EU's "Dual Regulations" Emerge: Subsidy Limits and Recycled Content Thresholds Imposed, Posing Strong Challenges for Chinese Automakers Venturing Abroad

February 18th news indicates that the European Commission plans to incorporate new rules into the "Net Zero Industry Act," requiring electric vehicles to have 70% EU-made components to be eligible for government subsidies. By value, at least 70% of components, excluding batteries, must be produced in the EU, and several core battery components also require local production. This measure is clearly aimed at protecting the EU's domestic manufacturing base and addressing the import pressure of low-priced Chinese electric vehicles. Simultaneously, the EU has established an initial €1.8 billion "battery boost fund" to support the construction of local battery gigafactories. However, most EU automakers currently rely on Chinese and Korean suppliers for battery packs, and some joint venture battery companies have even scaled back their gigafactory construction plans in the EU.

In December, the Council of the EU and the European Parliament reached a provisional agreement on the Regulation on Circularity Requirements for Vehicle Design and Management of End-of-Life Vehicles. This regulation puts forward binding requirements around the proportion of recyclable materials used, the supervision of end-of-life vehicles, the responsibilities of car manufacturers, and export controls, attempting to promote the transformation of the European automotive industry towards a circular model. Organizations such as the European Association of Automotive Suppliers (CLEPA) are calling for the strengthening of local content rules, maintaining the existing proportion of locally sourced components in EU-assembled vehicles, and clarifying the definition of "Made in Europe."

Source: Fast Technology

New Subsidy Rules: Chinese Automakers' "Cost Conundrum"

The EU's new electric vehicle subsidy regulations will have a significant impact on the cost of Chinese automakers going global. To meet the 70% local content requirement, Chinese car companies will need to establish or expand parts production bases in the EU. This means substantial upfront investment in factory construction, equipment procurement, and personnel recruitment and training. For instance, building a battery core component production plant in the EU, from site selection and construction to commissioning, could take several years and hundreds of millions of euros.

Moreover, the EU's local component supply chain may not fully meet the needs of Chinese car companies, and some key components may still need to be imported from China or other regions, which will increase logistics costs and the difficulty of supply chain management. In addition, the price of EU-made components may be higher than that in China, further pushing up production costs. Rising costs may reduce the price competitiveness of Chinese car companies in the EU market, affecting market share and profit margins. Chinese car companies that originally opened the EU market with cost-effectiveness advantages may lose some price-sensitive customers due to increased costs.

Recycled Materials Mandate: Technical Certification and Supply Chain Restructuring Challenges

The EU's "Regulation on End-of-Life Vehicles" poses significant technical and certification challenges for Chinese automakers. The regulation mandates that new cars achieve a recycled plastic content of 15% within six years of its enactment and 25% within ten years, with at least 20% of the recycled plastic originating from end-of-life vehicles. Subsequent targets for the use of recycled materials like steel and aluminum will also be introduced. However, the application of recycled materials in automobiles faces performance and cost barriers.

In terms of performance, recycled materials need to undergo extensive testing and validation to meet automotive safety and performance indicator requirements. While car manufacturers are currently increasing R&D investment, there is still a gap compared to automotive-grade requirements. For example, the strength and heat resistance of recycled plastics may be inferior to virgin plastics, affecting the service life and safety of some automotive components. In terms of cost, bio-based materials have high R&D investment, and costs can only decrease with large-scale application. While recycled aluminum and steel have cost advantages, cost control for bio-based materials remains a challenge.

Simultaneously, the application of recycled materials involves international certification issues. Exporting overseas requires obtaining international system certifications, in which Chinese automakers have shortcomings. Currently, the utilization rate of recycled materials in China is low, and the construction of certification systems is insufficient. Even if the recycling rate is not low, the actual usage rate of recycled materials is relatively low, making it difficult to meet EU requirements.

Supply chain restructuring is also a major challenge. Regulations require car manufacturers to ensure that new car designs facilitate parts recycling, reuse, and remanufacturing, which necessitates close cooperation between car manufacturers and their supply chains. Multinational car manufacturers have already begun to collaborate with their supply chains: BMW has introduced natural flax fiber composites, Volkswagen has increased the use of recycled materials, and Japanese car manufacturers such as Toyota, Honda, and Nissan also have corresponding plans. If Chinese car manufacturers want to gain a foothold in the EU market, they will also need to restructure their supply chains and establish supporting recycling and recycled material industrial chains, but this will not happen overnight.

Countermeasures: A Multi-pronged Approach to Navigate EU Regulations

Facing challenges from EU regulations, Chinese automakers need to adopt a multi-pronged approach to respond proactively. In terms of technological research and development, they should increase investment in R&D for recycled materials, collaborate with universities and research institutions, and overcome performance challenges. For instance, developing novel recycled plastics with enhanced strength and heat resistance would enable their application in more critical automotive parts. Simultaneously, exploring pathways for the large-scale application of bio-based materials is crucial to reduce costs.

In terms of supply chain construction, strengthen cooperation with local EU suppliers to jointly develop components and recycled materials that meet regulatory requirements. Establish recycling networks and recycled material production bases in the EU to improve the self-sufficiency rate of recycled materials. For example, cooperate with local recycling companies to establish an end-of-life vehicle recycling system to ensure a stable source of recycled plastics.

Actively participate in international standard setting, strengthen communication and cooperation with international certification bodies, understand certification requirements and processes, and proactively plan certification work. Establish a comprehensive quality management system to ensure that the production and application of recycled materials meet international standards.

At the policy level, the government can introduce relevant policies to support car manufacturers in expanding overseas, such as providing financial subsidies and tax incentives, to encourage car manufacturers to invest in factories and conduct technological research and development in the EU. Strengthen communication and consultation with the EU government to strive for a more reasonable transition period and policy space, creating favorable conditions for Chinese car manufacturers to adapt to regulations.

The EU's "double standards" pose a new challenge for Chinese automakers expanding into Europe, but also an opportunity to enhance their competitiveness and promote industrial upgrading. Chinese automakers should actively respond by implementing measures such as technological innovation, supply chain restructuring, and policy support to overcome EU regulatory barriers and achieve sustainable development in the European market.