EU Electric Car Insistence Exposes Auto Industry To Existential Threat

The European Union’s (EU) plan to force its citizens to buy electric cars has blindsided its auto industry, as Chinese electric vehicles are ready to outclass local products in the mass market.

The insistence on electric cars is winning plaudits from environmental groups. But the mass market is likely to be dominated by Chinese automakers, with their competitive sedans and SUVs which can’t be matched by Europe. This will likely mean financial losses for the manufacturers and big job losses.

The EU is outlawing the sale of new internal combustion engine (ICE) powered vehicles by gradually cracking down on carbon dioxide (CO2) emissions to the point in 2035 when only new battery electric vehicles (BEV) will be viable.

This has been criticized by industry leaders like Stellantis CEO Carlos Tavares, who has said it’s a recipe for disaster if politicians choose technology winners. Only rich Europeans will be able to afford new cars and that spells political trouble, he has said.

The European industry faces a crisis of the EU’s own making. Critics say, sure, it will promote the green economy. But it will also devastate its own auto industry in the process and hand over a big share of its home market to Chinese companies and U.S. ones like Tesla. Its insistence on BEVs winning is an open door to China which has a huge lead in making electric cars, because of its world class battery technology and established supply chains for exotic, crucial materials.

European mass-market manufacturers like Volkswagen and its mainstream brands, and Stellantis will be the main victims of this. More expensive models from Mercedes, BMW, VW’s Audi and Porsche won’t be affected, yet. But even this high end of the market is under attack from China.

Matt Schmidt of Schmidt Automotive Research points out the huge scale of the likely Chinese incursion.

“We see BEVs from Chinese (manufacturers) accounting for one in ten of new BEV cars sold across Western Europe during 2023. This could reach 12.5{38557cf0372cd7f85c91e7e33cff125558f1277b36a8edbab0100de866181896} in 2030,” Schmidt said.

Schmidt Automotive Research expects overall BEV sales in Western Europe of around 1.6 million and a market share of 15.1 {38557cf0372cd7f85c91e7e33cff125558f1277b36a8edbab0100de866181896} in 2023. Sales will surge to 2.7 million in 2025 (20.0{38557cf0372cd7f85c91e7e33cff125558f1277b36a8edbab0100de866181896} share) and on to 9.2 million (65.0{38557cf0372cd7f85c91e7e33cff125558f1277b36a8edbab0100de866181896}) in 2030.

“We expect (Geely’s) Polestar, SAIC’s MG and BYD to dominate the Chinese (manufacturers) in 2023 in Western Europe with all three accounting for over 80{38557cf0372cd7f85c91e7e33cff125558f1277b36a8edbab0100de866181896} of Sino-volumes (mainly electric) between them with the other Chinese brands from the likes of NIO, GWM, Aiways and FAW’s Hongqi brand claiming the rest. Geely’s Zeekr will be an interesting prospect to watch in 2023,” Schmidt said in an email exchange.

Will the EU try and raise the 10{38557cf0372cd7f85c91e7e33cff125558f1277b36a8edbab0100de866181896} import tariff to slow down sales?

“Mercedes CEO Ola Kallinius pointed out last week, with European companies having filled their coffers with Chinese renminbi over the years, especially German ones, it would be slightly hypocritical if Germans begin calling foul play now that the Chinese want to enter Europe,” Schmidt said.

Nick Molden, CEO of independent emissions testing company Emissions Analytics, said China has a smart strategy and Europe has played into its hands.

“We are seeing Chinese vehicles priced at £25,000 ($29,000) competing with similar European vehicles priced between £40,000 and £50,000 ($60,000) and this is going to be carnage for Europe’s auto industry. There will be very strong pressure for tariff or other protections,” Molden said in an interview.

“The EU Commission is caught between political consensus established by environmental organizations and an industrial crisis which they just don’t know what to do about,” he said.

The European Auto Manufacturers Association, known by its French acronym ACEA, called for action from the EU to help mitigate the Chinese attack. ACEA is also concerned about the impact of the U.S. Inflation Reduction Act (IRA) on European automotive competitivity.

“The heightened competition with Chinese manufacturers of electric vehicles now shows more clearly than ever the need for Europe to have a strong industrial policy. Europe is trying to regulate its way to zero-emissions mobility, whereas other regions are incentivizing their way. The U.S. Inflation Reduction Act for instance creates massive incentives to focus on battery-electric and hydrogen-powered vehicles,” ACEA said replying to questions.

Stellantis withdrew from ACEA last year. It didn’t detail its reasons, but it was probably linked to ACEA’s public acceptance of the EU’s plan to ban the sale of new ICE vehicles by 2035. This latest statement by ACEA for a strong industrial policy seems to call for more subsidies rather than a change in the underlying rules.

ACEA welcomed the EU Commission’s Green Deal Industry Plan (GDIP), which would help keep automotive investment in the EU. The IRA is expected to tempt much global investment in batteries and electric cars to the U.S.

“ACEA is also hopeful that the Critical Raw Materials Act will enhance domestic capacity to extract, refine and process raw materials, as well as improve their security of supply. Otherwise, EU vehicle manufacturers will continue to be at a significant disadvantage compared to their counterparts from other regions,” the ACEA statement said.

Emissions Analytics’ Molden says EU politicians only have themselves to blame because they paid too much attention to sectional interests which accepted an extreme view, rather than more balanced views, of the imminence and gravity of a “climate crisis”. Americans are unlikely to accept a total ban on ICE vehicles soon. The IRA will play to the U.S.’s natural advantages.

“America can build the refining capacity for electric vehicle materials. In the long run America could in theory go all-electric, served by a large domestic industry, but Europe will always remain dependent on foreign imports for large parts of the value chain,” Molden said.

“But it was Europe initiating this ICE ban that in part led to the U.S. reaction. Europe doesn’t have the minerals or refining capacity and not enough green electricity yet. Europe is caught in the middle between China and America and the likely results will be a much smaller European car industry,” Molden said.

Owen Edwards, analyst at Grant Thornton UK, has a more relaxed view of the China threat, which has to beat the 10{38557cf0372cd7f85c91e7e33cff125558f1277b36a8edbab0100de866181896} EU import tariff. There have been suggestions the EU raise this to slow China a bit, while the threat of tariffs might persuade the Chinese to tone down the threat.

“It is unclear whether the EU will react to the influx of Chinese vehicles in the region by imposing further tariffs on imported vehicles to protect their domestic (manufacturers). Therefore, Chinese manufacturers must consider this possibility when deciding their long-term manufacturing strategies for Europe. Additionally, it may take time for them to gain a stronghold in Europe due to the lack of brand recognition and consumer acceptance and the reduction in future BEV subsidies across Europe that will generally slow BEV growth,” Edwards said in Cox Automotive’s Autofocus publication.

But Molden sees serious consequences for Europe.

“What happens when the mass market needs electric vehicles? Even now, we are running short of those willing to pay the price. There is significant entry by the Chinese with heavily subsidized vehicles. European car makers will suffer because they can’t compete on price, and fortunes will be lost by the mass market European car makers.”

“They will run to the European Union (EU) for subsidies, although the premium sector will be OK for now. The European industry will end up much smaller, more like a final assembly industry, a bit like the U.K. By banning new ICE vehicles and insisting Europeans buy electric cars which they can’t make cheaply enough, they have created a nasty pincer movement between its good intentions and economic reality,” Molden said.