Europe’s industrial nightmares are coming true
Gobs of government cash are unable to rouse Europe, with the Ukraine war and US-China competition still battering energy-intensive sectors
ARE the wheels coming off Europe’s bid to catch up to China and the US in critical industries?
Swedish electric-vehicle (EV) battery maker Northvolt is cutting jobs and selling assets amid slowing demand, just months after securing 912 million euros (S$1.3 billion) in subsidies to build a plant in Germany, rather than the US state of Nebraska.
Meanwhile, a planned Intel chip factory in Germany that was awarded 10 billion euros in subsidies has been delayed after the company decided to cut costs.
These investments were supposed to be geopolitical weapons to protect valuable supply chains and help achieve climate targets.
They now look more like political hot potatoes, with Sweden ruling out a rescue of Northvolt and German politicians demanding Intel’s subsidies be withdrawn or allocated elsewhere.
They also seem to be confirming the deeper fears of sceptics, after France and Germany accounted for over 500 billion euros in approved state aid in 2022.
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Gobs of government cash have not been able to rouse Europe from its industrial nightmare: The scars of the Ukraine war and US-China competition are still battering energy-intensive sectors such as chemicals, threatening jobs, as well as squeezing carmakers such as Volkswagen.
“Europe has no industrial policy,” Luca de Meo, the chief executive officer of carmaker Renault said.
Europe’s elites face some difficult choices – not least whether to keep throwing good money after bad in a sector such as batteries, where more than half of European projects are at risk of cancellation or delay, indicated transport lobby Transport & Environment.
The good news is there is at least an understanding that the outlook is bleak.
On a recent trip to Brussels, where the threatened closure of a local Audi plant has sparked protests, I was struck by how Mario Draghi’s recent report calling for more investment to overhaul Europe’s economy has sunk in as the policymaking framework for the next five years.
But political and national divides still run deep. France and Germany, united on the benefits of grooming mega-companies, are at odds on almost everything else, and their leaders are losing the trust of voters.
Smaller EU member-states fear the distortive effects of their bigger neighbours’ subsidies, designed to keep up with Washington and Beijing.
And with open season now declared on net-zero targets, including a combustion-engine ban by 2035, some frustrated investors and executives are quietly hoping politicians will quit meddling.
Instead of funnelling cash into a potential Solyndra – the solar firm that went bust despite state support – why not let US and China dominate in chips and batteries and let Europe stick to its strengths?
It is certainly true that the return of industrial policy merits some kind of reality check.
Subsidising a Tesla style giga-factory – a cutting-edge manufacturing facility across an area equivalent to scores of football fields – to the tune of US$1 million per job will not suddenly lift the share of manufacturing in a services-dominated economy such as France.
Nor will it make ramping up production any easier: In 2021, actual EU battery production was only 26 per cent of announced capacity, said the EU’s audit body.
When OpenAI’s Sam Altman boasted to Taiwan Semiconductor Manufacturing executives of his plan to splurge US$7 trillion on 36 chipmaking plants, they mocked him privately as a “podcasting bro”, reported The New York Times.
Perhaps Europe has become a bit of a “subsidy bro”, forgetting that cutting-edge manufacturing is risky and costs a lot of time and money.
Sometimes, comparative advantage has to win out: On solar panels, for example, Europe knows there is more to gain from importing them cheaply than trying to out-compete China.
Still, I am not convinced of the wisdom of giving up on industrial policy or a sector such as batteries, where Europe’s manufacturing weakness contrasts with strength in patents and innovation.
It can be penny-wise and pound foolish. Increased dependence on the US and China means faith in the security of global supply chains at a time when geopolitical conflicts are getting worse.
Giving up on a critical component of EVs might mean losing out on auto jobs, investments and productivity gains in the future. And it may be that Europe has a card to play in the next generation of battery tech after lithium-ion, where China’s dominance looks hard to dislodge.
Industrial policy can deliver failures such as Alitalia, but also winners like Airbus. It is never clear-cut.
The answer probably lies in a mix of approaches. One is to admit that not every company needs to be saved, and not every sector is strategic. There needs to be more competition and dynamism between companies to ensure that subsidies do not flow to just one champion or incumbent.
And when it comes to picking sectors deemed strategic, there needs to be more thought put into how those decisions get made; a European Darpa (the US agency researching breakthrough tech) would seem a wiser approach than asking a gaggle of politicians.
It certainly does not help that countries still think nationally rather than regionally: State aid remains very much a country-by-country phenomenon, not a continental one.
The scale of the problems facing Europe, though, with Germany giving up hope of achieving any growth this year, means a lot has to go right. If energy costs are a competitive disadvantage for the industry, that is a separate challenge to needing more spending on research and development.
Trade policy will also have to play a part in levelling the playing field for domestic industries, with an imminent decision due on China EV tariffs. All these will have to work alongside foreign policy in the race to secure raw materials, as the Centre for European Reform notes.
And if Europe is going to shift from an export-dependent model to a demand-driven one catering to its 450 million consumers, that will require looser monetary policy, a more integrated single market and a mindset shift in Berlin’s hostility to joint borrowing.
It turns out crafting industrial policy is really hard. Maybe even harder than making batteries. But it is still worth trying.
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