China’s electric vehicle (EV) makers may need to shift supply chains and redirect exports in the coming year if a European Union (EU) anti-subsidy investigation results in punitive new tariffs on their products.  

The EU said on September 13 it will initiate a 13-month investigation into whether government subsidies have helped Chinese EV makers win market share in Europe in recent years. 

The announcement came after French President Emmanuel Macron said in May that the EU should not allow China to capture its EV sector in the same manner it has for solar panels, where China now controls 80% of the world market. 

“After the investigation, the EU may impose additional tariffs on imported Chinese EVs,” Xu Lifan, a columnist at the Beijing News, writes in an article published on September 15. “The EU has kept increasing tariffs in the name of anti-subsidy probes in recent years. But it remains unclear whether this can suppress the growth of Chinese EV firms and boost the European ones.”

Xu says Chinese EV makers and parts suppliers can fine-tune their supply chains and export channels to avoid possible tariff hikes in Europe.

The Beijing-based Zhong Lun Law Firm pointed out that the maximum investigation period for an EU anti-subsidy case is 13 months, though the bloc’s investigators may finish the probe earlier. That, the firm says, means there is not much time for China’s EV makers to optimize their supply chains.

“Once the EU finishes its investigation and imposes anti-subsidy tariffs on them, Chinese EV makers will face pressure,” predicted the law firm. Currently, tariffs on Chinese EVs are set at 10% in Europe and a whopping 27.5% in the United States. 

In the first seven months of this year, Chinese EV makers including BYD, Nio and Xpeng sold 820,000 vehicles in Europe, up about 55% from the same period in 2022, Reuters reported. Chinese EV makers’ market share in Europe has risen to 13% this year, up from 6% in 2021. 

The European Commission said China’s market share of EVs sold in Europe could reach 15% by 2025 if current trends hold.

In the fully-EV market, Chinese makers’ market share in Europe was about 4% in 2021, 6% in 2022 and 8% so far this year, according to French auto consultancy Inovev. It predicts that figure will grow anywhere between 12.5-20% by 2030, with annual sales projected at between 725,000 and 1.16 million fully-EVs.

A KPMG report said the top three destinations for China’s EV’s to Europe were Belgium (198,000 units), the United Kingdom (109,000 units) and Slovenia (47,000 units) in 2022.

Both France and Germany welcomed the EU decision to launch an anti-subsidy investigation against China’s electric cars.

“We won’t let our market be flooded by over-subsidized EVs that threaten our companies just as it had happened with solar panels,” said France’s Minister for Europe Laurence Boone on the investigation’s announcement. 

“This is about unfair competition, it’s not about keeping efficient cheap cars out of the European market,” German Economy Minister Robert Habeck said while adding that the EU must take action if there are found to be breaches of free competition rules.

“It is a naked act of protectionism that will seriously disrupt and distort the global automotive industry chain,” the Chinese Commerce Ministry countered in a September 14 statement. “China’s EV industry has thrived due to innovation and a complete industrial supply chain.”

New EV sales exceeded 10 million units in 2022 and will grow to about 14 million units in 2023, according to the International Energy Agency (IEA). Around 14% of all new cars sold worldwide were electric in 2022, up from around 9% in 2021 and less than 5% in 2020, IEA said.

Currently, about 58% of all the electric cars on the road worldwide are in China. In the first eight months of this year, retail sales of EVs in China grew 36% year-on year to 4.44 million units, according to the China Passenger Cars Association (CPCA).

However, domestic demand for EVs in China has started to decelerate and external demand seems to have peaked as well, Alicia Garcia-Herrero, chief economist for the Asia-Pacific at Natixis, wrote in a recent research note.

“With the introduction of the Inflation Reduction Act (IRA), the US aims to reduce its dependence on China for the energy transition, which involves a drastic reduction in imports of electric batteries and EVs,” she Garcia-Herrero wrote. “In the EU, the pressure to take action is mounting, as shown by President Macron’s call to impose anti-dumping duties on Chinese EVs.”

She says the EU is by now acutely aware of its high dependence on Chinese EV batteries and components, driving policymakers to implement new industrial policies and trade agreements including for critical raw materials to reduce the reliance.

“Against such a backdrop, the international expansion goals that Chinese EV manufacturers have set their sights on are at risk, at least in the West,” Gracia-Herrero wrote. “Geopolitical tensions and protectionist measures will further complicate this process.”

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