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New industrial policies and the CEE automotive industry: the “lesser of two evils” vote ahead?

The European Union and Central and Eastern Europe (CEE) are about to enter a slippery slope of national industrial policies. Global green automotive transformation and its perceived negative impacts on the CEE industry might surprise some and be a boiling frog story to others.

As I argue in this piece, although such policies, including the US Inflation Reduction Act (IRA), have been a wake-up call to many EU policymakers, the issue is deep-rooted.

One must consider tailor-made industrial strategies for the CEE region to keep its industrial heart beating. How hard should the CEE stakeholders (of EU Member States including Czechia, Hungary, Poland, Romania, Slovakia and Slovenia) fight to keep the automotive industry at the manufacturing forefront?

Leadership change

In the last twenty years, the CEE region greatly benefitted from becoming an “integrated periphery” of the automotive industry. Foreign direct investment (FDI) boosters increased its competitiveness and EU Single Market integration.

Blindsided by the relative success, the bloc paid little attention to see the automotive technological frontier pushed forward by a too-visible hand of Chinese institutions. The global value chains started shifting.

The environmental policies and directed technical change towards electromobility now seem like a bitter pill for many EU economies as they force “US and us” all to consider new industrial policies.

Industrial policies: all around us

The EU has been reviving the idea of industrial policy since at least the global financial crisis (GFC). However, industrial policy is about more than just direct cash injection or import tariffs, as many refer to.

The new OECD framework points to key industrial interventions, from access to cheap electricity and labour force, tax credits and subsidies and public procurement, to below-market loans and guarantees. Albeit invisible to some, industrial policies are all around us.

According to Global Trade Alert, the world has seen an upsurge in such “harmful” interventions in the automotive industry since the GFC, increasing much faster than any liberalizing rules. Unsurprisingly, China and the US were leading these new interventions, which may harm other countries.

The EU is no exception, as it’s also been intervening in the automotive industry by, for example, unilateral state intervention to support the sector at home. What’s more, new EU programs, including the Important Projects of Common European Interest (IPCEI), prepared a loophole to the tight state aid rules and EU Competition policy.

According to a wiiw report, IPCEI and Horizon 2020 programs were not discriminative against the CEE region. However, they went hand in hand with the economic strength of the EU countries, cementing the Franco-German industrial dominance.

“Shift happens”

The critical economic juncture is upon us. We all know from the past that the EU can easily miss wake-up calls and history can repeat itself, for example, in the solar industry then and wind industry now.

There are many blurbs around the IRA’s mercantilist form, but too little discussion about the impacts that the upcoming “China shock” and new industrial policies can have on the EU Single Market and EU Competition policy.

Not only are the Franco-German policymakers advocating strong industrial policies, albeit from different standpoints, but they also welcome the majority of Chinese FDIs in the EU. Moreover, the German automotive players happily invest in China and depend heavily on the Chinese market.

Without strong race-to-the-bottom policies, the CEE region could attract fewer FDIs than before. But if it does attract some, the assembly plants might leave the region with matured technologies’ production only.

Germany and France will be much hungrier for big investments and offer big money for building complex value chains – from R&D to material recycling. Any loosening of state aid rules in a beggar-thy-neighbour scenario will make things worse for the CEE region in the face of deep-pocketed countries.

CEEing the future

While the position of CEE in electrified supply chains hasn’t been that bad, it still reveals a mixed picture. On the one hand, the CEE region attracted significant investments in battery production in Poland and Hungary. On the other hand, it lost ground compared to Western Europe in electric vehicle production and planned battery plants.

Moreover, to achieve battery success, Hungary has been welcoming the Chinese FDIs. It is currently the only CEE country with open arms to such geopolitically risky investments. Other CEE countries will probably not join the Chinese production tandem so easily or happily and instead cooperate with other Asian producers.

From a longer-term perspective, the question remains open about assessing the “national” element of production. The EU Net Zero Industry Act aims to match 90 per cent of EU battery demand by local production in 2030. If Chinese subsidiaries delivered one-third of the local production in 2030, would that still satisfy the “Union’s battery manufacturers” condition?

Nevertheless, with fewer FDIs coming from the West, Asian and Chinese investments seem reasonable for the CEE region in the short- and medium-term if it cannot scale up other activities outside the production paradigm.

Devil’s advocate

However, will the sole production task outsourced in CEE be the best option for the region? The sad news is that even battery production might not amount to anything like cutting-edge technology to boost local economies unless they attract high value-added pre-production and post-production activities.

Then a devil’s advocate question would be: does CEE need to fight so hard to keep the “high employment” and “automotive-led” paradigms thanks to electric vehicles and battery assembly? Also, production reshoring and the race for EU and national champions might come at some cost to all taxpayers.

The CEE region has highly complex green economies with excellent export potential in many other sectors. Shouldn’t the bloc focus on niche areas of emerging industries, diversify and scale up, rather than race to the bottom for capital-intensive but production-only projects?

Building top-notch specialised and competitive companies across various emerging technologies could do well if tailor-made industrial strategies focus on the potential to leverage.

For example, Czechia ranks number 7th globally and first in CEE in the green complexity index, which measures how competitively countries export “green, technologically sophisticated products”.

The task is to pursue the green industrial potential through well-designed policies, not only national champion-picking in the automotive and battery industries. If the legacy-behemoth automotive players in Germany ring the alarm bells, shouldn’t the CEE region prepare, too?

Way forward

Batteries are the future of the automotive industry and energy systems. As such, this technology and its leadership have geopolitical and security consequences.

Within-EU rivalry could cost the EU much of its future leadership position. We all should acknowledge that “shift happens” and try to update our common EU Industrial policy. Yet, the newly proposed Strategic Technologies for Europe Platform fund (STEP) brings little extra cash into green technologies and some countries may aim higher.

For the CEE region, the evil lies on both sides. Be it building the national champions through strong industrial policies (where CEE cannot counter the fiscal room of the Western bloc) or relying on foreign emerging ones (where the business-as-usual leaves CEE with production-only activities).

Hopefully, the CEE region will find its way between transforming the automotive industry and getting the most from its wide range of activities across other green frontier products.

The article only expresses the author’s opinions, not necessarily those of the German Marshall Fund of the United States or Škoda Auto University.

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