Written by Alicia Asyera E. Unwaru (FPCI Chapter UI), Jovi Pratama Putra, and Christofer Wahyu Lorenzo Kadju (ISAFIS)
Background of the Development of China’s Electric Vehicle Industry
Since 2015, China has become one of the world’s major electric vehicle (EV) manufacturers, driven by substantial government support through subsidies, incentives, and pro-environmental policies. These factors have led to a surge in EV production in China. However, in 2023, China’s domestic EV market experienced a slow growth [Reinsch, W. A., & Whitney, J., 2024]. This trend is reflected in the growth rates from 2021 to 2023, which plummeted from an impressive 114% between 2021 and 2022, when sales surged from 2.99 million to 6.4 million units, to an increase of only around 30% from 2022 to 2023, with projections indicating deliveries of approximately 8.4 million EVs in 2023 [Zhuang, J., 2023]. With greater production capacity than domestic EV demand, Chinese EV manufacturers are looking for ways to maintain growth, one of which is by market expansion to the European Union (EU).
China’s EV Expansion into the EU: Opportunities and Challenges
China has identified the EU as a key market for two primary reasons. First, Europe has the second highest demand for EVs in the world after China. In 2023, Europe accounted for 25% of global electric car sales [VIRTA, 2019]. By the second quarter of 2024, Europe remained the second-largest market for EVs, with a significant demand primarily driven by countries like France, Germany, Italy, Spain, and the UK. The EV market share in these five largest European markets reached 50%, with sales rising by 7% year-on-year [Strategy & PwC., 2024]. This increase in demand is also reflected in large purchase subsidies and a well-developed charging network. Second, European governments are more welcoming to Chinese investment compared to the United States [Sebastian, G., 2021].
However, the EU perceives that the large subsidies (around 200 billion Yuan) from the Chinese Government has caused an unfair competitive advantage [Reinsch, W. A., & Whitney, J., 2024]. The large subsidies allows Chinese EV manufacturers to sell vehicles at significantly lower prices in the European EV market. This situation has led to a rapid increase in the market share of Chinese EVs in the EU, growing from 1% in 2019 to nearly 8% in 2022, with projections suggesting it could reach 15% by 2025. This swift growth has raised alarm among EU stakeholders about the long-term viability of European manufacturers, who fear job losses and diminished competitiveness. To address these issues, the EU aims to protect its local automotive industry by imposing tariffs on EVs imported from China.
EU Tariffs: Shaking the Domestic Economy and Triggering Global Reactions
China’s Response: Wrapping Protectionism in the Pretext of Healthy Competition
China’s Strategy: Planting Roots in Europe
In response to the challenges posed by the EU’s tariffs, China is adopting strategic measures to mitigate their impact. A key component of this strategy is increasing direct investment in Europe. Chinese EV manufacturers, such as BYD, have already begun building factories in European countries to circumvent import tariffs. BYD has established a plant in Hungary, by collaborating with Chery to start car production in Spain [McHugh, D., & Moritsugu, K., 2024]. This approach not only enables Chinese companies to bypass high tariffs but also strengthens their presence in the European market. By manufacturing EVs locally, Chinese firms can better meet the demands of European consumers and utilize local resources more efficiently, which enhances their competitiveness in the region.
Global Automakers Respond to EU Tariffs: Strategies and Adjustments
On the other hand, the introduction of EU tariffs has raised concerns among car manufacturers in Europe, particularly in Germany [Lahiri, I., 2024]. German Chancellor Olaf Scholz has expressed concerns that the tariff policy could have long-term consequences, especially regarding jobs in Germany [Lahiri, I., 2024]. Major German car manufacturers like BMW, Volkswagen, and Mercedes-Benz, which have factories in China and benefit from various subsidies and regulatory advantages there, feel threatened [Lahiri, I., 2024]. They worry that retaliatory measures could result in significant financial losses, as China remains a crucial market for these automakers [Jagat., 2024]. This can be seen with the German manufacturer Volkswagen, which holds the second-largest market share in China with a total of 2,228,635 units sold [Priyanto, W., 2024]. Moreover, the billions of dollars invested by German manufacturers in production facilities in China and the import of premium models into the Chinese market could also be affected, which might increase production and distribution costs, reducing their profitability [Xinhua., 2024a].
In response to the tariffs, EV companies with manufacturing in Europe, such as Tesla from the US, have adjusted their strategies. Tesla has increased the prices of its cars in the European market, including Germany, the Netherlands, and Spain, by around €1,500 (US$ 1,622) [Rahmawati, W. T., 2024]. Tesla is also working to reduce the financial impact of the high tariffs imposed on their China-made EVs by securing tariff relief from the EU. Currently, Tesla is subject to only a 9% tariff on cars produced in China, much lower than the 36.3% tariff imposed on other Chinese EV imports [Ljunggren, D., 2024].
Strategic Recommendations for Balancing EU-China Relations in the Electric Vehicle Market
Considering the impact of the EU’s tariff implementation, which affects not only China but also Europe itself, the EU could consider alternative strategies to address its concerns while fostering a balanced relationship. One option is for the EU to introduce subsidies for local EV manufacturers to boost domestic production and reduce reliance on imports. These subsidies could include financial support for research and development in technology, incentives to increase production capacity, and investments in autonomous vehicle innovation. Such measures would strengthen the competitiveness of Europe’s industry in the global market.
Additionally, the EU could engage in diplomatic efforts to foster cooperation and dialogue with China on the EV market. This could include joint initiatives for research and development, as well as establishing platforms for discussions on trade practices and regulations. On the other hand, China could take steps to ensure fairer trade relations by promoting transparency in its subsidy programs and opening its market to European manufacturers. By doing so, China can demonstrate its commitment to fair competition and strengthen mutual trust with the EU. Furthermore, China could engage in negotiations to seek compromises on the tariff issue, emphasizing the potential for collaborative growth in the electric vehicle sector, benefiting both sides.
Strategic Insights for Indonesia in the Global Electric Vehicle Landscape
From a policy perspective, Indonesia can draw valuable lessons from the EU’s approach to designing policies that support the development of local industries without drastically affecting international trade relations. One concrete step is to strengthen the Penggunaan Produk Dalam Negeri (PDN) program, which currently achieves 41% utilization—below the target of 52,48% outlined in the Strategic Objectives of the Ministry of Industry for 2020-2024 [Eko Riadi, A. S., & Pegawai Itjen Kementerian Keuangan., 2024]. To meet this target, the government could implement policies that encourage innovation and local production while maintaining strong trade partnerships with other countries [Eko Riadi, A. S., & Pegawai Itjen Kementerian Keuangan., 2024]. For instance, Indonesia could expand partnerships in the EV sector to gain access to international technology and investment, as demonstrated by Indonesia’s active participation in Hannover Messe 2023 as part of the Making Indonesia 4.0 campaign [Hamdani, T., 2024].
At Hannover Messe 2024, Indonesia has a strategic opportunity to build new trade relationships, share technological innovations, and strengthen global collaboration in manufacturing, energy, automation, and digital transformation [Hamdani, T., 2024]. In designing tariff policies, the government needs to be cautious to avoid harming local industries while considering the impact on global trade relations. Careful assessment of the impact of tariffs on domestic industries and potential responses from international partners is key to maintaining a balance between protecting national industries and ensuring stable trade relations.