"Relaxation of Internal Combustion Engine Vehicle Regulations and Preference for European-Made Cars" — EU Defends Against Market Infiltration by Chinese Automotive Industry, Impacting Overseas Complete Vehicle Manufacturers

France and Germany pushing for further relaxation of EU internal combustion engine vehicle phase-out regulations
Acceleration of Chinese electric and hybrid vehicles' market infiltration in Europe, increased trade barriers
Increased burdens on other overseas automakers such as Tesla, Toyota, and Nissan

France and Germany are pushing for the European Union (EU) to ease regulations phasing out internal combustion engine vehicles. Amid the rapidly growing presence of Chinese-made electric and hybrid vehicles in the European market, the plan aims to reduce the transition burden on domestic vehicle manufacturers while strengthening EU production and procurement requirements to protect the industrial base. Additionally, Europe is accelerating the preparation of further countermeasures such as the Industrial Accelerator Act (IAA). These regulations are posing challenges not only to Chinese companies but also to many overseas vehicle manufacturers' European business strategies.

Discussions on easing internal combustion engine vehicle regulations by France and Germany

According to the Financial Times (FT) on the 13th (local time), French President Emmanuel Macron said on the 12th at the Paris Motor Show, "An agreement on EU automotive policy is imminent," and "We are finalizing an agreement with Germany to allow Europe to move forward." In these negotiations, Germany is demanding a relaxation of the 2030 emission reduction targets applied to car manufacturers, and in particular, is pursuing easing the EU's ban on sales of new internal combustion engine vehicles set to apply from 2035. The main point is to allow up to 10% of new car sales to be internal combustion engine vehicles after 2035. The agreement is also expected to exclude obligations to use low-carbon fuels or low-carbon materials in internal combustion engine vehicles.

France appears to be securing support through cooperation with Germany to focus public subsidies and procurement contracts in core technology fields such as electric vehicles and batteries on EU-based manufacturers. This measure aims to strengthen the European automotive supply chain and production base. However, changes to EU regulations cannot be made through agreements between only the two countries; amending related laws requires approval from the council involving EU member states and the European Parliament. Particularly, the expansion of allowed sales of new internal combustion engine vehicles significantly relaxes existing EU climate policy goals, so considerable controversy may arise during future discussions.

Chinese electric vehicles expanding influence in Europe

The market views these moves by European countries as a form of check against Chinese automotive companies. Over the past several years, Chinese companies have rapidly expanded their influence in the European automotive market, led by electric vehicles. According to the European Automobile Manufacturers Association (ACEA), 20% of pure electric vehicles sold in the EU last year were manufactured in China. Market researcher JATO Dynamics also reported that the market share of Chinese automotive brands in Europe rose from 2.7% in the first half of 2024 to 5.1% in the first half of last year, with sales increasing by 91% during the same period.

The EU has consistently erected trade barriers to curb this rapid rise of China. Since 2023, the EU has conducted an anti-subsidy investigation on Chinese electric vehicles for about a year, and in July 2024, imposed provisional anti-dumping duties on Chinese EVs, finding that Chinese government subsidies distorted competition in the internal market. This was the first large-scale trade sanction on Chinese electric vehicles. Subsequently, in October of the same year, the EU finalized, with member state approval, additional anti-dumping duties of up to 35.3% per company on Chinese-made electric vehicles. Specifically, BYD faced a 17.0% duty, Geely 18.8%, Shanghai Automotive Industry Corporation (SAIC) 35.3%, and Tesla vehicles produced at the Shanghai plant were subject to a 7.8% tariff. These tariffs are added on top of the existing 10% import tariff on automobiles, applied from October 30, 2024, for a duration of five years.

Strong hybrid vehicle offensive

As EU trade barriers increased, China expanded sales of hybrid vehicles, which have relatively lower tariff burdens, penetrating the local market. According to China's General Administration of Customs, exports of hybrid vehicles from China to the 27 EU member states totaled $7.72 billion in the first half of this year, three times the $2.57 billion during the same period last year. Compared to the annual export value of $869 million in 2021, this is about nine times larger. The FT also analyzed that Chinese automakers' market share in the EU plug-in hybrid market jumped from 2% in 2024 to 25% in the first half of this year.

In response, the European Commission asked China to voluntarily reduce exports of hybrid vehicles to Europe and lower market share, but China refused. After continued conflicts, the two sides recently agreed to cap annual imports of Chinese hybrid vehicles at 350,000 units. This measure is expected to take effect as early as early December, with the annual allowed volume increasing by 6% each year. Furthermore, the import cap applied to China will not be lower than caps applied to other exporting countries.

Table 1. EU countermeasures against Chinese-made automobiles

Tesla faces European regulations

Industry attention focuses on that these European moves to protect domestic industries are affecting not only Chinese companies but also foreign automakers overall. A representative case is American electric vehicle manufacturer Tesla. Tesla recently changed the name of its autonomous driving technology in Europe from 'Full Self-Driving Supervised (FSD)' to 'Tesla Assisted Driving.' This was a response to Germany's Federal Ministry of Transport's statement on the 6th that the FSD designation could cause misunderstandings about the actual technological level. German authorities pointed out that the system is not a fully autonomous driving technology that performs all driving tasks, but a driver assistance system supporting some driving tasks such as acceleration, braking, and steering. Drivers must continuously monitor the surroundings and be able to take direct control of the vehicle immediately if necessary during system operation.

Regulatory barriers were prominent even during the process of introducing this driver assistance system across the EU. Earlier, after about 18 months of safety testing, Tesla received FSD system approval in April from the Dutch vehicle certification authority (RDW), but this did not immediately lead to commercial authorization throughout the EU. In the EU, when new vehicle technologies do not fully comply with existing safety regulations, a separate exemption approval process must be followed under Article 39 of the EU type-approval regulation (EU 2018/858). For Tesla to offer this technology throughout the EU, the Dutch authorities must submit an application to the European Commission for EU-wide approval, followed by a vote in a relevant committee comprising member states.

Japanese automakers also on alert

Japanese automakers remain concerned about the EU's proposed Industrial Accelerator Act (IAA). This bill focuses on protecting production bases of European companies and expanding demand for European-made products in response to low-cost competition from non-EU countries such as China. It targets key strategic industries including automotive, steel, cement, aluminum, and batteries. In the automotive sector, the bill suggests applying EU production and parts procurement requirements to electric and plug-in hybrid vehicles receiving public procurement and some subsidies and tax benefits. According to the Commission's draft, such vehicles must generally be finally assembled within the EU, and the local procurement ratio of vehicle parts, excluding batteries, must exceed 70% based on retail price. Separate local production requirements have also been set for battery cells and key drive components.

Toyota, a leading Japanese automaker, produced approximately 80% of its vehicles sold in Europe last year within the European region, but this figure includes production in the UK and Turkey, which are non-EU countries. On June 6, Yoshihiro Nakata, CEO of Toyota Europe, urged that key partner countries such as the UK, Japan, and Turkey be included in the IAA’s list of recognized EU-origin areas. Nissan faces a similar issue. According to a March report by The Guardian, Nissan reportedly warned the UK government that if the UK is excluded from the IAA's EU-origin recognition scope, the Sunderland plant's closure might need to be considered. The Sunderland plant directly employs about 6,000 people and is the UK's largest automotive production facility with an annual capacity of up to 600,000 vehicles.