[KH Explains] How should Korea adjust its trade defenses against Chinese EVs?

Korea, home of the world’s third-largest automaker, Hyundai Motor Group, finds itself at a critical juncture as the rise of Chinese-made electric vehicles in the domestic market poses a complex challenge: how to protect national interests while embracing the inevitable shift toward electrification.

Unlike the United States and the European Union, which perceive Chinese EVs as a grave security threat, experts argue Korea should adopt a more nuanced regulatory strategy. This involves refining its regulations not just to fend off Chinese competition but to leverage it as catalysts for enhancing the competitiveness of the local automakers.

Made in China, driven in Korea

Once known primarily for low-end trucks and buses, the Chinese auto industry has shifted gears, exporting increasingly sophisticated passenger cars to global markets, including Korea.

Despite initial consumer skepticism towards Chinese-made cars in Korea, perceptions have been changing, driven by competitive pricing and quality improvements. Tesla’s Model Y, manufactured in Shanghai and equipped with CATL batteries, exemplifies this shift, having sold over 15,000 units last year in Korea alone. The Polestar 2, another China-manufactured EV, became the second top-selling imported EV model in Korea last year, with 2,794 units sold.

Furthermore, BYD, the world's largest EV maker, is not only entering the Korean market this year but also reportedly exploring the establishment of a local manufacturing plant in North Chungcheong Province.

Chinese EVs charge global tensions

The burgeoning presence of Chinese EVs has ignited significant security and economic concerns in Western nations. The EU, wary of market distortions from Chinese state subsidies, is investigating imposing heavy duties, similar to the solar panel disputes back in 2012.

In the US, the focus extends to national security, with the Department of Commerce scrutinizing the implications of foreign-controlled elements within the connected vehicles sector -- vehicles that communicate externally via integrated network connections, with a focus on Chinese EVs.

Korea, however, does not currently see Chinese EVs as an outright market or national threat as it has greater reliance on trade with China, making draconian countermeasures less feasible. It also doesn't share the same deep security fears about China as its Western allies.

Therefore, a more prominent issue is a ballooning auto trade deficit. Following the deployment of the THAAD missile system in 2016 and subsequent Chinese boycotts, Korea's auto trade deficit with China has worsened, reaching $564.2 million in 2023 for EVs, up from $156.49 million in 2022. Discriminatory subsidy practices by the Chinese government have also hampered Korean battery manufacturers.

“From 2016 to 2019, Korean battery manufacturers in China missed out on EV subsidies due to the Chinese government's protectionist policies, giving CATL a significant advantage to becoming the global market leader,” said Lee Wang-hwi, a professor and international trade expert from Ajou University.

According to him, Korea faces additional challenges from the US, which, upon concluding its connected vehicle investigation, will likely urge allies to adopt similar security measures and technical standards. He warned, "As Korea exported over 1 million vehicles to the US last year, noncompliance could severely restrict our access to the US market."

Regulatory tightrope between allies and markets

Still, experts caution against Korea adopting a regulatory stance towards Chinese EVs that mirrors the US approach, where strict policies like the Inflation Reduction Act discriminated against Korean-made EVs and batteries. They advocate for a more nuanced approach that supports the domestic EV market without resorting to outright discrimination against Chinese imports.

"Implementing stringent manufacturing origin requirements for subsidies might provoke a backlash from US and European firms exporting China-manufactured EVs," said Lee.

Yet, Hana Securities analyst Han Su-jin, who covers the Chinese automotive and battery sectors, advises against simply increasing subsidies for EVs equipped with Korean batteries. She notes that the current Korean Ministry of Environment's subsidy criteria, which emphasize fuel efficiency and performance over country of origin, align pretty well with broader industry goals.

The most recent revision of these subsidies particularly impacts EVs with lower-performance lithium iron phosphate batteries, like those in Tesla’s Model Y, while favoring high-performance, recyclable batteries used in domestic brands such as Hyundai and Kia.

“The newest subsidy revision might be bad news for consumers, but it’s in the right direction. It's actually in line with practices where the Chinese government once varied their subsidies by driving range and battery type -- although their thresholds were lower, allowing broader support for LFP batteries,” she said.

She added, “Such policy not only filters out subpar technology but also pushes domestic brands to innovate. The regulators should continue to work on fine-tuning the exact criteria as technology improves.”

In addition to incentives, Han suggested implementing a regulatory framework centered on data security to manage the risks associated with imported EVs. She proposes that all Chinese-made EVs should be required to establish local data centers within South Korea. This mandate would ensure that all operational data generated by these vehicles is stored and processed domestically, safeguarding against potential security breaches.

This mirrors China’s own requirements for foreign automakers like Tesla, which established a local data center following concerns about data privacy.

“But it's indeed questionable whether Korea can wield the same economic clout as China does in its dealings with major players like Tesla for investments as big as data centers," she said.