The Diplomat author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into U.S. Asia policy. This conversation with Dr. Max J. Zenglein ̶ chief economist at the Mercator Institute for China Studies (MERICS) in Berlin and co-author of MERICS-Rhodium Group Report “EV Battery Investment Cushion Drop to Decade Low: Chinese FDI in Europe 2022 Update” – is the 372nd in “The Trans-Pacific View Insight Series.”
Identify the factors behind the decline of Chinese investment in Europe.
Chinese investors faced a combination of international and domestic factors that were not very conducive for companies to venture abroad. Economic uncertainty was paired with rising geopolitical risks. A major factor in all this was Russia’s invasion of Ukraine. The slowdown in Chinese investment was in line with a global trend in which companies opted to play it safe and assess the situation amid a quickly changing investment environment.
Domestically the Chinese government’s adherence to its “zero COVID” policy including lockdowns of the financial center in Shanghai in the spring and restrictions on travel hindered cross-border deal-making. Adding to the already strained global economic outlook, the strict measures further weighed down the economy, with GDP growth stalling in the first half of the year, expanding by 0.4 percent, and only recovering to 3 percent for the full year. In addition, companies had to also navigate the Chinese government’s crackdown on the tech sector on the one side, and stricter investment screening in the EU on the other side.
But despite the low Chinese investment number in Europe, this needs to be seen in comparison. In a very challenging investment environment Chinese companies were keen to explore opportunities, and Europe remained relatively open.
Explain why China’s greenfield investment in Europe has increased by 53 percent.
The structure of Chinese investments in Europe has been turned upside down. While M&A deals have plummeted, greenfield investment has surged. Seven of the top 10 investments are now greenfield investments. It is the result of a handful of large-scale projects concentrated in the automotive sector and to a lesser degree data centers. There are currently five battery plant projects, with most of them being billion euro projects. The massive 7.6 billion euro investment by CATL in a factory in Hungary announced in the summer of last year gives the trend another strong push.
Greenfield investments in manufacturing tend to be multiyear endeavors to set up factories and make them operational. This means that even if no new projects are announced in 2023, we will see continued investment inflow as part of the announced projects. But in order to keep up this trend the number of greenfield investments would need to increase or risk drying up once the existing projects are completed.
Why has Europe become a part of China’s greenfield expansion?
The investments in battery plants are part of a global push by Chinese companies in the EV value chain. It is also a reflection of the competitiveness of Chinese companies and their ambition to capture more market share abroad. Europe is the second largest EV market after China. As part of the EU’s decarbonization efforts, the sale of combustion engine cars will be banned by 2035. The automotive market is undergoing major shifts while at the same time, Europe lacks major battery players of its own. Chinese companies are trying to position themselves in the market and have announced a total of $17.5 billion since 2018. By 2030 we estimate that 30 percent of Europe’s capacity for batteries will be supplied by Chinese companies.
This approach helps them save on tariffs and transport costs while mitigating the risks of political opposition. Chinese manufacturers can benefit from producing in Europe instead of exporting to it. For example, in 2022 Stellantis CEO Carlos Tavares advocated for increased tariffs on vehicles made in China, reminiscent of resistance faced by Japanese automakers in the 1980s when entering the European market. To avoid tariffs and address political concerns, Japanese and later Korean carmakers invested in local production.
Which European countries are targets of Chinese investment and why?
Chinese investment in Europe continues to be concentrated, with 88 percent being directed to only four countries. In 2022 the “big three” economies, i.e., Germany, France, and the U.K., collectively received 68 percent of China’s FDI in the region. Notably, this share was higher than the average of 56 percent received by these countries in the preceding decade. These investments were complemented by the massive CATL investment in Hungary. All four countries received significant greenfield investments from Chinese battery manufacturers, along with being the primary destinations for M&A activities in Europe throughout the year.
This is part of a pattern we have been observing over the past years where usually the big three economies receive the bulk of investment plus another country based on a larger deal. Given the current low levels of Chinese investment in Europe, a single large transaction has the potential to create a short-term increase in another region. While it was Hungary this year, single deals in the Netherlands and Poland had similar effects in previous years.
Analyze how and why the EU is scrutinizing Chinese investments and acquisitions of strategic assets.
European countries have strengthened their investment review mechanisms, with almost all member states establishing such mechanisms. In 2022 the number of publicly disclosed reviews of Chinese investments increased from 11 to 16. This increase can be attributed to expanded regulations leading to more screening, Chinese investors showing greater interest in strategic sectors due to barriers in the U.S. or Japan, and European governments becoming more transparent about the review process, which was previously kept confidential.
Most of the publicly known cases of reviewed Chinese investments focused on critical infrastructure and strategic dual-use technologies. Approximately one-third of the screenings involved planned acquisitions of semiconductor firms, a sector considered highly strategic by both Chinese and European governments. With recent U.S. export controls on semiconductor equipment, China may be more inclined to invest in European technology providers, given the opportunity. It is also worth noting that European screening mechanisms have been reviewing investments by Chinese-owned European firms, such as Syngenta.