The European automotive industry is at a crossroads, with policy decisions impacting its direction and competitiveness. Bruegel, a prominent economic think tank based in Brussels, has raised concerns about the EU’s current strategies, which it argues may be hindering rather than helping the sector adapt to the electric vehicle revolution.
Recent EU measures, including tariffs on Chinese electric vehicles and proposed local-content requirements, are seen as counterproductive by Bruegel. These policies could increase the cost of electric cars by over €2,000, according to their analysis. “This approach is misguided,” the report asserts, emphasizing that the future lies in electrification and that delaying this transition only serves as a distraction.
A Pact with Consumer Costs
Bruegel criticizes the EU’s policy as “an implicit pact” that protects domestic carmakers from international competition while encouraging them to localize their supply chains. This strategy, however, burdens consumers and taxpayers with increased costs. For example, producing battery cells within the EU could raise their cost from €50 to €85 per kilowatt-hour, resulting in an added expense of approximately €2,100 per electric vehicle. In contrast, simplified vehicle approval rules would offer manufacturers a modest saving of €61 per car.
The think tank highlights a fundamental conflict: the most cost-effective path to electrification involves global supply chains, whereas the most resilient approach involves domestic production. Attempting to balance both simultaneously, as outlined in the EU’s automotive package, could obscure the true costs involved.
France’s consumer subsidy scheme, which effectively excludes Chinese manufacturers, provides a case study of the potential downsides. This policy has led to a 60% drop in sales of ineligible electric models compared to those that qualify and may have hindered overall adoption of electric vehicles.
Moreover, the frequent changes in policy exacerbate the situation. “Regulatory unpredictability is itself a competitiveness cost,” the report warns.
Bruegel also points out a loophole in the EU’s tariffs on Chinese electric vehicles, which apply to fully electric cars but not to plug-in hybrids. This has led to a surge in hybrid imports, undermining the effectiveness of the tariffs as a protective measure for European manufacturers.
Challenges in the Automotive Sector
The European automotive industry, particularly in Germany, faces multiple challenges. Volkswagen recently announced €10 billion in one-off charges, adjusted its profit margin forecast to a maximum of 1%, and was removed from the Euro Stoxx 50 index. Similarly, Stellantis, the company behind brands like Peugeot and Fiat, was also dropped from this index last year.
Adding to the industry’s woes, some manufacturing plants are shifting away from car production. Volkswagen’s Osnabrück factory, for instance, has been sold to work on air defense components in collaboration with Rafael, while Rheinmetall is repurposing parts of its automotive production for military use.
Despite these setbacks, Bruegel maintains that the industry is not on the brink of collapse. While EU car production has dropped by 2.6 million units since 2019, the sector still employs a significant portion of the workforce and remains a major net exporter. However, the think tank warns of potential erosion in export markets, technological leadership, and supplier networks, advocating for an adjustment strategy rather than protectionism.
Proposed Strategies for Change
Bruegel proposes equalizing tariffs between fully electric and hybrid vehicles and suggests negotiating a temporary export quota agreement with China, backed by a snapback mechanism to address non-compliance. The EU has already initiated discussions with China to limit hybrid exports, drawing on historical precedents such as the 1990s cap on Japanese car imports, which ultimately benefited European producers.
While acknowledging the potential legal challenges of such a quota under World Trade Organization rules, Bruegel argues for its temporary nature and emphasizes the importance of welcoming foreign investment. South Korean and Chinese companies currently hold significant shares in European battery cell production, and Bruegel views this as an opportunity for European producers to catch up rather than a threat.
Ultimately, the goal should be to provide European manufacturers with the time and space needed to compete effectively with Chinese counterparts, rather than attempting to stifle competition, the report concludes.
Original Story at www.euronews.com