Tariffs return as China overtakes rivals with global EV investment

China is investing in electric vehicle plants, battery plants and all sorts of other transition technologies around the world. It is building electric vehicle factories and battery factories abroad to fight back against a tariff in the West that could prove to be as counterproductive as sanctions against Russia.

In June, the media reported that European governments were vying for China’s financial attention. At the EU level, there has been growing talk of import tariffs as the bloc has sought to build its own transitional supply chain largely from scratch in an attempt to protect local industries from cheaper Chinese technologies and superior. At the level of the national capital, however, money spoke louder.

Hungary is one of the beneficiaries of what the Financial Times reported was a “tsunami” of transition investment around the world. The central European country, which is often at odds with the EU’s central government in Brussels, is home to two South Korean battery plants and EV giant BYD has chosen it for the location of its first European plant. Poland is another beneficiary of Chinese investment in the transition — China’s Leapmotor and its new joint venture partner Stellantis will build an electric vehicle factory there.

Meanwhile, BYD is also planning an electric vehicle plant in Mexico for the same reasons it is building one in Europe: rising tariffs. Of course, this tactic of setting up local production to defeat the tariffs caused problems for Washington. US policymakers are now trying to pressure Mexico to be less hospitable to Chinese investors, Reuters reported in August. The pressure campaign also worked, with Mexican authorities refusing to offer Chinese electric vehicle investors any incentives available to other automakers. The problem: They could take their business elsewhere. Related: Goldman Sachs sees $20 upside to oil prices on Iran supply shock

The FT reported that Chinese investment abroad rose 12.5 percent to the equivalent of about $112.2 billion in the first eight months of this year. Much of the money invested abroad by Chinese companies is earmarked for transitional technologies, the report said. An Australian research firm has reported 130 transition investment deals since the start of 2023 totaling $109.2 billion in final investment decisions for overseas projects, Climate Energy Finance said.

Interestingly, Climate Energy Finance director Tim Buckley told the FT that Chinese companies are not just investing in new manufacturing capacity overseas. They were also exporting “technology, engineering, supply chain and financing capabilities.”

“Foreign direct investment (from China) is growing at a scale that we cannot ignore and compare it to the biggest global investors like the US and Japan,” Oxford Economics researcher Betty Wang told the FT. A Climate Energy Finance added that this increase in investment comes on the back of falling transition technology costs at home. In essence, it appears that China is exporting cheap transition. In Europe and North America, however, companies are scrambling to cut costs—and often failing.

Electric vehicles are one sector where this is particularly evident. The FT reported again this week that European carmakers are bracing for a prolonged downturn amid falling sales. “We all assumed things would get back to normal, but they’re taking a turn for the worse. All of a sudden there is an acceleration of negative factors and the extent of the damage is large,” a Jefferies analyst told the publication.

It could be argued that what is happening is a natural consequence of processes started several years ago, and as such is not at all unexpected. The decline is the result of accelerated pro-EV policies that twisted the arms of automakers to start producing more of them while ignoring the demand side of the equation.

Now it turns out that European EVs can’t compete with Chinese EVs on price – and often on quality, it seems – so they’re fighting back, and the EU is helping by implementing protectionist policies that the Chinese are using by setting up of local factories. The picture is the same in transition technology. It was no accident that in a recent report, Wood Mackenzie stated the facts clearly: no China, no energy transition. That statement was about copper, but it seems increasingly true for the energy transition as a whole.

By Irina Slav for Oilprice.com

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