Geoeconomic Competition
Welcome to "Geoeconomic Competition", a thought-provoking podcast diving deep into the intricacies of geoeconomics. In each episode, Francesca Ghiretti engages with other economic security and geoeconomics experts to navigate the intricate and often hidden manoeuvres of economic security and of global economic power plays. From the growing set of policies to the changes in globalisation, we explore how countries leverage their economic strengths, engage in trade wars, and form strategic alliances to gain geopolitical advantages.
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Geoeconomic Competition
Chinese greenfield investments in the EU with Gregor Sebastian
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In this episode of Geoeconomic Competition, Francesca Ghiretti has a chat with Gregor Sebastian, Senior Analyst at Rhodium Group. The episode provides an overview of the current situation and engages with the debate on the advantages and risks of Chinese greenfield investments in the EU EV sector.
Articles cited:
https://ip-quarterly.com/en/solution-eus-chinese-greenfield-investments-conundrum
https://rhg.com/research/aint-no-duty-high-enough/
https://rhg.com/research/pole-position-chinese-ev-investments-boom-amid-growing-political-backlash/
Welcome to Geoeconomic Competition. I'm Francesca Giretti, your host, and in every episode I engage with other experts to dive into the intricacies of geoeconomics. This is the first episode after the podcast summer break. And instead of taking it easy, we're going right to the core of the debate on Chinese green field investments in green technologies in Europe. To tell us more about it, I have asked Gregor Sebastian to join me today. Gregor is a senior analyst at Rodin Group and has a great passion for the automotive sector. Welcome, Gregor.
SPEAKER_00Hi, Francesca. Glad to be here.
SPEAKER_01Thank you so much for being here. And jokes aside, Gregor has a very deep and longstanding expertise that regards the automotive sector. So since we're going to talk about EVs quite extensively, there's no better person to ask these questions to. But let's start with the basic. Gregor, could you tell us what a greenfield investment is?
SPEAKER_00Yeah, sure. So greenfield investment is a type of foreign direct investment. So that means that a company, usually a parent company, multinational, will create a subsidiary in a different country. And that could really be a sales outlet, it could be an administrative office, or, and this is what we're mainly going to be talking about today, is a manufacturing plant. And the other main type of uh foreign direct investment is an acquisition. Um and just to put that in context, what we've seen with Chinese um FDI over the over the past two decades is that especially in developed economies like Europe or the US, China has primarily been um investing in terms of acquisitions in M ⁇ A, mergers and acquisitions. And this kind of greenfield shift is is quite a recent one that we've seen develop over the last two to three years.
SPEAKER_01Um thank you. And so you alluded to it in your answer, but why is it important to talk about Chinese greenfield investments, especially in connection to the EU grain transition?
SPEAKER_00Yeah, so I mean the EU obviously has very ambitious targets to decarbonize its economy. Um, under the Green Deal, uh, Europe wants to become climate neutral until 2050. And one of the key roadblocks at the moment um is that road transportation actually has increased uh in terms of its share of um emissions in Europe and has really been a stumbling block. Um so there is obviously uh also policy movement in this direction. Europe wants to de facto phase out new uh internal combustion engine vehicles that use petrol or diesel. Um but the EV transition is currently, uh, at least in Europe, uh, facing some headwinds. And I think this is where China, Chinese car makers and Chinese investments come in and could potentially actually contribute uh to the EU's green transition plans.
SPEAKER_01Let's talk a little bit more about uh Chinese electric vehicles. And you have done a lot of research in this regard and wrote a couple of pieces earlier this year about the growth of Chinese investments and Chinese greenfield investments specifically in the EV sector in the European Union. So if you could give us a bit of an overview of what the current situation is related to that field, it would be great.
SPEAKER_00Yeah, sure. Um so so looking at China's um EV investment first globally, perhaps, it's really skyrocketed in the last two, three years. Um, and it's also gone, undergone a couple of important shifts. So we had like this first phase of outbound investment, which was really more going to Latin America, Africa, um, Southeast Asia, where Chinese mining companies wanted to access uh certain raw materials. And now, and this is really a shift, I think, that that has accelerated during the pandemic. China's own domestic EV industry is really world leading. And now we have car makers, battery makers that are dominant in their home market that are investing overseas to expand their market access and actually also increase their market share overseas. And Europe is really the key target here. Um, when we look at the absolute investment numbers, especially in the battery sector, um, there's no other region that has received as much investment as Europe. Um, in terms of announced investment, we've um had nearly 5 billion in 2022, and that went up to 20 uh in to 13 billion in 2023. In the first half of this year, um, there's been less new investment. Um, and I think this is partly linked to uh three factors. First of all, we have a high base um that was established in the previous two years, so there's um already a lot of investment that that was announced. There is also um slower than expected EV uptake in in Europe, which is linked to uh the phase of subsidies in in markets like uh Germany. Um it's also linked to um political uncertainty now uh regarding the the these targets, right? We had the European election uh a couple months ago, and now some of these EV adoption targets are actually questioned, right? And there might be a review in the coming months um and and they might be tweaked downwards. The third factor is um China-specific, that Europe, uh the European Union, the Commission has initiated a um review into Chinese EV imports. Um, but at the same time, some of the new European uh tools could also target investment. So I think this is the third factor, a China-specific factor where Chinese investors worry that some of their investments could actually be blocked or um uh after they've uh been announced, investigated as well. So I think these these three hurdles are creating a downward trend at the moment uh into 2024.
SPEAKER_01And so you mentioned it, so let me just build on that. Are there any specific cases that you can think of of Chinese greenfield investments in Europe that you think are particularly important to bear in mind or think about when we talk uh about this phenomenon?
SPEAKER_00Yeah, so I think the first one to mention would be CATL's investment in in Germany. And I think I mentioned that one um because it's the only currently operating Chinese battery plant in Europe, right? So at the moment we actually only have three to four battery plants that are running in Europe. Um, most of them are operated by South Korean companies, and this is really the first one. They started production, I think, um, last year. This plant is actually smaller than um initially expected. Um there's obviously potential that it might expand in the future, but at the moment it's it's it's not looking great. Sierti Aldo has has announced another investment which is currently under construction, and that's a much, much bigger plant, um roughly 10 times as large in Hungary. Um, and Hungary has really become a hotspot for Chinese battery and EV investment. We also have um battery component supplier, so in a into a battery cell, you have uh anodes and cathodes. Um, these are also quite capital-intensive um projects by Huayo Cobalt, for instance. Um, they've also focused on Hungary. And then more recently, in the last uh six to nine months, we also had a couple of um EV manufacturing investments, um, and chiefly BYD in Hungary, once again, um, another car maker that is going to Hungary. And we had Cherry um in Spain, where they're cooperating with a local Spanish company. And then technically, if we look at the ownership, um also Volvo's new plant in Slovakia, because Volvo since 2010 is owned by um the Chinese car maker Gili. There's a couple more rumored investments, but because I hinted at this uncertainty at the moment, um there's actually a lot more rumors than actually announced investments where we have specific plans and contracts signed with local governments.
SPEAKER_01Your answer triggered two further questions on my side. The first one is, and I don't know if you know, but is why was it the plant in Germany smaller than expected? And then the second question naturally is why Hungary? Why is Hungary so popular for Chinese greenfield investments?
SPEAKER_00Yeah, so I mean, why the why the German plant is smaller than expected? I mean, I don't know 100%. I think partly it's related as well to energy costs, um, which are particularly high in in recent months in in Germany, obviously linked to the war in Ukraine. Um, so that's certainly one reason. Um, on top of that, I mentioned this already. The V transition in Germany is particularly slow. This is not to say that it's a lot faster in Hungary, but um uh, you know, you have other factors there, right? The plant in Hungary isn't isn't operating yet. It's still going to take a couple of years to um become operational. So I think those are some of the factors related to that. I think mainly it's really about the um operation costs in Germany. And Germany was always seen as like an attractive first investment, not necessarily because it's it makes sense due to the cost, but just because you already have um German car makers that are very close by that CATL has uh cooperation with in China. So I think that made sense. Um in Hungary, I think there's lots of factors that play into that. I mean, I think chiefly is um the good political relationship between Hungary and China. Um when you're a Chinese company that is trying to look for a safe haven to invest in Europe, um, I think Hungary kind of jumps out. You have a very accommodative um government for years and decades. This is actually predates also Orban's government, um, and it has been has been a more long-standing feature in in Hungary. Um a second feature, to be fair, is that Hungary has a um EV and battery strategy, which other Central Eastern European countries like Slovakia or the Czech Republic that might be competing with Hungary don't actually have. Um, so I think that's that's another important um factor playing into this. And also in Hungary, it's not just Chinese companies that are investing. There has been a lot of South Korean investment as well. Um, so there is already a certain ecosystem when it comes to batteries that Chinese companies can also tap into, um which also helps, right? And finally, once again, going back to this political dimension, I mean the Hungarian government has just been very accommodative when it comes to handing out state aid and a lot of other preferential policies that certainly have influenced um the decision here. It's notable though, and I think going back to this point of um having a political safe haven, I think the debate is also slightly shifting. I think actually now maybe some Chinese companies are reassessing their situation because there is a certain risk that if they invest too much in Hungary, um if they have a you know strong intelligence of inter-EU relations, that too much investment in Hungary could actually become a risk. Because obviously the relationship between Hungary and the Commission isn't the best. And this could be another kind of aspect of an increasingly tricky relationship. So while it might have made sense in the past to invest in Hungary, maybe going forward, it is actually, from a political perspective, at least from a PR perspective, it might make more sense to go into another member state uh like Italy, Spain, or even France, that might then uh, so to say, be your backer in Brussels against some of these policies that I think we we also want to discuss.
SPEAKER_01And this is the perfect breach, right? Because I guess the one of the questions that I'd have at this point would be: do you think that uh the lack of opposition or the very little opposition that member states displayed during during the investigation that the European Commission ran against Chinese subsidies in the electric vehicle sector could have spurred that kind of thinking. But before getting there, let me just, and you know, you can answer to this question if you want, but I just want to ask you about the tariffs that uh the European Commission posed against Chinese electric vehicles and the impact, if any, that these tariffs and future investigations potentially as well may have on the flow of greenfield investments from China into the European Union.
SPEAKER_00Yeah, I mean, I uh your your listeners are probably aware of the of the background, but just to quickly recap, I mean, Commission President von der Leyen announced uh this investigation last year at her State of the Union speech. Um the um investigation into Chinese battery electric vehicles was then initiated in October last year. And following uh multiple months of an investigation, including trips to China, um, the commission has announced provisional duties a couple of weeks ago because it's a you know, let's say an old-fashioned anti-subsidy investigation. It's a bit different from what we're seeing in the US or other markets where we have a uniform tariff for all producers. Here there's really a split uh depending on the company, which might then also incentivize companies that have a higher tariff to invest more quickly or change their strategy, versus some companies that might actually receive a lower tariff and might think, you know what, we can actually still um profitably export to Europe uh despite this. But I think in general, um, and we've seen this previously as well, right? I mean, this is not limited to the EV sector, in in other sectors, also in the car sector in other countries, we've seen that um higher tariffs and trade barriers um often spur um greenfield investment. Basically, there's a strong incentive to jump the tariffs, uh produce locally, and then depending on local content requirements, also depending on the individual company to then import some of the parts and then assemble the vehicle um locally. And I think because you mentioned the the risk of a further investigation, I mean there's a couple of tools, right, that the commission can use. Um I mean the first one would actually be an anti-circumvention. Um so we have this, we have this initial um investigation into EVs, um, assuming uh as the baseline that they're going to come into effect by um by this autumn. Um the commission could then decide to investigate some of these new plants, right? Like the cherry investment in Spain, like the BYD investment in Hungary over the coming uh months and years, and and determine you know what actually the local content is very low. This is more or less a screwdriver plant where the company imports most of the parts from China, um, and the local value added in Europe is actually very minimal. Um, so this could happen, and I think this is a risk that um Chinese car makers are concerned about. Um, and we've also heard, for instance, that BYD in Hungary, in the beginning at least, um, is not planning to build the batteries locally. And the battery is is um huge in terms of the value of a car, it can be 30 to 40 percent. So if you don't produce that locally, um obviously the risk of such an anti-circumvention is is is a lot higher. Um on the other hand, though, I mean it could be hugely disruptive because um the the the tariffs, as far as I understand, could then also be applicable basically to all Chinese imports, not just that one specific producer. So that could then also affect other um European OEMs, for instance, that import parts from China. So I think this is maybe a solution that you don't necessarily want to use if you can avoid it. Um what you could do is obviously initiate more uh investigations into parts, right? This is a little bit of a whack-a-mole approach, and I don't think the commission is particularly keen to start 10 more investigations into uh automotive uh semiconductors, into car seats, maybe, or into batteries. Um, but maybe for one or two of the bigger products, we we could actually see that. Um, so that's that's certainly something to keep in mind. And then um the the really big tool would obviously be the use of the foreign subsidy regulation, which um would require a political decision in Brussels because it would need to be an ex officio um investigation by the Commission. Um and they could basically uh uh investigate whether subsidies have distorted the single market, whether even this investment uh poses potential damage to um to the union. Um and the consequences are you know very broad. Um there's a lot of potential remedies. It could include repaying uh some of these subsidies, suspending production, um, including as well sharing RD uh results, right? So there's really broad, uh really broad instrument. And I think this is what scares a lot of the Chinese car makers at the moment. And we've also heard that you know car makers like Xiaopang, Neo, Psyche, Dongfeng, right? They're they're they're trying to actually scout for locations to invest, but I think this is one of the key um factors that they think is is currently a massive risk for them when it comes to investing in in Europe.
SPEAKER_01And so let's let's go to the sort of closing question, because I think it fits nicely with what you've just said. Um and it's perhaps a bit of a difficult one, but do you think that we need Chinese greenfield investments in the European EV sector? And let me just elaborate on that a little bit. Do you think that Chinese investments in the EU EV sector can actually help European competitiveness if there are some guardrails or you know prerequisites that are put into place? Um I I entered your space of expertise and wrote an opinion about this, um, where I was saying, look, I think we can turn this thing around and to Europe's favor if we do put a few guardrails in terms of a number of things. But you are the expert of the European automotive sector. So I'll ask you, uh, do we need them? Uh does do they make the European sector more competitive? And if we do need them, um, what can we do to mitigate the risks?
SPEAKER_00Yeah, no, and you you uh brought a brilliant article on this. Um and I can actually mainly just echo your views. I think I think it is beneficial ultimately, right? If we look at the broad package, because obviously the the Commission has multiple um ambitions, right? It wants to obviously um tackle distortions stemming from China, it wants to promote European industry, um, it wants to protect employment, and it also wants to ultimately decarbonize its economy. And I think looking at the whole balance, I think letting Chinese car makers in without any conditions, be that on the import side, be that on the uh investment side, is not the wisest choice. But I think also completely excluding them and basically saying, you know what, um we don't need them or we don't want them at all is also not the wisest choice. Because I do think that European industry um could use a little bit of uh competition domestically. Um I do think that is important for consumers that currently don't have enough um affordable EV models, which is something that Chinese car makers can offer. Um, it also helps individual countries um to uh potentially rebalance um their manufacturing sector a little bit, kind of regain some of their uh former glory, or become kind of a new leader, right? It it doesn't have to be set in stone that Germany and perhaps France always need to be the automotive champions in Europe. There could be other countries that actually fill that gap going forward. Um and finally, I think also it's important um looking ahead when we want to still be competitive in third markets. Because if you shield European industry too much and uh keep uh Chinese companies out completely, well, you might have this bastion of um Europe, the US, maybe the entire G7 countries. And that is a big chunk of the market, but you know it's Not the entire world, and compared to what uh German, French, Italian car makers are currently competing in, it's a it's a it's a small pie. Um, so I think those are some considerations to take into account. What can we actually do? I mean, there's obviously um concerns, first of all, that um we have these plants that don't bring enough value added and employment and um don't help perhaps European suppliers. I think what's important here is first of all that we need to somehow um prevent a race to the bottom. At the moment, you have multiple member states that want to have these investments. Um not all of them um attach uh conditions to this. Sometimes it's also not possible, right? I mean, we have WTO rules, you can't necessarily demand local content in that sense. It was actually um banned, but especially if you if you tie it to state aid, which a lot of these companies are um trying to get as well. Chinese companies obviously benefiting from European state aid in a lot of cases, then you can attach um um uh standards. So I think some sort of European approach to this would be really useful to basically um coordinate at least, right? It's gonna be it's always gonna be a struggle to really say, you know, Italy wants to have uh more uh another car plant, right? And Spain also wants to have another. Obviously, coordinating that is going to be difficult, but I think setting up some sort of mechanism there um to at least inform each other and prevent this race to the bottom on the on the member state level um would be really important. Um in terms of like mandating or supporting the use of local suppliers, I think we also just need to do more research. I mean, this is something that we are currently working on. Um I think there is value to um having an eye on this, um, but I think it's also important to not be overzealous in the beginning because I think there is looking at Japanese car makers in Europe, looking at Chinese car makers in Thailand, where they are perhaps one or two years ahead of what's happening in Europe, there are signs that you know they're bringing over local suppliers. Um and it's not a complete screwdriver plan. So I think there's also like this important balance to be struck that you don't overburden um a company in the beginning too much, because then they're thinking, you know what, um, if I need to bring everything over all at once, this is a 10 billion investment and not a 2 billion euro investment. And then they might decide, well, actually, we won't invest at all. Or we might invest in Turkey, or we might invest in Morocco, um, and then try to export from those markets into the European Union, which might also not work because there's other tools to be used. But you know, these are some of the considerations we we have to think about, I think. Um, and then finally, I think just just to to um mention one more aspect is obviously the data and the cybersecurity aspect. And I think um here it's also just really important to have a healthy debate in Europe, um, to also use the tools that we already have. Um, I think actually, especially on the data side, we do have the GDPR, right? And it's it's often a matter of strong implementation um and perhaps better auditing capability. Um, but obviously going forward, these vehicles are becoming more and more advanced, are gathering more and more data. So we might need to also attach um greater controls here. And there might have to be a combination of political controls and technical controls by basically saying, you know, certain parts or um certain components need to be localized, or they might even have to be supplied by a trusted actor. Uh the definition of which I don't necessarily want to spell out at this point, but I think this is something that can be debated.
SPEAKER_01Yeah, we had a conversation with um Ilaria Mazzoko, with whom you collaborated in the past, about the relatively uh, I think it's unfair to call it immature, but to a certain extent, you know, the debate in Europe about connected vehicles and the data implications is a little bit behind compared to that in the US. The two debates are also different. But maybe we'll have an episode on connected vehicles. But I'm very grateful you mentioned it. Um, and you mentioned some of the solutions that could be adopted. I guess that, you know, overall, what I find particularly interesting is that we've had these conversations for years. You know, it's a conversation attached to the automotive NEV sector, you certainly have. And yet there are still many questions that remain unanswered. And when we talk about Chinese greenfield investments in Europe, certainly you mentioned a couple of questions and potential solutions that need to be debated, right? In terms of should we have something that, for example, resembles a progressive plan for um regional or you know local um supplies, or what should we have in there? So I'm happy to say that Gregor will have a lot of work in the months and years to come. But I'm particularly grateful that you took the time to uh speak with us today and to tell us more about what the situation is. So thank you so much for being here.
SPEAKER_00Thank you so much, Francesca. It's been a pleasure.