Can Macron Save Germany’s Car Industry?

Khodorcar - The French essayist Roland Barthes once famously said that "cars today are almost the exact equivalent of the great Gothic cathedrals.” That might be pushing it a bit. But it can certainly be argued that cars were key to building the Europe we live in today.

If you look at what powered economic growth in the crucial moments of the EU’s history, it was often that piece of metal, plastic, and textile on four wheels. Cars were at the heart of Germany’s Wirtschaftswunder, France’s trente glorieuses, and Italy’s miracolo. Cars fueled Spanish growth when the country joined the EU in the 1980s, but also drove Spain’s recovery from the eurozone crisis. And with German and French car brands going east after 1989, the industry became the draft horse of catch-up growth in "new” Europe.

Even today, it is hard to overstate the importance of the automobile business to Europe’s economic model. Not only because it is the EU’s single largest industry. Not only because Daimler and the likes are major clients for upstream sectors, such as steel and chemicals. Not only because it accounts for a staggering 28 percent of the research and development (R&D) spending in the EU. Not only because car exports help Europe earn the dollars it needs to pay for raw materials from abroad. In 2020, the auto industry generated 50 percent of the EU’s trade surplus in goods!

But also because Europe’s car industry is truly pan-European. The automobile business is about scale and cost competitiveness. The EU’s single market provided the former. By allowing carmakers to set up lower-cost production sites within the bloc and giving them access to a large labor pool, EU enlargements delivered on the latter. Automotive supply chains thus crisscross the continent. From Sweden (13.8 percent) to Germany (11.4 percent) to Romania (15.2 percent) autos represent the biggest share of manufacturing employment in many EU countries.

In short, the auto industry was the perfect lever for the EU’s politics of "economic integration”—the magic sauce the EU bets on to produce not only peace, but also a convergence of living standards and a rapprochement of heart and minds. When Brussels bureaucrats gaze through their office windows at the steady stream of cars pacing through the uncompromising 4-lane city highway that is the Rue de la Loi, they know they are looking at a big chunk of what holds the EU together at heart.

A "Bleak” Outlook

Yet the car business is no longer what it used to be.

Brussels has mandated that by 2035 only electric vehicles (EVs) can be sold in the EU—give or take an "e-fuels” loophole Germany’s pro-business Free Democrats (FDP) and their Porsche-driving leader, Finance Minister Christian Lindner, were so keen on. That is good for the climate, but less so for employment: The production of EVs is less labor-intensive and requires fewer components than internal combustion engines (ICEs). Many automotive suppliers fear that the EV age may rob them of their business model.

But if you add Beijing to the mix, the outlook for Europe’s car industry really becomes "bleak,” as Carlos Tavares, the CEO of French-Italian auto giant Stellantis, which includes the Peugeot and Fiat brands, says.

China’s exports of EVs to Europe are exploding. In 2021, 11 percent of EVs sold in Europe were "made in PRC.” That figure rose to 16 percent in 2022. And this is just the start.

With China’s production costs 40 percent lower than in the EU due to lower environmental standards and cheap energy, according to Tavares, the first EV that Europe’s middle-class households will buy will often be Chinese. Once Europe’s inflation-battered consumers see that Chinese EVs are pretty okay, bonne chance to European brands that try to win them back. (The Chinese electric scooter I bought four years ago still carries me smoothly through Paris).

Meanwhile in China, European car brands are losing market share, as their EV models seriously lag those of domestic competitors’. On the current trajectory it won’t be long before Europe will run a trade deficit in cars with China. Let that sink in.

European Brand, Chinese-American Profits

So, if Tavares is calling upon the EU to act quickly to save the industry, why don’t we hear the CEOs of Volkswagen, Renault, and the like going into panic mode? Three reasons.

The first is that European companies no longer primarily make money in China by exporting goods. Less than 40 percent of German companies’ China revenue is from exports, The Economist showed. Today, it is the revenue streams that Chinese subsidiaries generate on their own that are filling the coffers of their German parent companies. No wonder European investment in China’s car industry reached a record-high in 2022. No "de-risking” here.

Two, roughly 60 percent of the Chinese EV exports to Europe are deliveries for Western brands. We have to think of Chinese EVs not primarily as BYD or Geely, but Tesla, BMW, or Renault. It is Europe’s own brands that are driving China’s EV export boom to the EU.

So, while many European carmakers (and their often US-based shareholders) are still making good money from China, the Old Continent runs the risk of being the big loser in terms of jobs and industrial capacity. One really can’t emphasize it enough: Whatever is good for VW or Renault is not necessarily good for Europe’s place as an industry hub.

But there is a third, Germany-specific reason. Many across the Rhine think local producers are better positioned to resist China’s low-budget EVs on their home market. Germans are profligate when it comes to cars, they point out. True, Germans spend on average €38,000 on their car—much more than the regular European (€32,000) or French (€28,000). But who says that Germans are still willing to pay premium prices if EVs are less about engineering, but batteries and on-board entertainment systems? Also, weren’t German car companies already plain wrong when for years they refused to view Tesla as a serious competitor?

What’s Good Protectionism?

If car factories close down, unemployment rises, and entire regions in Europe where das Auto is key to local identities lose out, then the political backlash will be huge. Remember that iconic video during the export boom of Japanese cars to the United States in the 1970s, showing workers in Detroit smashing Toyotas? Prepare for that in Europe.

You don’t have to be a master political strategist to know that Europe’s mainstream politicians will feel obliged to intervene and make a slightly protectionist turn to save its car industry from China and keep the anti-EU far-right from power.

In the medium term, interests articulated by domestic voters trump values and economic ideology. If it were otherwise, Europe would have long done away with its highly protective tariffs on agricultural goods. And many European countries, from Germany to Poland, would not have subsidized coal mining at a large loss for decades.

The question is thus what instruments Europeans have at their disposal to save their car industry from China. And whether it will be too much, too little, or too late.

Puissance De Solution

French President Emmanuel Macron, who wants his country to be a "power of solutions” in Europe, has made a first, sensible move. Last week, he announced that France’s €7,000 purchase subsidy will be limited to cars with a low carbon footprint in production (i.e., European EVs).

It is smart protectionism. The French policy of basing subsidies on an EV’s carbon footprint is much more compatible with global trade rules than the outright protectionist schemes in China and the US, which make subsidies dependent on EVs being manufactured at home or in select partner countries.

At the same time, it’s not that easy to argue that France’s policy is plain mercantilism. It certainly promotes production of EVs from Valencia to Douai to Brandenburg, but doesn’t necessarily please French firms. For instance, the Dacia Spring, the best-selling EV in France, won’t benefit from the subsidy anymore. Renault produces the car in China.

Also, the policy doesn’t alienate China completely. Due to low production costs, China may still be able to sell some EVs in France even without the subsidy. Shutting out China from the EV trade is not an option anyway, due to Europe’s reliance on rare-earth processing and battery manufacturing in the PRC.

As regards transatlantic relations, Macron’s move strengthens Europe’s hand in the negotiations on the Inflation Reduction Act (IRA). As it now stands, US-produced EVs probably won’t meet the criteria for the French €7,000 subsidy. Remember when Macron unilaterally announced a Digital Services Tax in 2018 to pressure Washington to yield in OECD negotiations on corporate tax reforms? Here is Macron’s encore.

And the US won’t even be mad at Macron. The Biden administration encourages Europeans to engage in similar trade and industrial policy to de-risk their dependencies on China. And Macron’s move is exactly what Washington hoped Europe’s reaction to the IRA would be. This is what US National Security Advisor Jake Sullivan meant when he said he wants to "to turn the IRA from a source of friction into a source of strength and reliability” for the West.

But finally, what about the climate? Doesn’t the measure slow down the EV take-up in France and thus work as an obstacle to reducing emissions? Not really. China permitted two new coal power plants per week in 2022. Already today the PRC’s emissions per capita are nearly twice those of France. Its EVs are literally dirt-cheap.

And Now Scholz?

Yet, in order to be a real lifeline to Europe’s car industry, other EU members have to follow the French example and adapt their national EV subsidy schemes as well.

It’s not enough if it’s just French taxpayers that are subsidizing Teslas produced in Brandenburg. Chinese EV firms are all the more incentivized to set up production directly in Europe if other EU members pull along. And Brussels’ leverage in the negotiations with Washington on the IRA would be all the bigger.

Is that a step too far for Berlin, which fears that green trade measures could trigger a new trade war? Not necessarily. France was also first to push the carbon border adjustment tax, but then Germany joined the project after some hesitation. In fact, Berlin is slowly becoming aware that the trade war already started long ago.

And Chancellor Olaf Scholz knows he can’t afford to see Wolfsburg become Detroit. Citing Didier Eribon’s Retour à Reims and Hillbilly Elegy by US writer J.D. Vance, the chancellor often warns of the political consequences of rapid deindustrialization and the waning of the middle class. The question that is still unanswered, however, is whether Scholz realizes that to ensure that Germany remains a place that produces cars and not just the ads for them, he must do the opposite of what the nation’s car managers tell him to do. That is not a given in corporatist Germany.

In the past, as in the future, the EU’s fate remains tied to the fate of its car industry. Solving the triptych of protecting industrial jobs and capacity at home, while saving the climate and keeping the global trade order as intact as possible is the key challenge for Europe this decade. Macron’s initiative goes someway there. But Germany now has to join and further build on it. Let’s hope that the "Franco-German motor” will roar once more. And please enjoy this figure of speech while you can—your grandchildren will have no idea what a motor is.