Europe is at a critical juncture as it faces the double-edged sword of rising Chinese electric vehicle (EV) investments. With the imposition of tariffs on Chinese EV imports, the European Union (EU) aims to protect its internal market and encourage local production. However, these moves could inadvertently deepen Europe’s reliance on China unless comprehensive and unified investment strategies are adopted across the bloc.
Chinese investments in Europe have seen a noticeable decline recently, but the landscape is shifting. Companies that continue to invest in the region are now focusing on establishing new production facilities, particularly in the EV sector. These developments include investments in battery cells, components, materials, and final car assembly plants. This shift is largely driven by tariff jumping—a strategy where businesses avoid import duties by setting up operations within the tariff-imposing country or in nearby regions like Turkey, Morocco, or Thailand.
Recent announcements by companies like Volvo, Leapmotor, and Windrose about moving part of their EV production from China to Europe signal the early stages of this trend. Moreover, Chinese automakers such as Chery, Nio, BYD, and SAIC have secured production footholds in Europe, alongside key battery and equipment manufacturers like CATL, Huayou Cobalt, and Putailai. This influx of investment suggests that Chinese companies see a strong business case for production in Europe, provided that high tariffs remain in place.
The potential benefits of these new investments are significant. They promise to create local jobs, reduce import dependencies, enhance consumer choice, and stimulate competition in the market. Additionally, they could accelerate Europe’s transition to a greener economy by boosting the availability of EVs. However, these developments are not without risks. The most immediate concern is that substantial investments from China could reinforce the very dependencies that the tariffs aim to diminish.
To truly grow the market for EVs, prices need to come down, which could trigger price wars. These could have the unintended consequence of pushing smaller European competitors out of the market, leaving only the largest, most resilient players standing. Given China’s dominance over the critical components of the EV supply chain, it has the capability to absorb losses in one area and compensate in another, potentially leading to a consolidation of its power within the European market. This is particularly worrying for Europe’s automotive suppliers, many of whom are already struggling to survive.
A stark example of this is the battery industry, which despite receiving government subsidies, is seeing even its biggest players abandon their plans for battery and battery material production. With Chinese battery cell manufacturers using less than 40% of their production capacity and even less for materials, the business case for manufacturing batteries in Europe is becoming increasingly tenuous.
Another significant risk lies in the security implications of EVs, which are essentially connected platforms on wheels. Modern cars constantly engage in data sharing and communication, raising concerns about who controls these data flows. These concerns are not trivial and could have serious implications for national security, cybersecurity, and individual privacy. The EU has recognised these risks and is set to launch a cybersecurity risk assessment into connected vehicles, responding to warnings from intelligence services about Beijing’s influence through its companies operating on European soil.
To manage these risks effectively, the EU needs to back its tariffs with a set of unified protective and promotive investment rules. Currently, member states have the power to screen investments, but few are comfortable or equipped to scrutinise greenfield investments, particularly in the clean technology sector, even though World Trade Organization (WTO) rules allow for such interventions. A more unified approach to investment screening is essential, especially one that considers the automotive industry’s transition to electrification a matter of public security. Given the industry’s vital role in the European economy and the anticipated widespread deployment of data collection devices in EVs, this is a logical step.
To support these measures, governments could offer tax and purchase incentives for EVs, conditional on meeting standards that bolster the EU’s industrial base. While 20 member states currently offer such incentives, the conditions they set vary widely. Developing common standards for these incentives, even in the absence of an EU-wide Inflation Reduction Act, would give the bloc greater leverage in shaping the market to its advantage.
Three common EU standards could unify both protective and promotive measures. First, foreign EV investors should be required to use a share of local battery and material suppliers to ensure Europe benefits from the transition. If local supplies are not available, investors should provide evidence of this. Second, incentives for EVs should be structured based on their CO2 emissions. France has already pioneered this approach, but a standardised methodology across the EU would support the industrial base as a whole. Third, standards addressing cybersecurity risks must be harmonised. The EU’s risk assessment of connected vehicles is a crucial process that must be pursued urgently, with enforcement of these standards across the bloc being key.
While there is concern that Chinese EV investors might bypass Europe for other destinations, this is unlikely in the near term. Europe continues to hold significant market power, with nearly 50% of Chinese EV exports destined for the EU and UK combined. Despite a dip in confidence, a recent survey indicates that most Chinese EV manufacturers still plan to build factories on the continent.
Europe’s initial move to impose tariffs on Chinese EVs is just the beginning. To secure the future competitiveness of its internal market and protect its consumers, Europe must establish common security and market standards that cannot be undermined by national interests. The real battle for Europe’s industrial future has only just begun.
