Automotive Geopolitics

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The global auto market is currently valued at $4 trillion and is expected to surge to $6 trillion by 2030 – the year when more than 60 percent of vehicle sales are projected to be electric. Competition to seize this opportunity is ongoing, especially among the United States, China, and Europe. In 2023, these markets accounted for 95 percent of the 14 million electric vehicles (EVs) sold globally. Of these, Europe sold 3.4 million and the US 1.6 million. Although these shares were significant, they were dwarfed by the 8.1 million sold in China.

As China’s presence in this industry grows, countries that have historically dominated the auto industry are concerned. The automotive industry is a staple for a strong industrial economy. The sector is capital, research, resource, service, and skill intensive. Investments in this sector add significant trade value and have knock-on effects throughout an entire region’s economy. The German automotive industry, for example, generated over €560 billion in revenue in 2023 while accounting for €94 billion of the €177 billion in European auto exports as well as several million direct and indirect jobs across the continent.

Such a footprint is vulnerable to major disruptions, and the rise of EVs can be counted as one. Preeminence in the production of internal combustion engines (ICEs) does not ensure continued success. For example, stiff competition has pushed Volkswagen to even consider shuttering factories in Germany. Unlike ICEs where value is added across the supply chain, EVs are consolidated with batteries accounting for 40 percent of a unit price. The nature of this has helped several top-tier battery producers capture the market. Chinese companies have the most dominant role here, which is compounded by their consolidation over most other segments of the EV supply chain.

China has built this lead over the past two decades with a robust industrial policy – positioning the country to become the center of global exports. The surge of export capacity, especially from Chinese companies, has become a serious concern that has triggered strong reactions from many governments, particularly those in Washington and Brussels. This DGAP Policy Brief takes stock of how Chinese companies rose to prominence and the implications this is having, and it compares what the United States and European Union are doing in response. This analysis is followed by recommendations on what Germany can do to strengthen its own position, as well as the position of Europe, in the global automotive sector.

Decarbonizing Personal Mobility 

Decarbonizing how we move is crucial for realizing the Paris Agreement. In 2022, transport was responsible for 20.7 percent of global CO2 emissions. Personal mobility (cars and vans) represented half of them. Although the number is lower than the sector’s peak in 2019, the decline is marginal and offset by rising sales of sport utility vehicles (SUVs). The sector is, however, rapidly deploying cleaner technology, particularly battery electric vehicles. In 2012, there were some 190,000 battery and plug-in hybrid electric vehicles globally; by 2022, this reached 25.9 million. While this only accounted for 2.1 percent of the global vehicle stock, EVs accounted for 14 percent of all new vehicle sales that year – a 60 percent rise from 2021. Government subsidies and regulations have been key drivers of this growth. Overall, this trend has established personal mobility as one of the only sector segments on track to reach the Net Zero Emissions scenario of the International Energy Agency (IEA) by 2050.

The Rise of Chinese Electric Mobility

Throughout the 2000s, China was one of many countries exploring EV deployment. While others abandoned the technology, China doubled down – with a 2009 strategy outlining how a strong domestic EV market could “revitalize” the Chinese auto industry. These policies were unrelated to climate outcomes. Beijing’s priority was to reduce energy (oil) imports, maximize economic gains, and consolidate industrial leadership in the sector. As of 2009, Chinese governments have provided from $29 billion to $230 billion in incentives to fuel this growth.

The allure of this growing market spurred Tesla to establish its largest Gigafactory in Shanghai. While subsidies and cheap labor gave Tesla an edge, Chinese companies also learned from its example. As reporter Zeyi Yang argues in MIT Technology Review, Tesla’s entry in the Chinese market triggered the “catfish effect” – where the presence of a strong competitor spurred Chinese brands to rapidly innovate to compete on price and technology with the established market leader. This was facilitated by central government policies such as China’s ban of ICEs as of 2035 that signal where Beijing wants its auto market to go.

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The culmination of this and other factors allowed Chinese companies to consolidate leadership across the supply chain. By mid-2022, Chinese automotive manufacturer BYD surpassed Tesla as the world’s leader in global EV sales, representing one fifth of the global market. In the first half of 2022, BYD’s sales had grown by 320 percent over the first half of the previous year, solidifying China as the leader in EV exports. The surge pushed through 2023, when China became the largest exporter of passenger vehicles, outcompeting Japan for the first time – and Chinese output has not peaked. BYD and CATL, already the world’s largest battery producers, plan continued growth. Expansion is also a key priority identified in the central government’s latest work report. As the United States becomes harder for Chinese companies to access, Europe becomes a clear destination for these exports. Acquired Western companies bolster this expansion. Volvo, for example, is now a subsidiary of Chinese auto manufacturer Geely (see box on page 5 for details). Together, they co-own the brands Lynk & Co and Zeekr. Unsurprisingly, when Zeekr was launched in 2021, it was done in Sweden and the Netherlands. Expansions across the EU are expected in 2024. The culmination of these dynamics could lead China to capture up to 15 percent of the EU’s EV market by 2025 – up from the less than one percent it held in 2019.

Volvo

In 2010, Volvo was acquired from Ford by ­Zhejiang Geely Holding Group. Shortly thereafter, Geely and Volvo set up a joint R&D center, CEVT, in Gothenburg in 2013. CEVT employed multiple engineers who previously worked for Saab. Volvo’s headquarters and most of its manufacturing stayed in Sweden, with new factories being built in China for the Chinese market. After the acquisition, there was little interference from Geely. Volvo maintained its autonomy and Swedish identity, which was unique for a Chinese acquisition. The acquisition boosted Volvo sales in China, which drove more production to China. Geely even left the Volvo brand intact while using the technologies developed by CEVT to create new projects with the brands Lynk & CO and Zeekr. Nevertheless, while the M&A by Geely was initially supported by most Swedes, increased trade tension with China – and the looming possibility of a merger – has created doubts about Volvo’s future.

Such developments are occurring while Western brands lose market share in China. In 2024, Chinese brands account for two thirds of the domestic market, a near ten percent climb from 2023. In contrast, German brands have fallen from a 24.8 percent share of the Chinese market in 2020 to 15.4 in 2024. Part of this trend is due to Western companies, such as Volkswagen, not understanding Chinese consumers who prefer a new high-tech model intended to be quickly replaced rather than something built to last. This inclination is demonstrated by the centrality of “infotainment” systems; Chinese systems are all Chinese-made and cheaper while still coming with higher computing power than foreign models. Chinese consumers also prefer mid-range vehicles with more gadgets, something that Western brands, such as Volkswagen, misjudged. China’s ability to compete with foreign brands will likely continue as competition moves beyond its domestic market.

US Efforts to Build Capacity and Curtail China

The administration of US President Joe Biden has two broad aims for the EV industry: (1) to build a supply chain to service the US market and (2) to ensure the “security” of this market. These were outlined in the 100-day strategic review under Executive Order 14017 and the subsequent National Blueprint for Lithium Batteries 2021–2030 released by the Department of Energy. Following this, Congress passed the Bipartisan Infrastructure Law (BIL) and the Inflation Reduction Act (IRA), which include a range of incentives to boost investment into the North American EV ecosystem with the goal of creating a supply of and demand for vehicles made within the continent. This legislation will impact EV deployment and production in the United States – with the IRA alone potentially boosting EVs to over 50 percent of vehicle sales by 2030. For perspective, the 1.4 million new EVs sold in the US in 2023 represented 9 percent of new vehicle sales.

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The IRA’s local content requirements – or purchase incentives for vehicles made in North America – are a major factor here as they make battery cell production on the continent very cost competitive. Together, the BIL and IRA have accelerated efforts to friendshore, nearshore, and reshore industry aiming to serve the US market. For auto supply chains, near- and reshoring have been most prominent. Nearshoring is occurring in Canada and Mexico who benefit from the tax credit linked to the regional content requirement. For example, in 2023, nearly 100 large investments were announced in Mexican EV production, and Volkswagen prepared to invest $14.8 billion to build a battery factory in Canada. The EV purchase credit is compounded by the advanced manufacturing credits to have a reshoring pull. Within one year of adopting the IRA, the American EV production capacity pipeline to 2030 almost doubled – from 700 gigawatt hours (GWh) to near 1,200. This represented nearly $100 billion in private investments announced by the fourth quarter of 2023. 

To secure this market, the IRA aims to strategically exclude Foreign Entities of Concern (FEOC). FEOCs are non-state actors controlled by, owned, or subject to the jurisdiction of a country that could threaten American economic, security, and foreign policy interests. Primary targets are Chinese companies looking to invest in the North American EV supply chain. If designated an FEOC, these companies would not benefit from IRA tax credits – even if their batteries or EVs were made in North America. While some exceptions have been made, this has caused issues for Chinese companies. The Biden administration has gone further by raising the Trump-era Section 301 tariffs on Chinese-made EVs from 25 to 100 percent and on Chinese-made lithium-ion batteries and battery parts from 7.5 to 25 percent. This will raise tariffs on Chinese EVs to 102.5 percent when combined with the standard import rate for passenger vehicles. These challenges can even extend to Chinese customers who buy components for vehicles entering the North American market. For example, Volkswagen cars containing Chinese parts were barred entry to the United States. Washington is also pressuring its neighbors, having pushed Mexico to halt incentives for Chinese EV makers while nudging Canada to align with its policy. Such efforts have been effective. As of August 2024, Canada has mirrored Washington with similar 100 percent tariffs on EV imports from China. The culmination of these moves opens the door for battery companies from Japan, Korea, and Europe to gain privileged access to the North American market. 

European Efforts to De-risk and Decarbonize

Europe has largely used regulations to drive EV uptake. The EU has, for example, introduced a sales ban on new ICEs as of 2035 and regulation 2019/631 that tightened emission standards. The latter caused the EU’s EV sales to rise from 700,000 in 2019 to near 2 million – or 21.6 percent of new car registrations – in 2022. However, transitioning to EVs requires a simultaneous shift in manufacturing capacity. To ensure this buildout occurs in the EU, the institutions in Brussels have taken action in three primary ways: first, they set a strategic outline and platform for industry to build an EU battery ecosystem; second, they linked this industrial expansion to sustainability; and third, they attempted to coordinate government action to ensure European competitiveness. 

European competitiveness has become an even more central issue since the United States passed the IRA in 2022. In its aftermath, early studies showed two thirds of the EU battery project pipeline at risk of moving to North America rather than being completed in Europe. If exercised unilaterally, US subsidies are a risk to European projects. The European Commission has allowed EU member states to “match the aid received by competitors in third countries,” but any exceptions are unlikely to be EU-wide. Outside this exception, the EU has been more proactive with the Net-Zero Industrial Act (NZIA) and its anti-subsidy probes into Chinese goods. For example, the Commission initiated an ex-ante probe into EVs produced in China entering the EU last year that resulted in provisional tariffs. Considering China’s record of industrial subsidization and the EU’s experience with Chinese solar, such proactivity is not unwarranted. EV imports from China represented one fifth of the EU’s EV market in 2023 – up from less than half a percent in 2019. Projections even show Chinese EV imports shifting Europe to a net vehicle importer by 2025.

Despite these statistics, the politics behind the probe are complex. While France pushed the Commission to act, German politicians and industry undermined it. This is undoubtedly due to how exposed German industry is because of its continued investments in China. From 2018 to 2021, German conglomerates BASF, BMW, Daimler, and Volkswagen accounted for 34 percent of all European foreign direct investment (FDI) into China. In the past, this vulnerability would cause Berlin to intervene on Beijing’s behalf, but now German political opinion is unclear. German Chancellor Olaf Scholz has played both sides. He downplayed this issue while in China with automotive representatives but later called for a serious shift from Beijing. In contrast, in two separate trips to China, Germany’s vice chancellor, Robert Habeck, supported the EU’s findings while its transport minister, Volker Wissing, criticized the tariffs.

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The provisional tariffs resulting from the probe do, however, also show nuance in Europe’s approach. BYD, Geely, and other companies that cooperated with the investigation face tariffs of 17.0 percent, 19.3 percent, and 21.3 percent, respectively, while SAIC and other non-cooperative companies face tariffs of 36.3 percent. Thus far, Tesla is the only company to secure an individual duty rate of 9.0 percent outside of this. These percentages will apply on top of the existing 10 percent tariff that was already in place. Unlike Biden’s tariff – which applies equally to all vehicles – the EU’s tariffs appear less arbitrary and substantiated because they reflect the level of subsidy and reward compliance. These tariffs also come from a formal investigation, which, unlike section 301 of the US Trade Act, is WTO compatible and creates room for other countries to follow suit. Such openness is vital as political pressure toward one’s neighbors, such as that exhibited by Washington, can only go so far in recruiting partners to adopt one’s policies.

The EU also appears to be more open to Chinese investment to build its capacity. While US policies like the FEOC push out Chinese investment, the EU has opted to strengthen tools such as those for foreign investment screening. While these are rigorous, they still let deals through – for example, the recent ­Renault-Geely joint venture that was processed and approved through the screening procedures. This openness is further substantiated by financial flows. In 2023 alone, Chinese EV firms invested €4.7 billion in greenfield projects across the European battery supply chain that accounted for nearly 70 percent of Chinese FDI to the EU. Hungary was the largest recipient, receiving 44 percent of all Chinese FDI to Europe that year. In 2022, Hungary was the world’s fourth-largest battery producer, and projections show the country being the center of European production through to 2030.

Policy Recommendations

As the global auto market electrifies, Germany – and the EU more broadly – face complex challenges. While this transition is laden with risks, there are also opportunities for those who have strategic vision and can act to realize that vision. To mitigate its risks and maximize its opportunities, Germany should:

Clarify its solidarity with the European position to set a new precedent in the EU-China relationship

China leverages political uncertainty to divide the EU as its industrial policies consolidate sectors. If there is to be a sustainable EU-China relationship, this status quo cannot be allowed to persist. Yet China will not observe rules unless action is taken, and the relationship will only get worse until change occurs.

Brussels, however, cannot establish a new precedent of holding China accountable alone. The Commission needs clear, consistent, and unified support to reaffirm red lines by driving the anti-subsidy case forward. The German government should proactively and publicly support the tariffs as a common European position to dispel political uncertainty.

The EU, particularly Germany, should be self-assured when pushing back against Beijing’s threats. The Commission’s investigation found malpractice, and it must be addressed. To move away from this would undermine the EU’s legitimacy and German credibility as a supporter of free trade. While fears of retaliation are real, mutual exposure should not be underestimated. China needs the European market more than the EU needs China – especially as the United States blocks Chinese EV expansion.

Leverage market access and Chinese companies to build domestic capacity

Europe needs to continue building EV production capacity. However, as Chinese subsidies and the American IRA show, this will be expensive. Estimates show that Europe’s current project pipeline requires €276 billion of mostly private capital expenditures (Capex) and operating expenses (Opex). Yet, this could be insufficient. The EU may need more capacity to meet climate targets, and public finance could face constraints.

Germany should court more Chinese investment into the European battery ecosystem to fill this gap. Chinese battery companies are competitive and have leading tech – Western companies benefit from their presence. However, Germany should push Brussels to leverage access to the single market because Chinese battery companies are eager to invest abroad. The EV price war in China is hemorrhaging profits while China-based capacity is losing access to key markets. With North America locked off, the single market becomes the major demand center for EVs that command a high purchase price. These conditions give Europe an opportunity to capture FDI from China’s leading firms, which could help reverse decades of asymmetrical technology transfer.

However, Germany must be cautious, differentiating where this investment is wanted and where it becomes a security risk. In 2020, the Bertelsmann Stiftung drafted a checklist for green listing Chinese investments in which FDI into the manufacturing of motor vehicles was identified as carrying some risks due to the possibility of being dual use. As Chinese models utilize Chinese software and certain components that offer backdoor access, data transfer poses another risk. The EU already has investment screening mechanisms in place to ensure a degree of safety. These risks can further be mitigated by measures such as more granular investment regulations; restrictions on cross-border data transfer; and constraints that keep Chinese brands from being used by military, intelligence, and political personnel.

Reward European and clean producers by further linking to climate criteria

The IRA shows that incentives can spur large-scale private investment in the EV supply chain. However, it remains unclear if the EU will be able channel such investment into Europe. At present, it lacks a uniform approach to incentives and it does not want to lean into local content requirements.

Strengthening linkages to other criteria where Europe has a comparative advantage could help resolve this problem. As Chinese goods have had issues in areas such as human rights and high emissions, applying a stronger environmental, social, and governance (ESG) framework could be an option. According to Human Rights Watch, aluminum used in automotives from China largely originates from Xinjiang, where forced labor by the Chinese government has been ongoing for years. Moving to an example related to climate, China’s coal-powered battery manufacturing can be emission intensive. One study showed that production reshored to Europe could lower these emissions by over 60 percent. The EU has taken measures to standardize, map, and track these emissions with battery passports by adopting its new Batteries Regulation in 2023.

This regulation helps clarify the footprint of each battery, but more can be done to link this knowledge to reward consumers who purchase vehicles from clean producers. The French eco-bonuses that link EV credits to a lower carbon footprint are a good example that rewards clean producers while retaining open markets. As of 2024, up to a quarter of EV sales in France will not qualify for incentives because of a high carbon footprint. As the German government looks to reintroduce tax credits for EVs, policymakers should structure their incentives similarly to the French model to ensure that climate targets on cleaner production are also supported by EV deployment.

Leverage the Brussels effect against illegal ­subsidies and set a standard

With both the United States and EU becoming tougher on Chinese EVs, China will be forced to pivot to other markets. These countries will likely push back against China through protective measures of their own. Many countries have already done so – for example, Turkey on Chinese EVs and Brazil, India, and Thailand on Chinese goods.

Although this trend will likely continue as more countries experience Chinese export threatening their domestic markets, some potential destination countries may lack the political and administrative capabilities for such measures. The EU’s anti-subsidy probe can provide a blueprint for how a country can use existing trade rules to push back against China’s unfair trade without reverting to localized protectionism. The EU’s tariffs are non-discriminatory, not unilateral, and WTO compliant. This provides legitimacy and credibility for the EU and makes it possible for others to adopt similar approaches. Germany can play an active role in this by providing additional support and capacity building to countries launching investigations of their own. By sharing lessons learned from the EU’s investigations, Germany can help build a broader coalition of countries channeling trade disputes through the existing international institutions.