Global markets are now flooded with cheaper Chinese electric cars. And their price is kept artificially low by huge state subsidies. This is distorting our market, so I can announce today that the Commission is launching an anti-subsidy investigation into electric vehicles coming from China. Europe is open for competition. Not for a race to the bottom," von der Leyen said in her State of the European Union address.
What comes next?
The anti-subsidy investigation itself will initially only look at the prices of Chinese e-car imports, the state aid given to manufacturers and which EU countries are suffering significant losses from Chinese subsidies. However, according to sources who spoke to Portfolio, it will be comprehensive and will focus on three main areas:
- What and how much state aid is China giving to its car manufacturers to dominate the electric car market, is it gaining an unfair competitive advantage by keeping prices artificially low?
- This will later be complemented by a focus on supply chains: how does China influence prices, from raw material supply to component production, to put its own players in a position?
- What other market interventions does China or individual car manufacturers use to gain an unfair competitive advantage in the market?
The investigation could potentially lead to the imposition of additional duties on Chinese electric vehicles, which are believed to benefit from unfair advantages due to state subsidies. More broadly, this marks a change in approach for Europe, which has moved from being the world's largest free trade bloc to increasingly protecting its own market from both the US and China in a period of deglobalisation.
The anti-subsidy investigation is expected to be at the heart of the EU-China Economic and Trade Dialogue scheduled for 25 September, which will also precede the tone of the bilateral summit later in the year. EU Trade Commissioner Valdis Dombrovskis confirmed that he would be travelling to China for trade talks shortly, posting on X (formerly Twitter):
"We're open to competition but not to unfair practices. That's why we’re launching an investigation on Chinese e-vehicles. I will travel to China next week to engage on trade & economic opportunities/challenges. We want to keep dialogue open; to de-risk, not decouple."
All these measures could hurt Hungary badly
Although in her speech, Ursula von der Leyen only mentioned the automotive industry as a target, Portfolio's sources indicated that the subsidy investigation could be extended to suppliers involved in the automotive industry, and
will probably target component manufacturers as well, as the impact of Chinese state subsidies is also felt there, so Hungary, with its dreams of becoming a battery superpower, may also be concerned.
Put simply, the problem is that while European car manufacturers have almost no access to state aid due to strict EU rules, Chinese players have almost unlimited access to R&D and factory expansion funds, but Beijing also often improves their financial situation with huge central orders.
And in the three areas covered by the investigation, it is already known that there are Chinese actors in Hungary who have received significant subsidies in their home country. For example, CATL, as we have reported, is the largest global lithium-ion battery manufacturer, with significant central funding from Beijing. In 2020, CATL in Shenzhen reported in its IPO that it received around USD 1,646 million in state aid, a significant increase from USD 935 million the previous year.
And Semcorp, which is also expanding in Debrecen, could make more than RMB 100 million in profits from state orders between 2019 and 2021, which the new European regulation could also label as state aid.
And as several people with insight into the case confirmed to Portfolio on the spot: while the €800 million in aid from the Hungarian government was already under investigation by the Commission, another procedure was already planned to be opened under the EU Foreign Subsidies Regulation, in force since July, for the recapitalisation of CATL by the Chinese state.
As explained to Portfolio, the fact that Chinese car manufacturers and suppliers are able to lower their prices because they use state aid to cover their losses or finance their expansions is an advantage in the European market that could drain the industry's blood even in Europe.
Another trick the Commission may investigate, which could override the Orbán government's economic ideas, is that Chinese operators are trying to cut their customs costs by moving their battery and other component factories inside the EU. On paper, their subsidies for other purposes in their home country - say research and development - are in fact financing the Chinese budget to build their factories in the EU.
The problem is that not only are e-cars too cheap in the car industry, but the price of Chinese parts bought by European manufacturers is artificially low, threatening EU suppliers. The risk is that when EU producers go bankrupt or possibly cut capacity due to market losses, the dominant Chinese players may raise prices at any time and, with the loss of competition, may engage in unfair market practices in the future.
Simply put: the "Made in EU" stamp that can be obtained in Hungary allows China to save on tariffs with its state-subsidised factories.
But the fact that two Chinese carmakers have recently revealed that they may build a factory in Hungary could also give the cabinet pause for thought: both BDY and GWM are considering developing production capacity in the country. However, if the EU launches its subsidy procedure, experts say it will certainly extend to incoming car manufacturers, mainly to prevent the plants from circumventing any market protection duties that might be imposed.
No potential allies left for Budapest
It is almost inevitable that the Hungarian government will strongly criticise the tougher EU action against China. At the EU summit in early summer, Hungary itself signalled that it would not support a move away from mutually beneficial trade relations towards a move to distance the EU from the world's second largest economy.
At the time, even Germany was a partner in this, while France took a neutral position at the Council meeting. But now the Budapest government would be the last to hold China's hand.
"I welcome the investigation," Economy Minister Bruno Le Maire said in Berlin. "If these subsidies do not comply with the rules of the World Trade Organization, Europe must be able to fight back," he added, according to Politico.
German Economy Minister Robert Habeck also welcomed the decision. "It is about unfair competition. It's not about keeping high-performance, low-cost cars out of the European market; it's about looking to see if there are hidden, direct or indirect subsidies that create an unfair competitive advantage," he said at a joint news conference with Le Maire.
The automotive industry's main lobbyist in Brussels, Sigrid de Vries from ACEA, said the probe was a "positive signal" that the Commission was taking the threat to European carmakers seriously. "China’s apparent advantage and cost-competitive imports are already impacting European auto makers’ domestic market share," she said.
But von der Leyen’s call is controversial because big German brands are heavily exposed to the Chinese domestic car market, with huge manufacturing capacity in China. Until recently Volkswagen was the biggest seller there, while BMW and Mercedes dominate the premium market. That means any retaliatory measures from Beijing could hammer the Germans, more than anyone else.
The share of French cars in the Chinese market had fallen to 0.4% by August, according to statistics from the China Passenger Car Association - while their German counterparts have a comfortable 17% share. But the question is how far the German car industry can lobby for Brussels to go easy on the Chinese players who are gobbling up their market anyway.
Cover photo: Getty Images.
