The EU pushes IAA to revive "European manufacturing." How can Chinese companies find a breakthrough when entering the European market?

AI Question · How can Chinese companies gain a foothold in the European Union through greenfield investment?

The European Union has recently rolled out the Industrial Acceleration Act (IAA), seeking to revive “European manufacturing.” As part of this, the EU has proposed a set of stringent restrictive requirements for foreign firms’ investments.

Under the IAA, when investing in four major sectors—batteries, electric vehicles, solar photovoltaics, and critical raw materials—foreign companies must face restriction clauses such as mandatory technology transfer, foreign equity ratio limits, requirements on local product content, and targets for the proportion of local employees. Meanwhile, these restrictions are precisely aimed at third-country investors whose global capacity share in the aforementioned sectors exceeds 40%. The bill also explicitly calls for “Made in the EU first” in the area of public procurement.

A spokesperson for the Ministry of Commerce of China said in response that these practices constitute serious investment barriers and institutional discrimination, and are suspected of violating the most-favored-nation treatment principle, further increasing uncertainty for Chinese companies investing in the EU. China expresses serious concern. “China will closely follow the relevant legislative process, carefully assess the impact on China’s interests, and will resolutely safeguard the lawful and legitimate rights and interests of Chinese companies,” the spokesperson said.

Zhao Yongsheng, a researcher at the Institute of National Foreign Opening Studies, University of International Business and Economics, who has just returned from academic research in the EU, and director of the China-France Center for Social Governance Studies at Zhejiang University of Science and Technology, told a reporter from First Financial that the IAA, in essence, falls within the category of trade protectionism. He believes the deep logic behind the EU’s introduction of such restrictive measures is that global trade currently shows a “Darwinian competition” dynamic—winner and loser determined purely by strength, cost advantages, extremely high cost performance, and high-quality services. This kind of disruption is a major blow to Europe’s traditional markets, even creating a certain degree of “destructive” impact.

Based on this, Zhao Yongsheng suggests that, when expanding European markets amid an increasingly complex external environment, Chinese companies should combine with actual circumstances and actively seek deep cooperation with local enterprises.

Behind protectionist conduct

Judging from historical data, the decline of European-style manufacturing has long been evident. Wood Mackenzie’s data shows that from 2000 to 2024, due to sustained pressure from low-cost imported products in core areas such as steel, automobiles, and chemicals, Europe’s share of global gross domestic product (GDP) attributable to manufacturing fell from 17.4% to 14.3%.

Against this backdrop, the European Commission is trying to use the IAA to reverse the situation. The bill sets strict “Made in the EU” content and low-carbon standards for products delivered through public procurement or receiving subsidies. These so-called “strategic sectors” not only cover batteries, solar, and wind energy, but also include hydrogen-energy manufacturing and nuclear power plants.

Taking the photovoltaic sector as an example, the bill requires that its inverters and battery cells (or equivalent components) achieve European localization manufacturing within three years. In the electric vehicle sector, vehicles procured through public procurement must be assembled within the EU, and after six months from the date the law takes effect, the local content ratio of parts—excluding batteries—must reach 70%. Publicly procured aluminum must meet requirements that 25% is for European manufacturing and low-carbon. Steel does not have a “Made in the EU” requirement, but it must meet requirements that 25% is for low-carbon products.

Zhao Yongsheng analyzed that the core purpose of such policies introduced by the EU is to provide a window of protection for domestic companies. During this stage, they attempt to carve out survival space by building tariff, technology, or other non-tariff barriers.

Wood Mackenzie’s analysis shows that although the IAA aims to curb the decline of manufacturing, it still falls short in comprehensiveness and binding force if the goal is to raise manufacturing’s share of GDP to 20% by 2035. The institution believes the IAA’s core contradiction lies in the overly broad definition of “Made in the EU,” which encompasses any country that has signed a free trade agreement (FTA) with the EU. In addition, the bill’s “cost exemption threshold” may also reduce its effectiveness. The bill stipulates that when the price of European-made substitute products is too high, local content requirements are often shifted from “mandatory” to “voluntary.” For example, in the hydrogen-energy area, the exemption clause says that if EU equipment costs are 20% higher than substitutes, exceptions are allowed.

More risky still is the IAA’s three-year implementation lag. Wood Mackenzie senior analyst James Willoughby said that in ultra-fast-iterating areas such as photovoltaics and batteries, this time gap could cause Europe to fall one technology cycle behind China by 2030, creating an awkward situation of “using yesterday’s capacity to meet tomorrow’s market.”

A spokesperson for the Ministry of Commerce said that China believes the European side, on the pretext of developing relevant EU industries and promoting green transformation, is building walls and setting up barriers and engaging in protectionism. Not only is this counterproductive, but it will also undermine rules, disrupt fair competition, and throw global production and supply chains into instability. “Practice has proved that protectionism cannot enhance competitiveness; openness and cooperation are the right path to development. China and the EU are important economic and trade partners with broad common interests and positive cooperation outcomes in addressing climate change and promoting green transformation. We urge the European side to take the lead in complying with WTO rules, return to a path of fair, transparent, and non-discriminatory cooperation as soon as possible, and not go further and further down the road of undermining rules and protectionism,” the spokesperson said.

Stefan Šipka, head of the “European Sustainable Prosperity” project at the European Policy Centre (EPC), also said: “Nothing but the IAA can’t solve the underlying reasons for Europe’s industrial stagnation, including high energy costs, fragmented financial markets, and an aging population.”

How to go deeper and make it real

For Chinese companies that are deeply focused on the European market, compliance burdens are becoming increasingly heavy. According to the EU-China Chamber of Commerce’s annual flagship report, 81% of surveyed companies believe that uncertainty in the EU’s business environment has increased. With the tightening of review mechanisms, 43% of China-EU enterprises have paused or adjusted their investment plans. 63% of surveyed companies said their business has been directly or indirectly affected by the Foreign Subsidies Regulation (FSR).

In response, Ye Qingqing, China country business director at Ebury, a UK cross-border payments company, told a reporter that Europe is strengthening protection of local industries and manufacturing through various means. However, although compliance pressure objectively exists, Chinese companies’ investment in Europe has shown a clear trend toward “localization”—companies are no longer just exporting products; instead, they choose to take root in Europe and carry out deep cooperation with local governments and business institutions.

“From a macro perspective, this is a dynamic balance. Although there are restrictive policies such as the FSR, governments in countries like Spain and Hungary still strongly welcome and encourage Chinese investment, because it creates a large number of jobs. Chinese companies’ expansion abroad brings tangible opportunities to the local area. At present, the main force of investment in Europe is still large enterprises, while mid-sized companies are mainly concentrated in logistics and consumer industries. These companies tend to choose countries with a relatively friendlier policy environment for their layout, in order to offset part of the compliance costs,” Ye Qingqing observed.

Zhao Yongsheng also holds a similar view. He believes that compared with the United States, the EU still retains some room for communication. He suggests that Chinese companies should consider using “greenfield investment” to drive local technological upgrading and job creation, in exchange for survival space. “With technological and capital advantages, joint ventures or shared benefits can be considered. This is another strategic kind of concession and win-win arrangement in an overseas expansion strategy,” he said.

In addition, regarding the “difficulty in building credit” and local operating obstacles that small and medium-sized enterprises may face in the initial stage of going abroad, Ye Qingqing suggests that companies make full use of external resources and actively connect with local mature professional service ecosystems. By collaborating with professional institutions, Chinese companies can receive one-stop support from tax compliance to foreign exchange risk management, effectively lowering the entry threshold and achieving a smooth landing in a complex geopolitical environment.

(This article comes from First Financial)