This is how China subsidized BYD. The first evidence

12/04/2024

The Chinese electric car giant BYD, which in recent months has been competing with the American Tesla for the dominance of the EV market at the global level, is certainly the leader – along with Catl – of the ecosystem of the “New “Chinese Energy Vehicle (NEV)” which Beijing is banking on as a strategic industry, along with renewables and advanced ICT for technological dominance and beyond.

As shown in the detailed construction, BYD and CATL were born not only by the different focus of the central government on battery technology and by industrial policy preferences, but also because of the often overlooked innovations and management abilities of their founders. However, it was unclear how much, in part due to the ambiguities and hierarchies between the central and local governments, the subsidy contributed to the rise of these two giants.

If it is not true that now the question, from the academic debate, enters strongly in the public debate and between policy makers Europeans in a broader economic and geographic context. The electric vehicle industry is at the center of this tension, between the need to eliminate the fleet of cars by EU directives and the currently winning position of China which for more than a decade has first discovered, then gambled and finally subsidized the birth of the system of industrial ecology. based on lithium batteries. The result? Today BYD is competing for the throne with Tesla, the only Western EV manufacturer but with one Supply Overrepresented in China, Catl has more than a third of the battery market while European manufacturers remain in doubt not so much about their plans for electrification, but about their ability to remain competitive with uncertainty on the regulatory side but above all in the context of the market that even the Commission sees, in all probability, contaminated by Beijing’s interference.

How to decide this last step today for European producers can be seen in Italy and the debate on the industrial role of Stellantis, when the government through the minister Adolfo Urso (Mimit) does not rule out the possibility of bringing a Chinese manufacturer (perhaps BYD) to our country. “If Stellantis does not reach one million cars, there will be room for other manufacturers”. Basically: either the company controlled by Exor will decide to bet, once again, on Italy or in order to preserve and relaunch work in the sector it will have to look outside. At this point, Carlos Tavarez, The CEO of Stellantis, has repeatedly confirmed the company’s commitment to Italy, but has issued a real warning: “If the doors are opened to China, this could lead to consequences. We are ready to deal with Chinese competitors, but whoever tries to introduce them will be responsible for unpleasant decisions that will have to be done.”

From Tavarez’s words, one can see a out-out: either us, or them, the choice is yours. The government’s logic would be to launch a Chinese theory to bring Stellantis back to the table, if not for the fact that the Dutch-based company already has a friendly delocalization strategy of its own, or. to make friends (although this last term, which has now been compounded in recent years, suggests a flow of investment and agreements with neighboring countries to restore production from China, although this is not always possible without some cooperation with Chinese suppliers). We see this with investments in factories and plants in Serbia and Morocco. The future of Stellantis in Italy, therefore, it may already be written also due to other factors, energy costs in First of all.

Second, it is the potential penetration of BYD (and other Chinese companies, but not battery manufacturers such as Catl with which cooperation has already begun) that worries Stellantis and others. car manufacturers Europeans, at a historical moment when more Chinese production capacity in the domestic market must be offloaded, focusing primarily on exports to developing countries (where the presence and growth of Chinese EV companies is certainly poor compared to the US and European Union). And here we return to the decisive question.

According to preliminary estimates from the Kiel Institute for World Economics (KIWE), a German think tank that advises the Berlin government, BYD would receive at least $3.7 billion in direct subsidies from the Chinese government as part of the strategic plan. to control this situation. industry among those selected in the now famous “Made in China 2025”. State aid would increase from $220 million in 2020 to $2.1 billion just two years later. Obviously, to encourage the adoption of EVs, many countries have decided to use incentives or tax breaks, including the EU and the United States. What sets China apart is the wide variety of these subsidies, many of which are indirect and often more difficult to track and quantify. But it is mainly the first ones, consumption incentives, that work differently in Asian countries since, as explained in policy summaryis paid directly to manufacturers rather than consumers and only to EVs produced in China, thus discriminating against imported vehicles (which make up less than 1% of the circulating vehicle fleet).

This type of subsidy, which ended at the end of 2022, played a major role in two ways: it stimulated the adoption of EVs but above all it stimulated Chinese producers of batteries and components, since Beijing introduced strict performance requirements for battery pack techniques. installed in BEVs and PHEVs, then sold by brand such as Byd but also Nio, Geely and SAIC. It is precisely on this type of subsidy, which has enabled the birth of the electric car ecosystem, that the EU is considering imposing a recurring commercial tax also on those cars that have already been imported into Europe, considering their discriminatory nature.

According to the calculations, BYD would be the manufacturer that benefited the most from the incentive, with more than 1.6 billion dollars distributed to 1.4 million NEVs (which include battery-powered vehicles, hybrids. Plug in and hydrogen), followed by Tesla which remains the only Western manufacturer that China has allowed to remain the owner of its gigafactory in Shanghai, unlike cooperation was introduced by Volkswagen, General Motors, BMW and Toyota. In general, also for other types of incentives – such as exemption from purchase tax, which will remain in effect for all NEVs until 2027, worth around €68 billion. BYD turned out to be the main beneficiary compared to the Chinese competition, which on the one hand is not surprising considering its market shares. Other types of subsidies, however difficult to track, are amounts of public investment (debt repayment orequality of the target company) below market values, purchasing key inputs (such as steel and batteries for electric vehicles) at low prices, or discriminatory public procurement. Not to mention subsidies or other forms of support guaranteed by the government (central or local) to suppliers of components or materials, which now represent a large part of the cost of battery packs.

“The empirical data presented in this paper confirm the concerns and accusations made by many trading partners against China: China subsidizes manufacturing industries that are heavily involved in its economic policy agenda,” it reads. Including, of course, the electric car industry. The point is to know how China’s subsidy system, unclear and complicated, designed for the domestic market and national companies, may have distorted the rules of international trade according to the rules of the WTO, until champions like BYD have benefited from it. for international expansion. With the Biden administration’s Inflation Reduction Act (IRA), the United States has already taken a clear position: to relaunch American production in the electric transition, but without Chinese interference. The EU remains in solidarity: currently the Commission’s agenda does not include a trade ‘war’ with China, but this preliminary evidence – which will surely be confirmed by the detailed investigation to be published soon – suggests that countermeasures will be needed. taken. It will be a political choice, which is certainly influenced by the results of the June election.

If it still will all in on EVs and decarbonisation, there is a high probability that business taxes will be raised, starting a dialogue with the Chinese government – which continues to despise the Commission’s position as a “guardian” and insist. the commercial technological superiority of its EV companiesin the words of the Minister of Commerce Wang Wentao – discuss the suspension of incentives considered most dangerous to competition and production of BEVs by European car manufacturers. But it is not certain that it will be the most effective measure without an even stronger commitment to a consistent and, hopefully, coordinated industrial policy between Brussels and the automotive industry on the needs of European consumers. As I learned by comparing myself to analysts and battery experts, without a level playing field China’s production costs, direct access to raw materials and the certainty of a more mature domestic market represent an ecosystem that EU producers do not currently have.