Chief Investment Strategist
Summary: The EU is feeling the threat of Chinese electric vehicles and has announced an investigation into Chinese subsidies of its car industry extending the geopolitical fragmentation game from semiconductors to electric vehicles. This naturally makes it more difficult for carmakers to operate but also for investors to predict the long-term winners in EVs and as such we suggest investors increasingly look into the expanding and sprawling ecosystem around EVs.
The Commission president Ursula von der Leyen announced yesterday in her annual address to EU lawmakers that the EU would launch an investigation into Chinese subsidies of electric vehicles production, which have flooded the market with cheap Chinese EVs. In the past, Chinese cars were no threat to Europe’s carmakers because of poor build quality, but the Chinese carmakers have climbed the learning curve, and the transition to EVs from ICEs have undoubtedly flatten and shorten the learning curve creating an opening for Chinese carmakers.
Chinese carmakers are already facing 27.5% tariffs on their EVs exported to the US market, so it would be reasonably to assume that Europe could contemplate a similar tariff rate. The initial reaction was negative for Chinese EV-makers and positive for European carmakers, but the price action did not extend today suggesting the market is in a wait-and-see mode. Today China responded saying the EU’s action is a “naked protectionist act” and could negative impact the trading relationship between the EU and China. No thing that is blatantly indicating that China is heavily subsidizing its car industry is the car factory utilization rate which according to China Passenger Car Association (CPCA) is only 54.5% down from 66.6% in 2017. This is a sign of overinvestment and potentially gross malinvestment in non-productive assets.
Just like the US is facing the Thucydides Trap with China in semiconductors so is Europe now in the green transformation spanning production of solar panels, wind turbines, batteries, and electric vehicles. Europe’s “war” against China was inevitable because Europe has a much more open economy (see chart) and thus stands to lose the most from state subsidies in foreign countries but also the fragmentation game, which is a geopolitical dynamic in which the US, Europe, and China are all reshoring key technologies to reduce strategic fragilities.
If electric vehicles become part of the geopolitical fragmentation game then it will become even more unpredictable which carmaker will win and how market share will be dispersed in the future. In our recent equity note The growing ecosystem around electric vehicles we make this point of unpredictability among EV-makers and that the ecosystem of around EVs such as charging stations, batteries, lithium, and battery recycling might be more predictable and deliver higher returns in the future. As we have said repeatedly, the combined market value of car companies (ICE and EV makers) has risen 148% over the past 7,5 years despite low growth in the overall market. This suggests a mispricing because of the technological disruption from EVs or that cars will be sold much more profitable in the future, but the “easy” rise of Chinese EV makers suggest that cars will be even more commoditized in the future so it is difficult to see these higher margins.
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