·      EU probe covers domestic, foreign brands that make EVs in China

·      Investigation may progress to encompass key third-party suppliers

·      Global compliance crucial for China EV makers pondering overseas move

China-based EV makers are looking for ways to expand business globally ahead of anticipated European Commission's tariffs, which are expected to range from 15%-20% and kick in before the end of next year. Some top players have expressed interests in setting up manufacturing sites in Europe, Southeast Asia or Mexico, while others are amenable to forming JVs outside of China. They all have one thing in common – the belief that supply chain diversification is inevitable given the heightened levels of geopolitical angst.

On 4 October, the EC formally launched an investigation into China-produced EVs. EC President Ursula von der Leyen said she expects "full cooperation from all relevant parties" for the "fact-based" investigation. The remark came following her 13 September speech announcing the investigation and warning that global markets were "flooded" with cheaper Chinese electric cars supported by "huge state subsidies".

China Association of Automobile Manufacturers (CAAM) characterized the probe as an "obvious act of protectionism" that could impede the expansion of the worldwide electric vehicle market. The Ministry of Commerce and the China-EU Chamber also expressed concern and dissatisfaction, calling for the EU to safeguard the stability of the global supply chain.

Just days after von der Leyen's 13 Sept announcement, on a panel that included representatives from China's most prominent electric car makers and suppliers, sources from various Chinese EV manufacturers told this news service they are prepared to "cope with" the EC's anti-subsidy investigation.

Consistently building on Chinese EV's competitiveness and global deployment of regional-based supplies will be critical to EV makers' future growth, the Chinese EV makers on the panel said.

Foreign brands like Tesla, whose exports to the EU from its Shanghai factory accounted for 40% of total Chinese EV exports to the EU, are also included in the investigation. The EC defines subsidy as a range of financial contributions, including preferential lending from state-backed banks, the cheap allocation of land, as well as favourable raw material and battery prices. The EC’s broad definition of subsidy means almost all local and foreign brands will be subject to the probe.

The EU presently imposes a 10% tariff for China-made EV imports. The anticipated tariff increase will pose a challenge to China’s EV exporters hoping to secure growth in the EU market, targeting a 15% market share by 2025, according to media reports.

Domestic China EV makers are at a crossroads, one source said. Facing headwinds, they need to be prepared to proactively navigate the investigation and lobby to seek a lower tariff, sources said.  

Cost of compliance

The EC's anti-subsidy investigation is adding another layer of complexity to an already onerous export compliance burden for China-based EV makers striving to position themselves as world-class enterprises, sources told this news service.

"Global compliance is becoming a key point at our board meetings", a source from a top local EV brand said.

Supply chain compliance in particular imposes extra workload and costs for electric car makers selling units in America and Europe, the sources added. 

Since June 2022, all Chinese exporters to the US are required to ensure that their producers and suppliers have removed any linkage to the sensitive regions or names on the sanction list. This can be challenging for businesses in China, especially in determining if a firm along the supply chains is complicit with a sanctioned entity as the US adopts a "rebuttable presumption" on the issue. Exporters have endeavoured to spin-off any sanction list-related asset since last year, one source noted. Yet companies hoping a divestiture would ward off regulatory risk still feel uneasy.

A few sources said they wouldn't be surprised if EC followed the US in passing a similar act.

"It's rather costly to conduct a comprehensive supply chain audit for US compliance requirements on a highly sophisticated industrial product like an EV. The expense would be about CNY 40m-CNY 50m for just one car model," the source said. "Even if we just examine 70% of the core parts of a car, like the battery, the sensitive metal structure, it might take as long as three years."

"What if our product is planned to launch in North America next year?" the source added.

Data lawyers also warned that EU data compliance requirements, such as those in the General Data Protection Regulation (GDPR), must be addressed and well communicated to stakeholders in view of any expansion overseas. At the Internationale Automobil-Ausstellung (IAA) Mobility 2023 in Munich this August, a few Chinese EV brands were noted for their competitive product offerings. However, they also seemed to be facing potential European customers’ worries on their user data security.

"The European market understands Chinese EV brands and products, but it does not mean that brand acceptance level is high," according to an EV source who attended the IAA Mobility in Munich this August.

Diversifying EV value chain

According to several sources, supply chain diversification could be a way forward for outward-looking Chinese EV makers.

In the long term, and with strategy front of mind, EV makers and their core suppliers and innovation partners will have to move capacity to the EU or other markets, the sources said.

After the EU, Southeast Asia is another possible destination because of risk reduction, while the region is somewhat removed from the China and US or European tensions. Approaching the European market via Southeast Asia is a strategy on the table, the first source said.

Several leading EV makers inspected and deployed capital in Vietnam in 2022 and 2023. "They are nevertheless proceeding very cautiously," one source who participated in such pitching said, noting that risk levels in potential destinations can be unclear, and policy uncertainty requires greater caution. Although Mexico is close to the North American market, investment projects there could be abruptly scrapped for any unknown reasons, according to a source who has knowledge of it.

In any alternative market, industry insiders believe supply chains can be restructured through cross-shareholdings with local partners or JVs with local governments.

“With the EU anti-subsidy launching, we'll see Chinese EV manufacturers invest massively in Europe to establish production lines," sources said. And they will bring together their upstream battery and component suppliers to Europe.

A report by KPMG said Chinese companies’ cross-border M&A to Europe focusing on upstream mineral resources will continue to grow, while battery and vehicle companies are building factories in Europe and supporting sales, R&D and after-market service centres will become mainstream investments in Europe.

In 2017, BYD successfully invested in an electric bus factory in Komarom, northwest Hungary. In 2022, NIO announced that they would be constructing their first overseas factory in Biotorbagy, Pest, Hungary. This facility will serve as NIO's manufacturing, service and R&D centre in Europe. The main focus of the factory will be manufacturing battery swap stations and providing after-sales services, along with training for NIO's European charging business, according to both companies' press releases.

China-based EV brands' greenfield investment in Europe increased by 33% in 2022 compared to the previous year, according to the same KPMG report. However, the expansion carries considerate risks amid the rising geopolitical temperature. Legal experts on the EV industry note that the EU in 2022 published several white papers on supply chain compliance -- a sign that related hot-button issues, such as those related to labour, remain in focus in the bloc.

The European Green Deal, a set of policy initiatives approved in 2020 by the EC with the overarching aim of making the EU climate neutral in 2025, has a relatively high disclosure obligation of EV companies, the sources noted. The EU’s new Batteries Regulation, covers any EV batteries to be used in EU countries, including Chinese imports. And the Corporate Sustainability Due Diligence Directive (CSDDD), the predominant supply chain due diligence law of the EU, is directed toward factories that surpass a particular scale. "It's a painful process that will require plenty of business adjustments," a source involved in the compliance work in an automobile company said.

Meanwhile, the EU's Foreign Subsidy Regulation (FSR), which came into force earlier this year, is aimed at "tackling distortive foreign subsidies on the internal market". The extensive rules are likely to affect Chinese EV's existing and future deployment in the EU market since filings for an EU-based joint venture are likely to involve Chinese parent companies, which may have received state aid.

The abovementioned regulations will soon encompass the entire value chain of EV manufacturers, demanding not just higher compliance obligations from EV makers, but also structural changes to their business. 

"There is a possibility the anti-subsidy investigation may widen to EV's upstream and downstream suppliers, for example, batteries," legal practitioners worried. In that policy direction, greenfield investment, which is currently a loosened scrutinized area that Chinese automakers eye, might be captured by ever-tightening regulations in future.

Only through systematically upgrading local EV industrial chain, Chinese EV makers could look for ways to continue cost advantages, sources said. And this can be done through facilitating local partners' industrial development.