Mike Smitka
Prof Emeritus of Economics, W&L Univ
Judge, Automotive News PACE Awards for supplier innovation
Steering Committee, GERPISA global auto industry research network
Contributor, SeekingAlpha
Europe is poised to launch an antidumping countervailing duty investigation of Chinese EV exports to Europe. Launching is a political decision. Once the "go" is given, however, it turns into an administrative process that runs according to set rules. What matters is whether the lawyers involved find subsidies in China; they will. [You can find many details here on the European Commission Directorate-General for Trade website, including the link to a spreadsheet of recent EU cases.] It won't matter whether the EU provides similar incentives. Once launched, a guilty verdict is certain, and that could well lead to punitive tariffs that will bring an end to European EV imports from China. The process, however, will take several months, so might not affect European imports until June 2024.
The initial announcement focused on the threat from cheap EV imports from China, naming several of China's EV startups. But that's not how the process works. The EU plays by the rules, and those rules focus on an industry or product category, and in general not an individual firm. So the reality is that the real focus, intended or not, is Tesla. That's because they're the dominant EV exporter – all of Europe's Model 3s come from Shanghai, and many Model Ys. Stopping those exports from Tesla's Shanghai plant will not only lessen the pressure on the German car companies and their high-priced EVs. It will also force Tesla to turn up the volumes of production of the Model Y in their plant in Berlin.
Other EU firms will be caught in the cross-hairs. The Dacia Spring EV comes from China; Dacia is Renault's lower-price brand. Some BMWs and Volvos come from China. Their volumes are still modest – the Spring sold just over 5,600 cars in August – but their plans are expansive. Tesla's volumes, however, aren't trivial. Over the past 12 months Tesla sold 103,000 made-in-China Model 3. I don't have detailed data for made-in-China Model Ys, but I conservatively estimate half of the 200,000 Tesla exported the past 12 months made their way to Europe. At 1 million units a year, that output represents 20% of their Shanghai plant's capacity. In other words, without exports to Europe the Tesla plant in Shanghai can't surpass the 80% utilization level that is the auto industry rule of thumb for being profitable. Making cars, after all, comes with high fixed costs, and the irony is that the lower the wage level, the more plant-level fixed costs matter. Tesla now sits in the normal position of a car company with aging product: cut prices to maintain sales and capacity utilization or keep prices high and see sales plummet. (There is after all what the media calls a price war going on in China's EV market, touched off by none other than Tesla.) Either way, margins collapse. Fortunately Tesla's starting point is one of good margins, so that alone won't push the company into the red. But it does undermine the case for investing in Tesla's stock.
I add further detail in my Sept 26 article on SeekingAlpha. First, I provide underlying data. One key observation is that the era of rapid growth for China's EV market is over. Market expansion will no longer allow EV makers to see sales expand despite keeping prices high. Tesla has launched a refresh of the Model 3, produced for now only in Shanghai. The Chinese auto press however pans it as not worth the most prominent new feature, a higher price. And things will look much worse if the slowdown in the Chinese economy expands from real estate and shadow finance merchants in China's lower-tier cities to the wealthier metropolitan areas such as Shanghai where most EVs are sold.
Addendum: I continue to look into the process, and previous EU countervailing duty examples. The calculated subsidy will be the sum of national level subsidies such as reduced income taxes, provincial subsidies and local subsidies. Those individual items of 1% here and 0.5% there can add up to a significant total, the 19 line items for Chinese truck & bus tires add up to 21.97% (min) and 75.91% (max), so the bottom line in that case is substantive. The DG-Trade does not substantiate every claim, or finds some below the threshold to do detailed calculations. And the geographic variation of policies in China mean that the final CV duties will likely vary from firm to firm, as the industry is spread across a wide swath of China.
There are many issues. How will they treat the free license plates for EVs in 8 of China's largest cities? – I have no idea. If data aren't provided, what will they use as a proxy? One example of subsidized land for a factory in China uses the price of a similar sized site in Taiwan as the comparator. That may or may not be a higher price, but there's some incentive for the industry in China to cooperate lest the Trade Directorate choose arbitrary comparators that are unfavorable. However, recent Chinese legislation that classifies much data as "sensitive" may impede cooperation, lest company officials end up in jail for sharing classified information with a foreign government.
Out of the 432 line items in the database, 274 are for purported subsidies to exporters in China; many others are for India. As with antidumping cases, the steel industry generates multiple examples, but there are also ones for fiber optics, for commercial vehicle tires and on and on. br />Finally, one commentor on SeekingAlpha who has a Europe background believes the political decision has already been made. So now the devil will lie in the details.
Original article Sept 26, the final paragraph and other modifications addedd Sept 27.
