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The European Union has launched an investigation into the subsidies provided by the Chinese government to its electric vehicle (EV) manufacturers, marking a significant development in the global automotive industry. The probe, announced on Friday, is centered on Beijing’s financial backing which allegedly keeps EV prices artificially low and distorts the competitive landscape.

China has responded firmly to this investigation, labeling it as “naked protectionism” that could potentially damage trade ties between China and the EU. This diplomatic tension has caused fluctuations in various auto stocks throughout this week.

Among those affected are Chinese EV manufacturers Nio (NYSE:), XPeng (NYSE:), and BYD (SZ:), and their European counterparts Volkswagen (ETR:), Mercedes-Benz (OTC:), and Stellantis (NYSE:). Interestingly, Tesla (NASDAQ:), which enjoys a strong market presence in both regions, could potentially benefit from this situation.

The EU’s concerns have been fueled by the rapid expansion of Chinese EV brands in developed markets due to their high value-for-money offerings. For instance, BYD, a Chinese EV manufacturer, recorded a staggering 323% increase in registrations from January to July 2023 in Europe.

During the same period, Chinese manufacturers collectively saw a surge of over 130% in registrations year over year. In stark contrast, European companies only recorded a modest growth of 36%. These figures highlight the success of Chinese EV makers in penetrating the European market.

EU regulators argue that while an integrated supply chain contributes to cost efficiency for Chinese manufacturers, government subsidies also play a significant role in keeping prices low.

Despite these successes, Chinese EV makers still face challenges in further penetrating the mature and highly competitive European market. However, opportunities for expansion remain in other global markets such as Russia, Iran, Central and South America, and Oceania.

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