EU can't go green without China

chinese made solar panels, wind turbines, and electric cars are under scrutiny in the EU. but the thruth is that europe can’t meet its climate goals without china.

There is a real fear in among European wind turbine producers that the sector will suffer the same fate as the European solar industry due to competition from China. So much that Christian Bruch, the CEO of Siemens Energy, one of the largest energy companies in Europe, is now urging the EU to impose regulation to restrict Chinese competitors in the market.

Not so long ago, Chinese companies where copy cats. Today, many of them are world leaders in technology. When I visit Chinese solar manufacturers like Trinar Solar, I am not allowed to take photos inside the factory as they are afraid to get copied in Europe!

He told the South China Morning Post that “if you don’t act it will go”, meaning to the same direction as the solar industry which was wiped out by a wave of bankruptcies a decade ago. Christian Buch is urging the EU to establish a combination of either quota or qualitative criteria such as where the research and development took place and whether the materials used were recyclable.

“We don’t ask to fence off the European market but to install principles to create a level playing field, which today is not there with Chinese suppliers”, he told the Hong Kong based newspaper.

Existential threat

This is just the latest outcry from European industry naming China as an existential threat. A few months ago, the EU Commission announced that it will investigate whether Chinese electric car producers received illegal subsidies as new brands like BYD, Nio and Xpeng are entering the EU market.

Elon Musk, the founder of Tesla, recently told international media that he believes Chinese electric car producers will have significant success outside China. Tesla is already feeling the heat from local competition in China, the largest car market in the world.

“Frankly, I think, if there are not trade barriers established, they will pretty much demolish most other companies in the world,” Musk said.

A brand new electric car maker in Jiangsu Province in Eastern China that I visited in 2021, recording this video from the bus. Recently HiPhi won a cold weather test in Norway, but also started making headlines because of economic trouble as consolidation has become a reality in China. Not all the new Chinese brands will survive.

One of the current challenges is that there is a huge overcapacity problem in China. Simply, because a lot of the lending that used to go into real estate development has been channeled into green manufacturing which created a huge boom in capacity in recent years.

Overcapacity problem

China is producing a lot more electric cars, batteries, solar panels, and heat pumps than the market can absorb, putting additional pressure on prices.

Cheaper clean tech products should be good news for the green transition, but it’s not. At least not for European industry. A recent oversupply of Chinese made solar modules, stocked up in European ports and warehouses, has resulted in fierce competition in Europe, causing the European Solar Manufacturing Council to send a letter to the EU Commission on February 2. The council is urging politicians to take acute action to protect around 80 European solar industry companies.

“If policy makers don’t take immediate actions to safeguard the solar PV module producers in the EU, relocating abroad or bankruptcy are the only options”, the letter said.

China controls supply chains

According to Politico EU produced only 3 percent of the panels it installed in 2023, which means that Europe is still very dependent on Chinese supply chains. China sits on more than 80 percent of the world’s solar panel manufacturing, and Chinese companies control many of the critical minerals and components needed for solar manufacturing.

Strong voices in the EU want this to change in near future. EU legislators have just agreed on the Net-Zero Industry Act which set a clear goal to produce 40 percent of technologies like solar panels, wind turbines, heat pumps and electric batteries in Europe by 2030. Obviously, the plan is a response to the US Inflation Reduction Act which has made it very attractive to invest in America. But it’s also a part of the plan to become less dependent on Chinese suppliers.

The truth is that EU is very dependent on China for imports of everything related to the green transition, including critical minerals, components, and core technology. According to industry experts it will take at least 10-15 years to build new supply chains on European soil. And even if it’s possible, large part of the new manufacturing capacity will probably be owned by Chinese companies, like we have seen in Vietnam and in Mexico.

*Source: Science Direct*
China controls the majority of the global production of rare earth minerals which are crucial in manufacturing technology products like solar panels and electric cars. The EU currently imports around 98 percent of rare earth minerals from China.

Derisking is difficult

So far “derisking from China has resulted in longer, less transparent, and more expensive supply chains. That is bad news for the green transition.

According to pan-European media Euractiv the EU Commission has cautioned against import restrictions on China made solar panels as this could impede the EU’s goal to increase solar generation capacity to 600 gigawatts by 2030, up from 263 GW today.

Also, it will be hard for EU member states to agree on such trade restrictions, because Hungary, a good friend of China, is likely to veto over anything that goes against Chinese interest. China has been the largest foreign investor in Hungary since 2020, and Chinese companies like BYD, the world’s largest producer of electric vehicles, and CATL, the world’s largest producer of batteries, are currently constructing factories in Hungary.

Investigating whether Chinese companies received subsidies is a waste of valuable time. Everyone who understands the Chinese market will know that Chinese companies in these strategic sectors received lots of subsidies from the Chinese government, and it’s no secret. It is mentioned in multiple official plans for China’s green transition and development.

Subsidies are not the only reason Chinese companies can offer cheap products. Another important factor is the fact that they are born in the largest market in the world, meaning they have massive scale and therefore gravity in the global market. This is the main reason for the price reductions in solar panels and battery prices in recent years.

Risk of trade war

Make no mistake, if the EU impose trade restrictions clearly targeted at Chinese companies, the Chinese government will strike back. The cost could be high for some of Europe’s largest companies who have invested billions in the Chinese market.

This is a huge dilemma facing the EU, and it will not go away anytime soon as “green manufacturing” is one of China’s new economic drivers. The dilemma boils down to the following choice:

Should the EU protect European industry against “unfair competition” by imposing restrictions on Chinese competitors that will slow down the green transition and make it harder and more expensive to fulfill climate goals?

Or speed up the green transition benefitting from cheaper technologies and products made in China, while at the same time trying to reduce long term dependency on China?

The honest answer is that for now, the EU can’t go green without China.