Just as China’s electric vehicle (EV) market has started to boom, it has been faced with a major obstacle. The European Union (EU) has announced an investigation into the subsidies that have been extended to Chinese EV producers. It will determine whether or not the European Commission will impose penalizing tariffs designed to protect EU automakers from the flood of EV imports coming out of China. Reuters reports that Chinese EV producers have benefited significantly from state subsidies, according to the EU. This news has already been problematic for China’s top automakers, including Nio (NYSE:NIO). But while NIO stock and its peers trek downward, questions abound as to what this will mean for China’s EV market as a whole.
The Road Ahead for NIO Stock and its Rivals
This development has ended the winning streak that carried NIO stock through last week. As of this writing, it is down more than 3% for the day and isn’t showing signs of a rebound. Most Chinese EV stocks are struggling today, though. Things aren’t looking much better for BYD Company (OTCMKTS: BYDDY). China’s leading EV producer is also down 3%, as is XPeng (NYSE:XPEV). The only Chinese EV stock that seems likely to pull back into the green is Li Auto (NASDAQ:LI), down less than 1% after falling this morning.
While details are still emerging as to the investigation, at present, the outlook for Chinese EV producers looks questionable at best. If the EU opts to impose the punitive tariffs it is weighing, it could certainly pose negative consequences. The global presence of the country’s automakers could be compromised. This is likely to compel some investors to pull back before NIO stock and its peers fall even further. As TipRanks reports:
“The European Commission conducts an anti-subsidy investigation after it receives a complaint from the EU industry with’prima facie evidence that a country is subsidizing companies exporting a particular product to the EU and that this is causing injury to the EU industry.’ Following the investigation, the European Commission must impose any recommended measures within 13 months of the start of the investigation.”
While this investigation may not yield any concrete results for some time, it will likely cast uncertainty over the sector until it does. That doesn’t bode well for Chinese EV stocks. The timing especially isn’t opportune for Nio, which is preparing to release its highly anticipated EC6 vehicle on Sept. 15. This announcement could dampen any enthusiasm that might have otherwise pushed shares up.
Why It Matters
This isn’t the first time that tensions have risen between China and the EU this year. A few months ago, European leaders considered a ban on using Chinese telecom giant Huawei to build 5G networks. China did not respond well to this decision, issuing harsh criticisms of the EU. The EV subsidy investigation is likely to lead to further friction between the two global economies.
The fact that the European Commission is conducting an investigation based on prima facie evidence should worry investors. The cabinet government clearly sees just cause for looking into the matter. If it finds evidence of what it alleges, tariffs will likely be implemented, pushing Chinese EV stocks down significantly.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
