China's clean car manufacturers find a European foothold in Hungary
Business
China’s growing investment in Hungary’s automotive industry has opened country up to rival players.
BUDAPEST (AFP) - Years of under-investment in electric vehicle technologies and supply chains have left European carmakers struggling to keep up with their Chinese competitors. But even as the EU debates putting up trade barriers against electric vehicles imported from China, Chinese automakers are investing hundreds of millions in setting up their very own European factories in Viktor Orban’s Hungary.
Europe’s borderlands are changing. In the city of Debrecen in the south of Hungary, a lithium-ion battery plant worth €7.3 billion is being built over a 221-hectare stretch of former farmland in the Southern Industrial Park special economic zone. The factory – Hungary’s largest greenfield investment project ever – is being built by Chinese manufacturer CATL, which controls nearly two-fifths of the world’s electric vehicle (EV) battery market. Once production starts in 2025, the 100-GWh plant will be the biggest EV battery producer in Europe.
As Chinese President Xi Jinping continues his three-day visit to Hungary, Europe’s carmakers are facing a fundamental dilemma: Having become utterly dependent on Chinese batteries to power their own sluggish shift away from the internal combustion engine, they stand to profit hugely from the Chinese gigafactory, which will supply Western companies including Volkswagon, BMW and Stellantis.
At the same time, though, China’s growing investment in Hungary’s automotive industry has opened the country up to rival players who may one day drive Europe’s own carmakers out of business. Chinese EV manufacturer BYD announced late last year that it was building its first European plant in the southern city of Szeged – a €500-million investment that will sprawl across some 300 hectares. BYD, whose European managing director announced Thursday is considering building a second European factory in 2025, is the first major Chinese carmaker to have set up a European production base. The company has said it wants to be the leading EV manufacturer in Europe by 2030.
Tamas Gerocs, a researcher and international adjunct at the State University of New York in Binghamton, said that BYD posed a direct challenge to Europe’s major automakers.
“The problem is that BYD has its own battery system, which the Germans don't have,” he said. “They're controlling their suppliers or their whole value chain in a much more advantageous way than the Germans do. And this is serious. It's not just about manufacturing batteries but it goes as far as the extractive end of the chain, to the mines. None of the German companies have direct access to lithium supply, for example – which most Chinese do.”
Agnes Szunomar, the head of the Institute of Global Studies at Budapest’s Corvinus University, said that creating production centres within the European Union would give China a strong base from which to launch its own high-quality EVs into Western markets.
“Chinese carmakers will definitely create competition for European carmakers,” she said. “Technologically they are at the same level, or on a better level, but in terms of price they are cheaper.”
Gerocs said that European carmakers were now struggling to make up for years of underinvestment in green technologies.
“Many of these German companies, they really made a lot of miscalculations about where to allocate their investment funds,” he said. “They were obviously sticking with these older combustion engines, diesel engines in particular, for too long. They hoped they could keep it in the market. And they under-invested in EV technology – and now it seems like they're going to be paying a price for that.”
GROWING DEPENDENCY
Since its wrenching transition to a market economy in the wake of state socialism’s collapse across central and eastern Europe, Hungary’s successive governments have relentlessly pursued a development model built on bringing foreign capital into its low-wage manufacturing sector. For three decades now, this has meant its automotive industry, which has long been dominated by German carmakers keen to shift their production to Europe’s periphery, being drawn to Hungary by generous taxpayer-funded subsidies for foreign investment.
These policies only intensified following the 2010 election of Viktor Orban’s right-wing Fidesz party in the aftermath of the global financial crisis. The spread of economic turmoil across the EU also served as a stark reminder of the risks of relying solely on Western European capital to fund Hungary’s development. Soon after his election, Orban began to promote what he called his “Eastern Opening” policy, building on his predecessors’ outreach to Asia to bring in multinational corporations from Japan, South Korea and, now, China.
Andrea Elteto, a senior research fellow at the Centre for Economic and Regional Studies’ Institute of World Economics, said that Orban’s government was spending hundreds of millions of euros in subsidies to attract foreign direct investment (FDI) into the automotive sector.
“The huge state aid and subsidies the Orban government gives to these companies – there is a kind of regional competition to attract those Chinese companies, and he offers so much help, state aid, taxpayers’ money that it seems like a very good offer,” she said.
The size of Budapest’s subsidies is substantial. To bring CATL’s battery plant to Debrecen, Orban promised the Chinese manufacturer some €800 million in tax incentives and infrastructure support – more than one-tenth of the total investment. And at 9 percent, Hungary’s corporate tax rate is the lowest across Europe. In return, Hungary hopes to surpass the US in electric battery production and rise to second place across the world – after China.
MOVING UP THE CHAIN
Gerocs said that the nationalist Orban’s embrace of foreign capital in targeted industries was part of a broader plan – so far unsuccessful – to pull the country further up the global value chain.
“They want to try to create a Hungarian industrial class, which is, you know, very minor,” he said. “It became almost extinct in the privatisation period in the 90s, within the broader framework of FDI dependency. So it's a kind of maneuvering in various ways. And they've been very friendly and attracting FDI in certain industries, mostly in the tradable sector, so like export industries, car makers, electronics, major exporters.”
Years of French, German and Italian investment in Hungary’s automotive industry seem to have done little to advance this aim, Gerocs said. Instead, an assembly-line approach to what now seem like dangerously outdated technologies has left the country’s manufacturing base exposed in the face of a global transition towards electric vehicles.
“This is a huge issue for these countries,” he said. “If they don't do something, if they have no strategy to adjust to this new situation and respond to these challenges which is clearly beyond their realm, then they’re going to have a shockwave sweeping through the industry and sweeping through these countries.”
But some are sceptical that building EV batteries will allow Hungary to climb up the value chain any more than building combustion engines did.
“One advantage could be the potential technological spillover effect but typically these companies are bringing assembly activity only – they’re not bringing research and development activity,” Szunomar said. “And it seems that the Chinese are choosing to follow in the footprints of the Germans and the French in this respect.”
BUILDING WALLS
Panicked by what it describes as China’s “overcapacity problem” in which preferential state treatment of domestic Chinese companies has flooded the world market with products that Western economies simply can’t compete with on price, the European Commission has already launched an investigation into “distorting” electric vehicle subsidies. The probe could lead to the EU imposing steeper tariffs on Chinese green technology to protect its own industries.
“Chinese electric vehicle companies are penetrating the EU market,” Szunomar said. “The EU knows that and fears the consequences, which is why they are already working on certain barriers and limits that would keep them out.”
But these tariffs, if they come into effect, would not touch Chinese electric vehicles made within EU borders, Elteto said. In this way, Chinese automakers’ investment in Hungary would not only give them greater access to the European market but shelter them from any protectionist measures the EU might put in place.
“I think the EU has woken up a bit late and I don’t know if it realises the extent of the Chinese, let’s call it invasion, in an EU country,” she said. “Or there is another possibility – that it realises it but let it go because of the German carmakers’ interest in having batteries.”
Gerocs said that European automakers’ dependence on Chinese batteries made it difficult for the bloc to present a united front against Chinese competitors.
“German companies have a very strong and direct exposure to that. They really rely on their Asian suppliers, battery suppliers in particular, and they are not able to come up with any viable alternatives as of now,” he said. “We see there is very fierce competition, both in the Chinese domestic market, and everyone's so scared of this coming over here to Europe and what's going to happen in the next couple of years. But at the same time, there is an interdependence. They still have to use this technology. They cannot just switch it off.”
The larger problem is Europe’s own stated commitment to an urgently needed reduction in carbon emissions in the face of the worsening climate crisis. Under the EU’s 2020 Green Deal, the bloc needs to phase out the sale of internal combustion engines in all new vehicles by 2035. Without continuing to benefit from Chinese-made EV batteries, Szunomar said, it is a target that Europe simply cannot reach.
“Meeting the climate targets is not possible without electric vehicles,” she said. “And electric vehicles are not running without batteries.”
