China should do more to stimulate domestic consumption, European businesses have declared, saying huge investment in electric vehicle capacity has caused "understandable" concern in the EU.
The EU last week announced an anti-subsidy probe over concerns Chinese exports could swamp its automotive industry as they previously did its solar panel sector.
China's policymakers have emphasised boosting manufacturing and exports, particularly of electric vehicles, rather than supporting consumers as a way of bolstering its pandemic-damaged economy.
"Because of overcapacity outside of Europe, the European solar panel market was more or less obliterated," said Jens Eskelund, president of the EU Chamber of Commerce in China.
"So I think it's understandable that in Europe there would be a certain concern about what is happening," Eskelund said at the release of the chamber's annual position paper on China. "Why do we see this rapid scale-up in [EV] production, which is significantly . . . overshooting any . . . presently anticipated demand in the market?"
The chamber called for "demand-side policies" and for a more "predictable policy landscape" that would support domestic consumption by ensuring consumers did not need to save so much to protect against sudden changes in government direction.
China's rising expertise in electric vehicles is expected to lead to a "seismic shift" in the industry, according to analysts at UBS.
They expect Chinese brands to account for one in five cars sold in Europe by 2030, compared to just 3 per cent last year, to the detriment of established nameplates.
China's battery and electric-vehicle manufacturers are following a playbook that foreign executives claim has damaged other overseas industries: overinvestment fuelled by subsidies and local government support that results in excess capacity then unleashed on global markets.
The average utilisation rate of Chinese lithium-ion battery factories was 45 per cent last year and has dropped further in the first half of this year, according to CRU, a research group. The country's current pipeline of new projects would by 2030 result in annual capacity vastly beyond that needed to convert the entire car fleet to battery electric power.
Analysts estimate the country's automotive industry is already suffering from output that far outstrips demand.
EU trade commissioner Valdis Dombrovskis is scheduled to arrive in China on Friday for talks that were shaping up to be tough even before the anti-subsidy inquiry was announced.
While Eskelund cautioned that the European probe had to follow fair and transparent principles and the result could not be anticipated, he said there were indications China's huge trade imbalances were being partly driven by industrial policy.
The EU's goods trade deficit with China hit €396bn ($423bn) last year compared with €144bn in 2017.
"What we have seen is a high focus on supporting the supply side, supporting manufacturing, supporting exports and we are beginning to see now how overcapacity is beginning to pick up in many industries," Eskelund said.
Among the recommendations in its position paper, the European chamber called on the Chinese government to increase productivity by emphasising market forces and "depoliticising" the business environment.
German carmakers in the line of fire of possible EU-China trade war
Under President Xi Jinping, China has increasingly emphasised the role of state-owned companies while introducing legislation that foreign businesses complain lacks clarity. These include changes to the anti-espionage law, a new foreign relations law and a series of data regulations.
The chamber also called on Beijing to "optimise policymaking" by allowing space for discussion following an intensifying crackdown this year on public discussion of the poor state of the economy.
It also urged China to continue its low-carbon transition after a shift back to the use of coal to provide power for manufacturing and exports as Beijing tries to reignite growth.
Additional reporting by Peter Campbell in London
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What is driving Chinese EV exports and their price competitiveness?
By Brenda Goh
September 15, 2023
SHANGHAI, Sept 14 (Reuters) - The European Commission began investigating on Wednesday whether to set punitive tariffs to protect its producers from imports of cheaper Chinese electric vehicles that it says benefit from state subsidies.
Here are the big questions about the move, which led to a slide in shares of Chinese EV makers on Thursday:
WHY EXPORT TO EUROPE AND HOW MUCH HAS IT GROWN?
A key driver for their push abroad has been slowing demand in China that has exacerbated overcapacity.
Bill Russo, CEO of Shanghai-based advisory firm Automobility, has estimated that China has excess auto capacity of about 10 million vehicles a year, the equivalent of two-thirds of all North American output in 2022.
Europe has become a key export market for Chinese auto brands, helped by the bloc's strict rules on emissions and Beijing's relatively benign trade ties, in contrast with rising tension with the United States.
Chinese new energy vehicle shipments to the EU jumped 112% in the first seven months of 2023 on the year and 361% from 2021, customs data shows.
The European Commission said China's share of EVs sold in Europe has risen to 8% and could reach 15% by 2025.
WHY ARE CHINA-MADE EVS CHEAPER?
China produces EVs more cheaply than anywhere else.
That is mainly due to Beijing's decade-old industry promotion policy of incentives and subsidies that enabled China to become the world's biggest EV market and control the global EV supply chain, including raw materials.
EVs made in China are typically a fifth cheaper than EU-made models, the European Commission says.
The policy has also spawned industry heavyweights such as the world's biggest EV battery maker CATL (300750.SZ) and BYD which replaced Volkswagen (VOWG_p.DE) this year as China's best-selling car brand.
China's cost and supply chain advantages have drawn foreign companies to manufacture there.
The best known of these is Tesla (TSLA.O), whose giant plant in Shanghai churned out more than 700,000 vehicles in 2022, or half the U.S. automaker's total output. Renault (RENA.PA) and BMW (BMWG.DE) also build cars for export in China.
WHO IS THE EU'S INVESTIGATION TARGETING?
The EU's anti-subsidy investigation covers battery-powered cars from China, so it also includes the non-Chinese manufacturers there.
The single largest exporter is Tesla, accounting for 40% of China's EV exports between January and April, U.S. thinktank the Center for Strategic and International Studies says.
Popular Chinese brands exported to Europe include Geely's (GEELY.UL) Volvo and state-owned automaker SAIC's (600104.SS) MG.
Other companies such as market leader BYD, Nio (9866.HK) and Xpeng (9868.HK) have also started expanding to European countries, including the Netherlands and Denmark.
WHAT SUBSIDIES HAVE BEEN ROLLED OUT?
Chinese state subsidies for electric and hybrid vehicles totalled $57 billion between 2016 and 2022, consultants AlixPartners have estimated.
China's best-known EV subsidy programme aimed to spur purchases. Paid to the automaker at the point of purchase, the subsidy began in 2009 and was scaled back gradually to end last year.
It paid out nearly $15 billion to encourage EV purchases through 2021, China Merchants Bank International has estimated.
In June, China unveiled a package of tax breaks worth 520 billion yuan ($72 billion) over four years aimed at boosting sales of EVs and other green cars.
Many local authorities continue to offer separate aid or tax rebates to attract manufacturing investment, as well as consumer subsidies. These have grown in recent years as the economy slows.
The EU said its investigation targets a broad range of possible unfair subsidies, from prices for raw materials and batteries, to preferential lending or cheap provision of land.
Reporting by Brenda Goh; Additional reporting by Ellen Zhang; Editing by Miyoung Kim and Clarence Fernandez
