Electrifying the Road - Forging a Sustainable Future
This article was originally published in Italian in Panorama on 13th October 2023.
Please note that this is a courtesy translation of the Italian language article originally published in the Panorama Magazine Issue at: https://www.panorama.it/economia/lelettrificazione-trasporti-strada-costruzione-cina
The 2020s marked the decade of the EV revolution. With decarbonisation set as a key priority for major economies across the globe, there has been a greater focus on phasing out fossil fuel vehicles to shift to more sustainable modes of transportation in recent years. As a result, electric vehicles took the world by storm in 2022 with sales for zero-emission EVs surpassed 10 million globally, marking a 55 per cent surge from 20211, with China sales taking the lion’s share. As strong Chinese contenders emerge on the global EV market, what speedbumps can be foreseen for the automotive industry? How will traditional European automotive powerhouses stay competitive in the global supply chain while China remains the largest global market? And most importantly, how does the growth of the global EV industry support help build a more sustainable future for us all?
EU Climate Policy Drivers
Let’s start with Europe. Driven by the 2030 Climate Target Plan to reduce greenhouse gas emissions by 55 per cent by 2030 and the ‘Fit for 55’ legislation requiring all new vehicles in Europe to be zero-emission by 2035,2 the EU has provided significant government incentives and environmental regulations to boost the European NEV market. Generous tax credits and subsidies have been offered by many European governments for the purchase of NEVs. For example, Norway is miles ahead, waiving import duties and car registration taxes for EVs in addition to imposing heavy taxes on purchases of conventional fossil fuel vehicles. Some EU Member States—such as The Netherlands and Sweden—have implemented zero or low-emission zones that regulate access to urban areas based on vehicle emissions to incentivise NEV adoption.3
Meanwhile, European consumers are increasingly aware of the environmental impact of their transportation choices, leading to a surge in demand for cleaner vehicles that has prompted automakers to invest in NEV development to meet European
preferences. Germany is the largest and fastest-growing EV market in Europe, with almost 39 per cent of total sales, while the Scandinavian nations of Norway and Sweden have the highest EV share of overall passenger vehicle sales.4 Due to its well-developed technology in performance and safety,European automakers have set standards that helped establish the region as global leader in the NEV industry.
China’s EV rise
With one in four cars sold in China categorized as a new energy vehicle (NEV) in 2022, China’s EV industry is now at the forefront of the world’s ‘EV revolution’, building on over a decade of development. While China saw a slump in NEV sales at the start of the year, the new package of tax breaks unveiled in June 2023 amounting to 520 billion Chinese yuan (CNY) will likely boost auto sales growth over the next four years, despite stricter national emissions standards effective from July 2023.5
For Chinese consumers, pandemic-induced economic woes have made the locally produced EVs more economically attractive than imported models. But that’s only one side of the story. Strong electric car sales in China have also been underpinned bysignificant financial support from the Chinese government for both manufacturers and buyers, with major investment in research and development (R&D) as well as a quota system for NEV production.6 Another boost to consumer confidence is China’s focus on improving charging station accessibility, with the number of infrastructure facilities nearly doubling in 2022.7 The country’s large middle-class consumer base, industrial clusters for components like batteries and large manufacturing capacity has also given it a competitive advantage.
In China’s latest bid to boost consumer spending, big ticket items such as electric vehicles have been targeted explicitly to prop up the weaker than expected economic rebound seen in the first two quarters of 2023. Now, the dynamism of the EV market means that Chinese companies are looking to expand globally by building export markets in Europe as well as the US. For example, XPeng, one of China’s EV champions, first debuted in Norway in 2020 and has since expanded to sell its sedans and SUVs in some of the hottest European EV markets - including Denmark, Sweden and the Netherlands. Furthermore, according to German national statistics, imports of EVs from Chinese companies represented 28% of all EV imports in the first quarter of 2023.8
The race to stay relevant
While these figures may pose a headache for European automotive players at first glance, China’s NEV threat to Europe’s automotive industry may be overblown. Sales of electric vehicles within the EU are soaring, with a 28 per cent year on year growth in 2022.9 According to 2022 data, Chinese car brands accounted for less than 10 per cent of the 1.1 million EVs sold in Europe last year and are expected to make up approximately 15 per cent of Europe’s EV market by 2025. 10 Furthermore, Chinese EV players such as BYD predominantly focus on providing a range of affordable models, compared to the medium and premium segments of established European players. While increased European investments in China have also heightened concerns of overreliance on China amid rising geopolitical tensions, there are also obvious benefits for the European EV industry. For example, Volkswagen’s recent 700 million USD investment into Chinese champion Xpeng provides an opportunity to gain access to China’s NEV know-how to speed up development of its own electric cars. Instead of casting doubts on the EU’s ability to stay competitive in the EV market and in its ability to reach its climate targets, Chinese expansion into the EU should also be interpreted as a vote of confidence in the booming EU EV market.
Due to China’s strong investment in renewable energy and export strategy, the EU’s relatively open market access has resulted in potential vulnerabilities of a growing EV trade deficit. Rising labour costs and potential supply chain shortages of critical raw materials such as lithium also exacerbate the challenges of staying competitive for European car manufacturers. As a result, adopting a more protectionist stance and increasing pushback to Chinese EV imports seems likely for the EU in the coming years.
An electric future
While it is clear we are heading in the right direction towards global sustainability pledges, the road towards complete electrification of the automotive industry is long and paved with fierce competition. China has showcased its ability to adopt the necessary transformative technology, not only to satisfy local demands for more affordable yet high-tech models, but to also compete globally. For European players aiming to get a slice of the China EV pie, mandatory data localisation and cybersecurity concerns have increased the reluctance of foreign companies from bringing their core technologies to China. Meanwhile, the United States-China ‘chip war’ and the semiconductor shortage poses a significant threat in supply chain security and production costs for the NEV industry overall, which relies heavily on advanced chips for battery management and connectivity.
On a more positive note, China’s carbon neutrality pledges propping up its shift towards electric vehicles also provide areas ripe for further EU-China collaboration. The findings of the 2022 European Union Chamber of Commerce’s Carbon Neutrality Report 11 finds that 67 per cent of European companies operating in China are already pursuing carbon neutrality, while 40 per cent have stablished China-focused decarbonisation teams. Given that improving climate change performance will be critical for China to maintain its competitiveness as a global manufacturing powerhouse, European companies can help China utilise proven European technologies to overcome the challenges of securing access to renewable energy and policy making on common standards for green investments. Likewise, for European players, near-term efforts must focus on making EVs competitive, through benefitting from China’s EV know how in the deployment of recharging infrastructure and manufacturing of sustainable batteries. While there is a sustained momentum for EVs in the EU, one thing is certain - European carmakers will need to adopt a more aggressive R&D strategy if the bloc wants to have a seat at the NEV table.