I have been invited by a brother who has direct access to key political figures and government officials in ASEAN countries to write a report. I will share with you some parts of my report that are not too sensitive to be shared with the readers. I apologize in advance for the length of this article, but it provides significant insights for readers who are interested in understanding the development path of global trends.
Recently, the European Union (EU) has initiated an anti-subsidy investigation into Chinese electric vehicles. The stated purpose of the investigation is to assess whether the advantage of the Chinese electric vehicle industry, which is achieved through government subsidies rather than innovation, undermines the substantial competitiveness of European enterprises. However, it is actually led by the EU Commission, with the aim of collecting extensive information on China’s electric vehicle industry. The investigation scope includes not only financial allocations and tax exemptions but also other forms of support, with the intention of conducting a detailed analysis of every aspect of the entire Chinese automotive industry chain.
Although it is currently difficult to determine the success of the investigation, I believe that the ultimate outcome of the investigation is not the main focus. According to EU law, the anti-subsidy investigation procedure is very compact. Once initiated, Chinese companies will face intense challenges within the following 12 months. The preliminary ruling is generally made within 9 months, and the final ruling is made within a maximum of 13 months.
In other words, Chinese automotive companies have a maximum safety window of 12 months after the investigation is launched. During this period, they will be busy preparing response strategies, including how to collect, organize, and submit relevant evidence, as well as how to defend and negotiate. Based on previous cases of “double reverse” (anti-dumping and anti-subsidy) such as textiles, light industry, and photovoltaics, companies that actively respond to the investigation have tariff rates up to eight times lower than those that passively respond. Additionally, government support, as well as the cooperation of European importers and downstream users, also contribute to increasing the success rate of responding to the investigation.
It is important to note that the current investigation is not about anti-dumping, but about anti-subsidy. According to the timeliness provisions of the “Foreign Subsidy Regulations,” the European Commission has the authority to investigate foreign subsidy behavior in the past ten years. Regarding subsidies obtained before the implementation of the regulations, the EU can investigate up to five years back to 2018. If the investigation results determine that the Chinese electric vehicle industry has violated trade agreements, the EU not only has the power to impose punitive tariffs on Chinese electric vehicles, but in the most severe case, it could lead to Chinese electric vehicle manufacturers losing market share in the EU and facing at least five years of market exclusion. At that time, it would not just be a matter of price competition, but the entire industry would suffer a devastating blow similar to the US sanctions on Huawei. The investigation results are also likely to prompt other countries to follow suit and impose similar sanctions on the Chinese electric vehicle industry, further restricting the development of Chinese automotive companies in the international market.
At the same time, the implementation of the “EU Battery and Waste Battery Regulations” poses significant challenges to Chinese battery companies in exporting to EU countries. The regulation sets strict requirements for the recycling rate of waste batteries, the use of recycled materials, carbon footprint, and battery passports (a mechanism for tracking and managing the entire lifecycle of batteries), placing the power battery industry under more stringent carbon management policies.
China has already become the largest automobile exporter, with over 2.341 million vehicles exported in the first half of 2023 alone (a year-on-year increase of 76.9%), surpassing Japan’s 2.02 million vehicles (a year-on-year increase of 17%). From January to July 2023, the top six markets for Chinese new energy vehicle exports were Belgium, the United Kingdom, Thailand, Spain, the Philippines, and Australia. However, compared to Japan, Chinese automotive companies still have relatively weaker presence in overseas production and sales. The eight major Japanese car manufacturers have production and sales volumes overseas that far exceed their domestic market, with nearly three-quarters of their sales contributed by overseas capacity. Japanese and Korean car manufacturers pursue true internationalization strategies, not relying on a single market, but by establishing production bases and sales networks worldwide to diversify risks and gain a broader market share.
For the Chinese automotive industry, going global is an inevitable trend, and it has already begun to establish factories and carry out localized production overseas. However, in the face of risks and challenges, especially in the European and American markets, Chinese automotive companies have not yet found a secure response policy.
The complexity and high integration of the automotive industry involve a large number of components, including at least five thousand parts. Among global automotive component suppliers, Germany’s Bosch has always been at the top. However, China has 13 companies in the global top 100 auto parts suppliers, with CATL, a leading power battery manufacturer in China, ranking fifth, making it the highest-ranking Chinese company.
Europe’s focus on the automotive industry stems from its status as a vital economic driver in the region. The automotive industry has created a significant number of job opportunities in Europe, with employment in the sector exceeding 10% of the total population. Additionally, the automotive industry generates a trade surplus of up to €759 billion annually and contributes over €375 billion in tax revenue to EU governments. Therefore, the rise of the Chinese automotive industry is not just a matter of the manufacturing sector but also affects employment and economic development throughout Europe. The automotive industry in Europe provides higher value-added wages compared to other industries.
Consequently, one of the main reasons for Europe’s response to the rise of the Chinese automotive industry is that its impact on society and politics has extended beyond the scope of a single industry. It involves broader issues such as employment, economic interests, and political sensitivities.
Are there any similar trends and outcomes in history that can be drawn upon? In fact, Japan and the United States engaged in a series of trade wars starting in the 1950s. These included textiles (1957–1974), steel (1968–1992), consumer electronics (1970–1980), and telecommunications (1981–1995). In 1978–1996, the competition between the US and Japan intensified in the automotive and semiconductor industries, leading to a massive and devastating retaliation from the US.
A common factor in these cases is that they started with light industries, gradually escalated to heavy industries and high-tech sectors, and evolved into macro-level issues and core economic systems, eventually becoming long-term structural counter-alliances. When the US initiated a currency and financial war, it served as an alternative nuclear bomb against Japan, leading to Japan’s comprehensive surrender in the financial war and a decline on the international stage for a whole 30 years. It ended with the US maintaining its global financial hegemony.
Of course, it is not appropriate to simply judge the current China-US/Europe dispute based on past history because Japan did not have a vast domestic market like China does. This leads to differences in the countermeasures and the space available for both sides. However, regardless of the circumstances, since the era of former US President Trump, this column has repeatedly reminded friends in the financial and political fields that what we are currently facing is not just periodic disputes and regulations or simple concepts of deglobalization or supply chain fragmentation. It is more likely a reconstruction of the new world order in a binary manner (the struggle between 0 and 1).
Behind the economic protection measures, we have reached a level of aggressive national ideology. In my view, this is the prelude to the third world war, which is unfolding in a non-military manner. The future world will be very different and unfamiliar compared to the past 20 years. Hopefully, politicians and leaders of countries will have enough political wisdom to coordinate conflicts. Entrepreneurs engaged in trade and commerce will require even more financial and political talent by their side, providing advice and assistance to navigate the storms of politics and finance.
Author: William Ling
Date: 17-Sept-2023
Contact Author: Linkedin
William Ling is a Senior Partner of a PE fund and renowned director of a multinational investment platform. With over 20 years of distinguished experience in finance, including a decade-long directorship at a leading exchange-listed financial enterprise in Hong Kong, William offers exceptional consulting, research, and training services to multinational financial institutions. His expertise is widely recognized, as he serves as a respected guest lecturer at prestigious universities in the region, provides insightful commentary as a regular radio commentator, and contributes weekly columns to esteemed financial media outlets in Hong Kong and Southeast Asia.
