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West braces for China’s electric car shock

West braces for China’s electric car shock

The port of Vlissingen in the south-west of the Netherlands has been at the heart of world commerce for centuries.

Roughly 17,000 cargo ships dock in its deep waters between the North Sea and the river Scheldt every year, laden with everything from vital commodities such as paper, timber, and steel; coal, liquefied gases, fertiliser and other key raw materials; to well as fruit and vegetables that will quickly find their way onto supermarket shelves.

On Wednesday, the harbour took delivery of one of its most significant consignments yet: 5,000 electric cars straight from a factory in Shenzhen, China, destined for forecourts across Europe and Britain.

Made by China’s biggest car-maker BYD, the shipment has the potential to turn rising international tensions into an explosive all-out trade war between Beijing and the West.

Electric cars, along with lithium batteries and solar panels, are what President Xi Jinping has proclaimed are “pillars of the economy”: sectors that the Chinese government has chosen to be the drivers of a massive manufacturing export boom. Commerce minister Wang Wentao has described them as China’s “new three” industries.

The country’s leaders are desperate to offset a property slump triggered by the spectacular collapse of debt-laden developer Evergrande, which has crushed consumer confidence. Attempts by China’s securities watchdog to prop up the nation’s $8.6 trillion (£6.8 trillion) stock market, by banning institutional investors from selling shares at the open and close of trading, shows how concerned officials are about consumer confidence.

“Since China’s reopening after the pandemic, industrial production has been quite strong but it has not got the domestic demand for that,” says Duncan Wrigley of Pantheon Macroeconomics.

“Households are reluctant to spend as much because they’re concerned about the future. People worry that if they lose a job now they won’t be able to get a replacement. That is contributing to the continued weakness in the property sector.”

Xi hopes that a state-backed manufacturing drive led by advanced goods and materials will power a fresh era of growth. But the prospect of China attempting to save its economy by flooding the West with cheap cars has policymakers in Europe and America on red alert.

The fear in Brussels and Washington is that with domestic demand in the doldrums, China will seek to ease over-capacity by dumping its goods – selling them abroad at lower prices than at home – on international markets and trashing Western industry. With officials already threatening serious recriminations, and Beijing warning of counter-reprisals, trade tensions are once again dangerously high.

As BYD’s Explorer No.1 ship was making its way through the English Channel after a five-week voyage to the Zeeland archipelago where Vlissingen juts out, the boss of Renault waded into the row with a plea to Britain and Europe to work together to resist what the industry fears will be an onslaught of super-cheap Chinese electric vehicles.

“With the internal combustion engine, our leadership was undisputed. For a century, we benefited from our expertise with this technology, and it was a barrier to entry for newcomers. Today, Europeans find themselves in a position of relative fragility,” Luca de Meo, chief executive of the French carmaker said.

De Meo and his counterparts are right to be concerned. By the second half of last year, the Chinese had captured about 10pc of the European electric vehicle market, according to Schmidt Automotive Research.

An invasion of Chinese cars promises to be great for Western consumers but terrible for carmakers in Europe. A typical Tesla can cost £40,000, whereas BYD’s models go for as little as £8,000. Chinese carmakers are offering generous discounts of up to €12,000 to boost sales on the Continent, Schmidt’s researchers found.

Even Elon Musk, the industry’s original trailblazer and someone who once laughed at the suggestion that BYD could ever compete with Tesla, is running scared. Without trade barriers, Chinese players “will pretty much demolish most other car companies in the world”, Musk said shortly after BYD toppled Tesla as the number one seller of electric models in mainland China at the end of 2023.

A report by Bloomberg’s New Energy Finance predicts that annual sales of electric vehicles will reach 56 million globally by 2040 – equivalent to 58pc of all cars sold around the world. It also believes China’s share of the electric car market will be 40pc by the end of this decade, a forecast supported by the International Energy Agency.

Experts liken it to the way that the country has come to dominate the solar industry. “China has these huge advantages: because it’s already built up enormous scale, manufacturing costs are much lower, and it has all the supply chains. In the last three to five years the cost of producing electric vehicle batteries has fallen so much that they no longer need so much direct government support,” Wrigley says.

Echoes of past Chinese booms that led to concerns over widespread dumping in heavy industrial goods such as chemicals, steel and textiles are hard to ignore.

“China’s industrial policy today is not only creating much more competitive industrial players. Overcapacities in protected industries are flooding global markets and can undermine our industrial base,” European Commission president Ursula Von der Leyen warned at a conference in Berlin in November.

Brussels is particularly concerned that “overcapacity will be exported…especially if overcapacity is driven by direct and indirect subsidies”, she said. “This will worsen as China’s economy slows down, and its domestic demand does not pick up,” she added.

There’s little doubt that Chinese carmakers have been the beneficiaries of some extraordinarily generous subsidies.

“Subsidies and tax breaks have created chronic overcapacity and vicious price competition – as well as ruthlessly efficient firms,” Yanmei Xie of Gavekal Research said. Last year, policymakers unveiled fresh support measures.

With re-election on her mind, Von der Leyen has promised recriminations to protect Europe’s industrial backbone. Car-making is particularly sensitive because European leaders see it “as both the past and future foundation of the bloc’s industrial success”, Xie said.

Chinese electric cars are already subject to a 25pc tariff in the US, so with protectionism high there, trade with Europe is more important for China than ever. However, the EU has launched an anti-subsidy probe into China’s electric car industry.

Officials believe subsidies have already enabled Chinese imports to undercut European EV prices by a fifth. Tariffs of 10 to 15pc have been threatened. Additional investigations could come for wind turbines, steel, and medical devices, Xie believes.

The fate of Europe’s solar industry may act as a precedent. The Continent’s solar panel manufacturers have begged Brussels for help after being crushed by cheaper imports and oversupply from China, but German Economy Minister Robert Habeck has warned that trade restrictions could bankrupt EU companies that assemble and install solar panels using imported parts.

Miguel Stilwell d’Andrade, boss of Portuguese utility EDP has pointed out the price of solar panels in the US is more than double that of Europe as a result of duties on Chinese imports.

EU Financial Services Commissioner Mairead McGuinness worries the transition to green energy could be crushed.

Western carmakers fear reprisals the most. Many have substantial Chinese operations, and most rely on Chinese parts, particularly batteries, for their electric models: In curbing Chinese expansion, they might sell more cars, but they would need more Chinese materials to manufacture them.

Tu Le, founder of Sino Auto Insights, accuses the industry of hypocrisy. “Look at how much these foreign legacy automakers have taken advantage of the China market over the last 40 years. Volkswagen, Toyota, and General Motors would not be who they are without that. So the thought that they don’t want to compete, or they only want to compete with China on their terms and in their domestic markets is a bit rich.”