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[KH Explains] Hyundai Motor feels cost pinch of ‘French IRA’

Carmakers exporting EVs to France from their faraway home countries likely to face subsidy cuts under new carbon footprint-based rules

By Byun Hye-jin

Published : Sept. 11, 2023 - 14:56

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Hyundai Motor's Kona Electric SUV, its top-selling EV in Europe, is being assembled at the carmaker's production plant in Nosovice, Czech Republic. (Bloomberg) Hyundai Motor's Kona Electric SUV, its top-selling EV in Europe, is being assembled at the carmaker's production plant in Nosovice, Czech Republic. (Bloomberg)

Hyundai Motor Group, having already spent billions of dollars to respond to the US Inflation Reduction Act, is tackling another protectionist policy looming large in Europe, a crucial market for the carmaker’s extensive EV strategy.

The French government recently announced its new EV subsidy policy, which is based on measuring the carbon footprint throughout the whole process of car manufacturing from production to shipping. Carmakers importing EVs to France from their faraway home countries like Hyundai are highly likely to be hit hard by the new rules that take effect in June next year.

Korea’s related government agencies immediately expressed grave concerns, citing a possible violation of the Korea-EU free trade agreement that bans discriminatory treatment. But industry watchers here say there are not many options left for Hyundai when France seems determined to stop subsidizing vehicles made outside Europe.

Two trade lobby groups, the Korea International Trade Association and Korea Business Association Europe, submitted a complaint to the French government on Aug. 25, calling the new French EV subsidy plan a protectionist strategy aimed at taking on the US IRA.

“The French government’s sea freight carbon footprint was set 10 times stricter than the globally recognized requirements. It gives disadvantages to cars imported from faraway countries like Korea and disqualifies them from applying for EV tax credits,” the KITA said in the complaint.

The group stressed that more internationally accepted standards should be used to calculate the shipment data of carmakers.

The European Commission is scheduled to make a decision this month on whether the French government’s measures seem valid. But since they are aimed at non-EU countries, the commission is not likely to put brakes on the matter, the KITA said.

The French version of the IRA, unveiled on July 28, tracks carbon dioxide emissions during the processes of steel and aluminum manufacturing, car assembly and raw material transportation as well as battery production. If an EV fails to earn the minimum of 60 environment points, vehicle buyers are not eligible for the existing 5,000-euro ($5,357) EV subsidy.

A Hyundai official declined to comment on the matter due to the sensitivity of the issue. “The company is in talks with government agencies, including the Ministry of Trade, Industry and Energy, to come up with countermeasures by June next year.”

EV subsidies are essential for the carmaker to maintain its price competitiveness. Any cut in subsidies is directly linked to its sales.

Under its ambitious goal to expand EV production in Europe to take up 54 percent of the market there by 2030, the world’s third-largest carmaker has been ramping up business there. After surpassing 100,000 units in sales in 2021, its sales in Europe hit 143,460 units last year.

In France alone, Hyundai was ranked fifth in 2022, selling a total of 16,570 EVs, of which almost 70 percent -- or 10,048 vehicles -- were produced in Korea to be exported to France to enjoy the EV tax incentive.

Its best-selling EVs from the January to June period of this year include Hyundai’s Kona Electric and smaller affiliate Kia’s Niro EV and EV6.

Experts say the auto giant might stand alone in the prolonged negotiations with the French government, since other US and European carmakers are expected to see little impact from the new subsidy rules due to their transportation routes being shorter than those of their Asian rivals.

“Hyundai’s best bet would be asking for leniency in the CO2 requirement in shipment,” said Choi Jae-won, a chemistry professor at Gyeongsang National University. “It could argue that it’s a double standard to apply the latest EV subsidy restriction because it has been selling electric cars at reasonable prices in Europe by adding little in transportation fees to the price tags.”

Choi added that reducing the carbon emissions in the production of steel and aluminum -- key car parts materials -- will be challenging because they are mostly imported from resource-rich China.

“Hyundai should join hands with its battery partners that are building production facilities in Europe and ask their support in reducing CO2 emissions in the manufacturing process,” he said.

Currently, LG Energy Solution and Samsung SDI operate three battery cell production plants in Poland and Hungary, adjacent to France.

Lee Ho-geun, a car engineering professor at Daeduk University, added that Hyundai Motor Group might have to expedite setting up EV production lines within its European plants.

The company has committed to transforming its plant in the Czech Republic as the strategic base for electric cars last year, while considering setting up EV lines within Kia’s Slovakian plant.

“Another costly option would be building an electric car manufacturing plant in Europe, renewing its commitment to creating more jobs in France. They can ask for a longer grace period until the plant is completed,” Lee added.