Germany, China and electric cars: no desire for a trade war

The MG4 is a prime example: A leasing rate of 159 euros for private customers in Germany without a down payment does not seem realistic. At least not when the car costs a minimum of 34,990 euros. The monthly payment conceals a very high discount. Is the MG4 the electric car that illustrates the market-distorting effect of state subsidies in China?

For SAIC(Shanghai Automotive Industry Corporation), the compact car is nothing other than a solid basis for sales in Europe. The MG and Maxus brands sold 11,312 electric cars in January and February. It was by far the most successful Chinese EV maker in Europe – but what does that mean for the debate about the competitive relationship with Germany and the question of how Europe as a whole should react? One thing is clear: simple answers are wrong, and clever ones are rare. And it is also certain that nobody wants a trade war, even though the subsidy race is a reality.

The current importance of electric cars produced in China is usually overestimated. According to analyst Matthias Schmidt, 13.6 per cent of new registrations in Europe in January and February were electric vehicles.

21.6 per cent of these – i.e. a good one in five – came from factories in China. Depending on how you read it, only half of these can be attributed to names such as SAIC, BYD or Geely. And hyped brands such as Nio or Xpeng only account for a very small number.

Dependency is mutual and self-evident

However, the best-selling car from a Chinese plant – specifically from Shanghai – is the Tesla Model 3 (15,197 new registrations). The BMW iX3 from Shenyang also accounts for 2,115 imported units. And what about the Dacia Spring (4,928 units), which is nothing more than a converted Dongfeng Nano Box from Wuhan? It is obvious: the decisive factor is where the added value is created.

That is also why the German Association of the Automotive Industry (VDA) is against punitive tariffs. A Volkswagen sold in China is built in Changchun, Hefei or Chengdu. However, the profits are booked in Wolfsburg. The VDA – and with it German Chancellor Olaf Scholz – are in opposition to the President of the European Commission, Ursula von der Leyen. But it’s election campaign time in Brussels, so the commission is investigating whether there are unauthorised subsidies in China. It is a threatening gesture and, at best, a means of conducting negotiations.

At the same time, German companies are producing in China. And more and more Chinese companies are producing in Germany and Europe. CATL, the global market leader in battery cells, manufactures in the German state of Thuringia. Volvo, part of Geely, will soon manufacture the EX30 in Belgium. BYD wants to build a factory in Hungary, where the Chinese manufacturer has been building electric buses for European markets for years. It is common practice in the automotive industry to produce in the markets where sales take place: in China, the US, and Europe.

Against this backdrop, it is neither possible nor sensible to make a sharp distinction between a binding yes or no system.

China in a domestic crisis

Nevertheless, fear is rife, and for good reason. For example, the CN EV Post reports that a kilowatt hour of LFP cells is being sold for the equivalent of only around 52 euros. Until recently, it was more than twice as much. The economic problems in the world’s second-largest economy are that, on the one hand, it has built up overcapacity. On the other hand, buyers lack confidence in their own economic prospects, and demand is correspondingly weak. Meanwhile, demographic change is likely hitting the 1.5 billion people even harder than us Europeans as a result of the former one-child policy.

Exactly how the state helps companies is not transparent. If taxpayers’ money is used, it could be an unlawful market intervention. However, fearful descriptions and helplessness are not an appropriate response to an unpleasant reality.

What needs to be done?

“We need to be more innovative.”

Professor Stefan Bratzel from the German Centre Automotive Management (CAM) is cautious: “Trade barriers and protectionism will not help us in the long term,” he tells us. Although we have to watch out for unfair subsidy practices in Europe, something else is crucial: “We can’t be cheaper. So we have to be more innovative.”

Build the best electric cars. That’s what it’s all about.

According to Bratzel, China currently has an advantage, particularly in producing battery cells and systems, resulting from a planned and long-term strategy. The aim of our industrial policy must be to create this added value in Europe as well.

Dependence is particularly critical in areas where China has established a quasi-monopoly. This applies, for example, to the chemically simple anode material graphite, which is used in almost every battery cell in an electric car. Theoretically, pure carbon can be produced anywhere. In practice, it is produced in China.

A similar situation exists with the refinement of lithium into lithium hydroxide. It was a mistake for the automotive industry to regard the battery cell as a commodity – i.e. as any raw material that can be ordered anywhere.

Inflation Reduction Act draws investment away

The mistake has now been recognised. The problem is that the US Inflation Reduction Act (IRA) attracts many investments to the United States or Canada originally intended for Europe. Volkswagen is a typical example of what is happening: the group’s own battery company, PowerCo, will build three gigafactories: one in Salzgitter, one in Valencia, and the largest by far in Canada, where raw material extraction coincides perfectly with access to the US market.

China and the US practically subsidise electric cars and the associated battery production.

In comparison, the Brussels review of anti-dumping duties looks unsympathetic to the outside world because it only acts defensively instead of taking positive, reinforcing action. Incidentally, bicycles built outside the EU are subject to 19 per cent VAT after 14 per cent import duty. The additional anti-dumping duty for bicycles from China is 48.5 per cent. For electric bikes, it is even 62.1 per cent.

Supply chain law and ecological assessment criteria

Anti-dumping duties could be just one instrument to counter unfair market distortions, Nils Redeker tells electrive. He is Deputy Director at the Jacques Delors Centre of the Hertie School and works on Europe’s economic policy. He favours a wide range of measures to keep the added value of electric cars in Europe or bring it here.

“One example is the Supply Chain Act. It is applied in Germany, and a European directive is currently being negotiated in trialogue,” Redeker explains. A supply chain law to prevent forced labour, among other things, would reward European standards.

The same applies to ecological assessment criteria, says Redeker. Incentivising CO2-free production, for example, would also be an advantage for Germany and other European locations.

But what about direct support programmes and subsidies? “The European Union needs to make structural improvements here,” says Redeker, pointing out that the EU does not levy taxes but only distributes relatively small membership fees: “It is unclear who will pay for direct and extensive support programmes.” On the other hand, Punitive tariffs would not be a good instrument, but they could send a signal. “The real goal, however, must be to establish the value chain in Europe.”

Reflect on yourself – and invest

Neither Germany nor China have a reasonable interest in deteriorating trade relations. The link has long been intensive. The idea of separation – us here, them there – is naive in the global automotive industry. Volkswagen is planning a joint platform with Xpeng. The Chinese company EVE Energy is building the plant for battery cells for BMW’s Neue Klasse in Debrecen, Hungary. And Porsche’s new electric Macan is fitted with CATL battery cells from Thuringia. That is the shared reality.

Nevertheless, the presumably state-driven overproduction in China cannot be ignored. It’s nice when battery cell prices fall. But please not to a ruinous extent.

The most important thing for the German car industry as part of the European car industry is to focus on itself and simply build good electric cars. That includes research and the production of battery cells and systems. Every cent must be invested in this strategy.