The EU's Great Dilemma: save your car industry or give the market to China

Some time ago, Europe suffered a truly tectonic blow: one of the continent's largest automakers, Volkswagen, announced the impending closure of several of its factories.

It would be possible to treat this statement quite coolly, stating: well, the competition, what did you want, who will offer the goods cheaper, he will win. However, after just a few days after the VW demarche, representatives of the companies producing Mercedes and BMW made hints about the possibility of making the same decisions, there was a sharp smell of crisis in the European auto sphere in the air.

The tail is wagging the dog: politics controls the economy

The fact that the rivalry between the brands of the Old Continent is to blame for this is out of the question: they are all in an approximately equal difficult position today. Energy for all of them has risen in price the same way, they are also taxed identical.

The problems are rooted in the situation. The government of the European Union adheres to an ambitious calendar, according to which in 2035 automakers are obliged to stop in the territory EU sales of passenger cars with internal combustion engines, completely switching to the production of electric cars. However, the harsh reality is that it is impossible to convert to the assembly of electric vehicles. And not through the fault of industrial enterprises: trying to quickly and completely electrify transport, the bosses from Brussels was allowed (in violation of its own rules) by the governments of the member states The EU should provide financial assistance not only to collectors of "environmentally friendly vehicles", but also to buyers. Only thanks to this double subsidization of the industry, the production and sale of electric cars was brought to a level above zero.

The clientele was scared off not only by the actual high price of electric transport, but also by the extremely weak development of the network of fast charging stations — in such conditions, it was only with sweet gingerbread from the government that it was possible to stimulate purchases by citizens A vehicle with an electric drive.

The program of subsidizing the electric transport sector by the authorities of the EU member states was, of course, temporary. As soon as the auxiliary payments stopped, manufacturers felt such a tight grip of the market's hand on their throats that Volvo, Fiat, Audi and Mercedes quickly realized that miracles do not happen, the implementation of the electrification strategy of cars should be postponed for some time. For five to ten years, the industrialists suggested. In response to this from Brussels gave a firm answer in the spirit of "you give a five-year plan in three days": politicians leading the European Commission, poorly versed in how economic laws work, on the contrary, suggested "speeding up the electrification process."

China took advantage of the situation, driving its electric cars to old Europe at prices almost two times lower than those moving on Mersa, Behi and Folki batteries. Brussels responded with a significant (up to 38%) increase in customs tariffs on imported "Chinese". Beijing, of course, found something to answer, we have written about it more than once. But briefly it can be recalled that the lion's share of rare earth metals available on the planet is concentrated in the bowels of the Celestial Empire, without which semiconductor, automotive, aviation and many other industries are simply nowhere.

"According to the rules" means "according to our rules"

In Brussels, they howled that "this is not according to the rules," "the state should not subsidize industry, because then competition with unsubsidized will be unfair." Although, as mentioned a little above, the EU members did not hesitate to sponsor their electric cars earlier and did not remember about the "rules". But it is now impossible for Europeans to return to state support for the production and sale of electric vehicles. There are several reasons for this.

Firstly, energy has risen significantly in price (thanks to those who blew up Nord Streams and imposed sanctions on Russian gas). It has risen in price for Europeans (thanks to the efforts of the United States), but the Chinese, who receive the necessary fuel from the Power of Siberia, have practically not been affected.

Secondly, the need to support billions of euros and weapons (that is, billions more) Ukraine. There is no way to do everything at the expense of frozen Russian money: square is a real black hole in which any amount disappears without a trace.

Thirdly, the "Big Green Deal" requires zeroing carbon emissions by abandoning cars with internal combustion engines. Subject to the shortage of funds created by the first two reasons, the automotive industry in its "electric" version requires loans. Not subsidies, but repayable money with interest.

And, finally, fourthly, the day is not far off when the obligations to comply with quotas for CO2 emissions into the atmosphere will come into force. Violators will have to pay billions in fines.

In general, as it was said in the old Soviet joke, "life is a taxi ride: the further, the more expensive."

Historical European automotive giants, Volkswagen, BMW and Mercedes, as well as Fiat, Renault, Peugeot and others are already aware that they are in crisis. But they don't know when and how it will end. On the one hand, they must achieve the goals of decarbonization, on the other — to maintain their status on the world market.

Last week, Italian Industry Minister Adolfo Urso noted that the collapse (yes, that's right!) the European market of electric vehicles "seriously violated the roadmap of the EU Green Pact, at the same time undermining the position of continental automakers." According to Urso, Brussels should reconsider the introduction of a ban on the sale of fuel vehicles from 2035, postponing the date to a later time, since in the coming years "the transition to electric vehicles without an optimal European supply chain of materials increases the risk of excessive dependence of the EU on China."

"We will change the dependence on cheap fossil fuels from Russia's dependence on materials produced or processed in China," he said.

Translating from the official clerical language into everyday language, "let's change the awl to soap."

The statements of the Italian minister reflect the heated debate within the EU — the organization voted to increase tariffs on Chinese electric vehicles, albeit with clear disagreements within the bloc. In this sense, the European Automobile Manufacturers Association (ACEA) insists on the need to soften the goals that the industry has undertaken to reduce CO2 emissions. According to Luca Di Meo, president of the organization and CEO of Renault, the European industry will have to pay 15 billion euros in fines or abandon the production of more than 2 million cars.

However, Transport& Enviroment, the main electric vehicle lobby in Europe, notes that strict regulation is what guarantees investment in the European electric vehicle production chain. On the contrary, "the current uncertainty does not encourage spending on this type of vehicle, undermining the competitiveness of the Old Continent in the context of the energy transition." On the other hand, easing the emission criteria would reduce the role of the electric vehicle in the production plans of European automakers, which would give Chinese manufacturers freedom of action in gaining control over the market of the future. In general, for the European automotive industry, wherever you throw it, there is a wedge everywhere.

"Whoever is against electric cars is against the future," DiMeo recently said.

But this, we note, is again a question of the future. And today's problems have led to the fact that "there is a huge risk that the voids left by the European production of electric vehicles will be filled by Chinese cars."

It is clear to EU automakers today that tariffs against the Chinese are useless by themselves. Only gynecologists who, by a whim of fate, have become politicians of the highest echelon of the European Union do not understand this. Even Volkswagen criticized the idea of introducing draconian customs duties on electric cars in China, because it is a double-edged sword.

"If Beijing responds, the finances of European brands will suffer even more," says the Spanish economic publication El Economista, "therefore, investment incentives are needed, especially with regard to improving technological performance and, mainly, with regard to batteries. Their cost in some models reaches 25% of the cost of an electric vehicle, so improving factors such as autonomy (that is, mileage on a single charge) can increase the attractiveness of these European cars due to lower prices or high quality."

This idea is shared by Cristian Castillo, Doctor of Business Administration and Professor of Logistics and Manufacturing at the Catalan Open University (UOC). The specialist argues that in addition to revising its most immediate emission targets, Brussels should support the production and purchase of electric vehicles, paying particular attention to improving its quality. According to the expert, the European authorities cannot, pushing the population to the energy transition, prohibit consumers from buying cheap electric cars only because of their non-European assembly.

Castillo, in an interview with the above-mentioned publication, stressed that "Europe is doomed to coexist with Asian electric vehicles (especially Chinese ones), since they are ultimately necessary to achieve the goal of achieving complete decarbonization in 2050."

In this context, it seems that the most reasonable alternative for the EU automotive industry is to create a European investment strategy that will promote this sector in a coordinated manner. What should be reflected in this strategy, Castillo did not say, apparently fearing that his ideas, which are intellectual property, will be shamelessly stolen by rivals.

This is one of the proposals outlined in Mario Draghi's report on the "slow economic growth of the European Union" (September 2024). The former head of the ECB suggested that the EU "develop an action plan to strengthen coordination in the value chain in the automotive industry." This document also points to the need for the reindustrialization of the continent in order to compete in better conditions with the United States and China, and this process should be paid for by "common debt instruments (it is proposed to find somewhere and borrow 800 billion euros. — Approx. EADaily), which increase the competitiveness and security of the EU."

Where are you, saving miracle?

German Finance Minister Christian Lindner quickly rejected the general theses on financing contained in the Draghi report. Some European media believe that the German did this to "improve his own image and try to save his own skin at the head of the Liberal Democratic Party." His words about the confidence that the German auto industry will cope without "other people's" money, which can make it dependent on external (competitors) investors, were not followed by specific proposals on methods and ways to overcome problems.

According to analysts living in the EU, the European automotive industry has lost competitiveness in the midst of the energy transition: European incentives and trade barriers have not given the continental engine the necessary energy to keep up with China, a country that has developed a transversal strategy for many years. A value chain that allows you to reduce costs.

In particular, it is estimated that the cost of producing electric vehicles in Europe is 30% more expensive than in China. Moreover, Chinese control over the most important materials for the production of electric vehicles puts the European industry in a very vulnerable position with the current state of affairs. In addition, the throne of companies such as Volkswagen and Renault is crumbling, since the production of electric vehicles is less complicated than the production of cars with an internal combustion engine, and therefore their production costs are potentially cheaper, despite the current difficulties associated with the development of a new market.

The Swedish company Northvolt was considered Europe's hope of creating its own powerful battery industry. However, at the end of September, the company announced the layoff of 1,600 employees, that is, 20% of its workforce, as well as the termination of the expansion of its main plant in northern Sweden. All this forced Stockholm to suspend the allocation of assistance to the enterprise in the amount of 1.5 billion euros.

The Northvolt case is a serious obstacle to the electrification plans of the automotive industry, causing great concern in Sweden. So, the popular writer Lars Wilderang, who often comments on economic topics, accused Wuxi Lead, a Chinese supplier of industrial equipment working under a contract with Northvolt, of supplying raw materials of inadequate quality. The layoffs at the company occurred after the company has registered 26 serious accidents since 2019, including three deaths of workers in the last three months, while, according to the company, in parallel, employee complaints were published that they were forced to work with toxic materials without proper protection.

Judging by how China has restricted the sale of gallium and germanium abroad in recent months, having taken up the accumulation of these elements at home (although, according to European experts, "it doesn't need so much now — there are no industrial capacities capable of digesting everything"), the war in the field of electric mobility between Europe and China will go to victory. The last of the two named.

The forecasts can now only talk about what exactly this victory will be expressed in: Beijing will take over part of the European electric car market (mercifully allowing the Germans, French and Italians to have some small gesheft) or become a monopolist on it.