EU and US on red alert after China’s green tech shock

Known as “the world’s factory,” China is no longer satisfied with exporting only low-end manufacturing products. With its exports of electric vehicles or EVs, solar panels, and lithium batteries, it now aims to conquer the American and European green markets.

This is why the European Union and the United States, in particular, have begun criticizing China for its “industrial overcapacity.” Beijing’s immediately retorted:

Globally, green capacity is not in excess, it is in short supply. The problem is not overcapacity but excessive anxiety.”

But that doesn’t change the problem of overcapacity. So, beyond this rhetorical battle, what is it about China’s manufacturing industry that worries the European Union and the US?

In so far as it concerns Europeans and Americans, overcapacity in the world’s second-largest economy can be summed up by two main elements:

• Massive Chinese government subsidies.
• And very small demand in the domestic market.

Domestic manufacturers

These two factors mean that the supply stimulated by public funding in China far exceeds local demand. The result is that Chinese products are flooding global markets, where, with their very competitive prices, they threaten the survival of domestic manufacturers.

Subsidies are prevalent in the green production chain. China’s strategy includes cheap loans, low-cost access to land, huge investments in infrastructure, and consumer premiums.

In the green industry, they are three to nine times higher than those of countries in the Organization for Economic Co-operation and Development or OECD.

By 2023, China will control an average of 71% of global production in the EV, solar panel, and lithium battery industries. That includes 60% in the EV sector, 80% in solar panels, and 74% in lithium batteries. On average, it accounts for 66% of global sales.

Yet, these figures need to be taken with a grain of salt.

Although China is now the world’s largest producer and seller of green products, the domestic market accounts for the lion’s share of consumption. Again that includes almost 90% of Chinese production of EVs and lithium batteries and 60% of solar panels.

The figures were released in a China Chamber of Commerce report for the import and export of machinery and electronic products.

State funding also means that, for the same model, the price of an EV sold in China is half that on the European market. Funding aside, Chinese EVs cost almost as much as European EVs to produce. And European EVs still account for the lion’s share in its domestic markets.

Still, a recent factor could change things. Beijing ended all subsidies for solar panels and EVs at the end of 2022. This could have a negative impact on the domestic market and lead to even greater global exports.

Economic competitors

So the EU was right to sanction Chinese EVs, even though companies will very likely find ways to get around the sanctions.

For example, they could team up with European manufacturers. This is the case for XPeng Motors and Leapmotor, two Chinese groups that in 2024 signed collaboration agreements, with Volkswagen and Stellantis, the two leading EV manufacturers in the EU.

The problem Chinese industry represents in the eyes of its economic competitors is not so much its “overcapacity” in terms of production, but rather the change in its economic model.

Now, it is focusing on top-of-the-range products with its famous “Made in China 2025” project. In less than 20 years, this paradigm shift resulted in the rise of a Chinese green industry before Western governments had time to prepare for it.

When China joined the World Trade Organization or WTO in 2001, the Western market suffered an initial shock. Originally, the famous “Made in China” label was almost a joke, given the poor quality of the products.

But since then, low prices for Chinese goods have turned out to be a tenacious strategy.

The second shock has just begun and is likely to have far more severe consequences than the first. This time, China has an exceptional combination of strengths.

• It accounts for 30% of global manufacturing.
• Its labor force remains relatively cheap.
• It has advanced technological capabilities.
• Its state subsidies are abundant.

So the challenge posed by China to the Western green industry is significant. In addition to state subsidies and “industrial overcapacity,” the comparative advantages of Chinese companies in this industry also play a part.

Take the example of electric vehicles, where 30% to 40% of the price comes from the battery. BYD, the largest EV group in China, is almost self-sufficient throughout the production chain since it produces not only most of the car’s critical parts but above all, its battery.

Massive subsidies

Green industry is the key to achieving climate goals. But, it is not always easy to convince stakeholders to change their orientation, especially when the cost is significant.

The EU and the US are right in accusing Beijing of providing massive subsidies. Yet, for a new industry to prosper and win market share in increasingly fierce global competition, reducing the footprint of external rivals is only the first step.

Europe and the United States must review their industrial policies, and the state must intervene where and how it can.

Yaxin Zhou is a Doctorante en science politique at the Université de Montréal in Canada.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of China Factor.