Trust and trade-offs: How to manage Europe’s green technology dependence on China – Part III  

 

Importance to the EU

 

The European Commission has an ambitious goal for least 30m zero-emission cars on European roads by 2030. However, industry forecasts expect only around 8.4m fully electric vehicles in Europe by the end of the decade (around double the current cumulative stock of 4.7m vehicles). Passenger cars and motorcycles represent around two-thirds of total transport sector emissions, making their electrification disproportionately important for reaching the EU’s transport sector decarbonisation goals. The EU has set a date of 2035 to ban the sale of internal combustion engine cars. Its plans to electrify personal transport mean the bloc is dependent on rapidly expanding supply in the next couple of years, especially of more generally affordable electric vehicles, outsourcing this element of the climate agenda to China can bear political risk.

 

Dependence on China

 

Even by the most conservative calculations, the EU’s plans will create a massive new consumer market. Chinese electric vehicle manufacturers are already gearing up to capture as much of it as they can. In 2023, cars from Chinese brands such as BYD claimed 8.2 per cent of Europe’s growing electric vehicle market, up significantly from a mere 0.5 per cent in 2019 and 3.9 per cent in 2021. Some estimates expect this to grow to 11 per cent in 2024 and even reach 20 per cent by 2027. If Chinese-made cars from Western brands are included, 1 in 4 electric vehicles sold in Europe will likely be imported from China this year.

 

State-led subsidies and investments in China have led to substantial overcapacities in the domestic Chinese electric vehicle market, with an estimated production surplus in 2023 of 5-10m vehicles, and potential to grow to 20m in 2025. Alongside other factors such as cheaper batteries, this domestic support allows Chinese manufacturers to offer significantly lower prices than their European competitors. For example, the BYD Seagull starts from as little as €10,200 – roughly half the price of even the cheapest current European car, such as the Dacia Spring. Cheap Chinese electric vehicles could help accelerate Europe’s electrification in the transport sector. But, given their subsidised low prices and rapidly improving quality, these cars also pose a formidable competition risk to the European auto industry, which, as already noted, directly and indirectly employs 13.8 million people. At the same time, European manufacturers increasingly produce electric vehicles within China, or are invested in joint ventures, which puts them in an awkward position of having to defend access for Chinese-made cars to the European market despite their shrinking market shares within China.  

 

This economic risk is unlike the challenges seen in the 1970s, when new Japanese and South Korean carmakers began making their mark in Europe; the speed and scale of Chinese electric vehicles’ entry into global markets is unprecedented. And it is compounded by an entirely new type of risk unique to this next generation of vehicles: they are equipped with arrays of sensors that monitor the inside and surroundings of the car, collecting a treasure trove of sensitive data to train artificial intelligence and improve the performance of autonomous driving. This raises serious questions about the risk of espionage, targeted surveillance, and other cybersecurity threats.

 

Current EU toolbox

 

The EU has lately demonstrated a clear willingness to push back against Chinese dominance of the electric vehicle market, most notably with the European Commission’s autumn 2023 announcement of a probe into Chinese subsidies in the sector. Chinese companies have so far not complied with the EU’s demands for transparency around state aid along the supply chain. This non-compliance does not mean the investigation ends, but in fact makes it possible to impose even higher duties. Separately, the European Commission is set to introduce provisional duties in July 2024 to add to the existing level of 10 per cent tariffs on cars imported from China.

 

The European Commission has also announced it is looking into “the cybersecurity aspects of connected and automated vehicles – including Electric Vehicles” as a matter of priority. It is planning a risk assessment of these vehicles as part of this effort.

 

While the French car industry has been largely supportive of the French government’s approach on pushing back against Chinese overcapacity in the electric vehicle sector, the German car industry is worried about the effect on its own sales within China and their export potential from China to Europe. As a result, the German chancellor has publicly spoken out against additional tariffs on imported Chinese cars.

 

Third countries

 

Manufacturers from non-EU countries play a particularly important role in this sector. While China’s dominance of electric vehicles is rising fast, the automative industries have traditionally been diversified between Europe, the US, Japan, and South Korea. Electric vehicles allow for even greater diversification and enable other countries to leapfrog the complex development of engines, and instead focus on design, software applications, and affordability. Indian electric vehicle manufacturers could also become highly relevant, and, notably, Vietnamese firm Vinfast has also entered the global market.

 

Chinese distortions and overcapacities are therefore not only a problem for legacy industry giants in the advanced industrial democracies – they pose an equally severe challenge to the emergence of alternative industries in emerging and developing economies. Yet this situation offers great potential for positive competition within the European market and globally. If China continues to push its electric vehicles onto the world market as aggressively as it has done so far, there will be very little space left for competition with China. The focus will be on intra-Chinese price wars, market consolidations, and competition between Chinese companies. This will also have an effect on car manufacturing in third countries, such as Morocco, where it has recently taken and which benefits in particular from significant French investment. If these companies in these countries cease to exist under pressure of Chinese competition, the automotive and parts industry will be dominated by Chinese companies far beyond Europe.

 

Electric vehicles scenario 1: Do everything … Slow down, dumb down, and ban

In this scenario, European policymakers mobilise all the regulatory and fiscal tools at their disposal to slow Chinese producers’ expansion into the European electric vehicle market.

 

As a result, they keep Chinese electric vehicles out of Europe, thereby minimising the cybersecurity risk of targeted surveillance and maximising consumer data protection and transparency. While this reduces the competitiveness risk of Chinese electric vehicles to the European car industry, the EU’s green transport transition slows as consumers lose access to cheap Chinese electric vehicles. Asymmetric weaponisation risk remains high if Europe does not simultaneously address the battery supply chain. There is also significant political risk, as countries benefiting from Chinese investments, such as Hungary, threaten to block other EU policies.

 

The actions

 

As a first step, the EU explicitly lists electric vehicles in its NIS2 – cybersecurity – directive as a vulnerable, critical technology. Next, the European Commission initiates a fast-track risk assessment of the security implications of Chinese electric vehicles. It finds significant cyber and national security risks, including vulnerabilities to individual and systematic espionage, remote hacking, and data security. As a result, the commission introduces new technical requirements for electric vehicles; these revised requirements mean that Chinese companies exporting to Europe must comply with transparency rules on data storage and transfer, supervised under strict enforcement of the General Data Protection Regulation. Finally, the commission coordinates an investment screening system for member states. This mandates them to scrutinise all incoming Chinese investments in the electric vehicle sector for security risks, although it leaves the final decision with national authorities. Strict constraints are placed on investments in security-critical domestic industries. Chinese electric vehicles are excluded from government procurement on the grounds of the presence of Chinese cellular modules, which contain software processing and geolocation capabilities that pose an espionage risk. And coordinated action at member state level restricts such vehicles from entering military facilities and their vicinities, as well as other areas with critical infrastructure. Most EU member states agree to this, with the notable exception of Hungary, which refuses to back a joint approach and does not implement any decisions taken by the other EU members.

 

By summer 2024, the commission concludes its anti-subsidy probe and imposes an additional 50 per cent tariff on Chinese electric vehicle imports. In order to cushion negative impacts on its sustainable mobility goals, the EU provides generous subsidies to homegrown automotive industries to produce affordably priced models that cost less than €17,000, attempting to at least narrow the price gap with Chinese products. Through the Critical Raw Materials Act, the bloc expands its network of strategic partnerships with like-minded third countries and provides financial support to European producers to encourage investment in such friend-shoring destinations. The EU and the US sign a “pro-competition arrangement”, allowing European cars that meet IRA criteria to qualify for subsidies and vice versa. Japan and South Korea join the arrangement shortly afterwards, as does India only a few months later. The commission designates companies in such friendly countries as eligible for European subsidies on the basis that they contribute to a competitive and fair market. Additionally, the EU and the US coordinate on export controls regarding smart car systems, including sensor technology, which is often provided by American firms. These firms obtain improved access to the European market but are no longer being able to sell to Chinese customers, limiting the potential of Chinese electric vehicles to process data with sophisticated AI sensors. This measure essentially dumbs down those Chinese electric vehicles already in the EU.

 

The trade-offs

 

The strong political will displayed by Europe to safeguard cybersecurity and reduce the competitiveness risk to its electric vehicle industry comes at the price of increased climate risk. These measures slow the mass rollout and adoption of electric vehicles in Europe, hampering progress towards the EU’s ambitious decarbonisation goals by 2030 and 2050. Squashing Chinese competition – and with it the prospect of readily available, affordable, and high-quality electric vehicles – pushes up the average cost of electric vehicles in Europe. The large number of consumers who are looking for a car that costs less than €15,000 will have a strong incentive to opt again for a petrol or diesel vehicle. More affordable cars from South Korean or Japanese brands provide some reprieve in the short term, but they also become more expensive as they are prohibited from using cheaper Chinese-made inputs such as batteries if they want to profit from European subsidies.

 

There is significant political risk in this scenario. As the primary recipients of lucrative Chinese investments in battery manufacturing, and increasingly electric vehicle manufacturing too, Hungary and Slovakia are unwilling to support a tougher stance on Chinese foreign direct investment. They threaten to stall progress in other areas of EU policy – for example, on further assistance to Ukraine. The difficult relationship between the European Commission and Hungary deteriorates further.

 

Even though the EU manages to keep its supply chain risk in electric vehicles low, the weaponisation risk remains high, especially if the bloc does not pursue simultaneous action to diversify its battery supply chain. China retains a stranglehold over crucial battery inputs such as graphite, anodes, and cathodes, which significantly hurts European electric vehicle manufacturers after Beijing restricts the export of these materials to Europe and imposes higher tariffs. It also retaliates against European car companies within China, excluding them from research collaboration and introducing highly restrictive measures on their handling of Chinese data for automated driving training processes.

 

Despite these increased risks, the measures adopted successfully minimise the cybersecurity risk of targeted surveillance, including human rights violations against members of the Chinese diaspora living in Europe and large-scale data harvesting inherent in Chinese connected electric vehicles. By regulating early, the EU maximises consumer data protection and transparency. It averts a situation where the security risk becomes uncontrollable because too many Chinese cars have already been sold and political leaders are afraid to deny consumers access to these vehicles.

 

Electric vehicles scenario 2: Do something … but nothing drastic

In this scenario, the EU struggles to coordinate policies among its member states. It therefore achieves only a minimal consensus on how to deal with the presence of Chinese electric vehicles in the European market.

 

The result is that Chinese electric vehicles quickly gain market share in the EU. Their availability and affordability contribute to the EU’s transport sector climate goals. European carmakers struggle to compete, putting them under pressure to close factories. Some of the job losses are absorbed by Chinese manufacturers moving to Europe but labour rights and workplace culture issues arise. The lack of subsidies means other third country carmakers focus production and sales elsewhere. The EU is left with the security risk of a large number of Chinese electric vehicles on European roads; with every car sold it becomes more politically difficult to implement transparency and trust regulation.

 

The actions

 

Chinese electric vehicles enter Europe more quickly than the EU can deploy regulatory or fiscal instruments in response. The European Commission’s anti-subsidy probe culminates in new tariffs of an additional 20 per cent on Chinese electric vehicle imports in the first quarter of 2025. However, this is insufficient to close the competition gap and only slightly slows European consumers’ uptake of the new models. This hesitancy follows the emergence of a new pro-China bloc that forms after the 2024 European Parliament election and sabotages the commission’s proposals to address the trust question. Policymakers argue that they have done something to address the problem, but it soon becomes clear it is too little, too late. Chinese companies also expand their investments in electric vehicle manufacturing in Europe. European policymakers are left to ponder how much market share they are comfortable conceding to Chinese companies, and whether they still have tools to limit the expansion.

 

The trade-offs

 

The EU’s sustainable mobility goals benefit from the increased supply of cheap Chinese models, which allows consumers with less purchasing power to buy an electric car for the first time. This accelerates the bloc’s overall share of electric vehicles and puts the bloc on track not only to reach the planned 30m fully electric vehicles by 2030, but also to meet its climate targets.

 

The competitiveness risk to European carmakers remains high. European companies continue to lose market share, unable to compete with the unique cost and quality offer of Chinese electric vehicles. While European manufacturers continue their longstanding focus on designing larger and more expensive electric vehicles, Chinese manufacturers already offer more than 75 electric vehicle models that cost less than $20,000, filling the gap in the lower-cost mass market left open by legacy European and US carmakers. In Germany, a wave of lay-offs in car factories leads to large-scale protests – demonstrating the high political risk in this scenario. However, as Chinese firms accelerate their efforts to open production sites in Europe and build new factories, some of these job losses are absorbed. While competition for this investment grows between member states, so do complaints about the kinds of jobs created by Chinese companies, whose management and hierarchical structures place heavy emphasis on automation. Unions become actively opposed to Chinese investments.

 

The EU quietly acquiesces to increased security risk. With many of the new vehicles already on the road, the decision-makers find it politically challenging to consider imposing measures that oblige Chinese firms to prove compliance with EU data security rules. China’s leverage increases with every purchase. European policymakers are left to tolerate the Chinese government’s possible access to economically valuable and security-relevant data and the dangerous potential of espionage inherent in this critical technology. They try to make a virtue out of the situation by signing sectoral data sharing agreements to satisfy the demand of European car manufacturers in China for data transfer from China to Europe.

 

Third countries – allies in the wider geopolitical competition with China and potential friend-shoring locations – are also impacted by the EU’s halfway house approach. The lack of real subsidy incentives means that the EU fails to make a compelling offer to Japanese, South Korean, Vietnamese, and Indian carmakers to actively invest and seek market shares in the European market. Instead, European car companies provide their distribution networks to Chinese producers and enter into joint ventures – a sort of reversal of past approaches where Chinese companies needed the European joint venture partner more. This power balance thus changes fundamentally. Japanese and South Korean firms choose to focus on the US, both as a lucrative market and attractive production centre. Other emerging players in the electric vehicle industry, such as Vinfast and Tata, come under pressure in third markets, where they find it difficult to compete on price points with Chinese electric vehicles on global markets. They remain successful only in protected environments such as the Indian market, which already has a 100 per cent tariff on imported vehicles.

 

Electric vehicles scenario 3: Do nothing … and embrace dependence

 

In this scenario, policymakers argue that now is not the time to challenge China geopolitically. Instead, they accept that China has built a comparative advantage in electric vehicles. They agree for the EU to embrace the benefits for European consumers and decarbonisation goals.

 

As a result, the availability of cheap Chinese electric vehicles accelerates the EU’s green transition in the transport sector. However, this is bought with a massive economic loss for Europe, as its car manufacturers lose competitiveness in their home market. This also entails very high national security risk for governments and individuals, as the potential for large-scale espionage, data theft, and individually targeted surveillance is severe. Third countries eschew the European market, unable to compete with the subsidised Chinese products.

 

The actions

The EU decides not to take on the Chinese electric vehicle industry. It redirects its available resources to sectors where it enjoys comparative advantages. This is at least in part determined by political turmoil after the 2024 European Parliament election and ongoing Russian advances in Ukraine, which persuade the European Commission to abandon its anti-subsidy probe and embrace a new China policy. The once-linear growth trajectory of Chinese brands in Europe changes becomes exponential, and their market share in electric vehicles surpasses 50 per cent by 2030.

 

Consumer uptake accelerates significantly due to the variety of cheaper options on the market. This helps the EU meet its transport sector climate targets. With over 10m electric vehicles on Europe’s roads by 2030, adoption rates beat all the forecasts. The EU agrees provisions with Chinese firms that are supposed to force them to store all European consumer data locally in an attempt to at least provide some degree of protection to European consumers. However, as leverage shifts and market penetration rises, these rules are increasingly challenged, with Chinese firms arguing product safety can only be provided if the data is fully transferred and stored within China.

 

The trade-offs

 

This acceleration in the EU mobility sector’s green transition comes with substantial economic costs, as European manufacturers cannot compete with the onslaught of cheaper Chinese cars without government support in the form of subsidies or tariffs. Similar to the story of the solar industry, they are forced to downsize or close factories. Such major losses in a sector vital to Europe, not only in an economic sense but also an emotional one, poses significant political risk to European governments, especially in Germany and France. Therefore, while the EU advances towards its sustainable mobility goals, it does so while giving up on an important domestic industry that delivers green growth and fails to capture the immense prospective economic value in the electric vehicle industry. Policymakers refocus their resources on alternative sectors, which provide other green growth drivers that can at least absorb some of these losses. They emphasise the potential of the wind sector and the development of smart grids.

 

The unconditional acceptance of Chinese electric cars on the European market contains a very high national security risk and cybersecurity risk. With nearly half of all electric vehicles in the EU now coming from companies with direct links to the Chinese Communist Party, and which can be forced under Chinese law to hand over data, the risk of broad and large-scale espionage, data theft, and individually targeted surveillance is severe.

 

Competitors from third countries outside Europe do not enter or expand their presence in the European market because they are now unable to compete with the subsidised Chinese products. Instead, they focus on the US, Japan, and India. Tata presents a €9,000 small passenger electric vehicle for the international market, which starts to gain traction in the emerging economies.

 

CONCLUSION

 

An exhaustive and comprehensive analysis including different scenarios and recommendations for reducing the EU's dependence on China in three key industries for the green transition (solar panels, battery and electric car production) can be used as a template for further action. The authors clearly and precisely stated the advantages and disadvantages of each of the possible courses of action in the EU, when it comes to the three industries that are key to the EU's green transition strategy.

Unfortunately, the countries of the Western Balkans are still only (mute) observers and none of the decision-makers is seriously dealing with the issues that are currently burning in the EU.

Although there is no significant production of solar panels and batteries themselves or their inputs in the countries of the Western Balkans, the automotive industry (production of parts for the automotive industry) is represented in a significant number of the countries of the Western Balkans, and its most important market is precisely the car manufacturers in the EU. No one is seriously considering the possibility of joint investments in the production of electric cars with interested companies from the EU, even though there are comparative advantages (educated workforce, proximity to the EU market, etc.).

This lack of interest could ultimately lead to job losses in the Western Balkans (in the automotive industry), but also to the likelihood that Chinese investors will choose to invest in this sector, which may ultimately lead to problems when it comes to respecting workers' rights, environmental standards, state laws, etc.