European industry pivots to US as Biden subsidies send ‘danger signal’

Northvolt, Europe’s great hope in the global battery war, began life as a start-up focused on the continent. Now the Swedish group, supported by Volkswagen, BMW and Goldman Sachs, is looking to the US to expand production.

The reason for the pivot is the Inflationary Reduction Act (IRA). The US flagship green technology legislation, signed into law in August, will subsidize factories in America by about $600 million-$800 million, according to Northvolt. That compares to €155 million in incentives on the table from Germany.

The IRA “is moving a lot of momentum from Europe to the US”, Northvolt chief executive Peter Carlsson told the Financial Times, adding that it does not only affect European companies. “There are new Asian players who are reallocating their strategic plans and investments to North America,” he said.

The combination of the Biden Administration’s $369bn package and high energy costs in Europe, where even after the drop in gas prices remain five times more expensive than in North America, is the sound of alarm bells in EU capitals.

“I think we need to wake up Europe at this point,” French President Emmanuel Macron told executives from domestic industrial companies such as glassmaker Saint-Gobain and cement maker Lafarge in a speech last week.

German economy minister, Robert Habeck, described US support as “excessive” and “hoovering up investment from Europe”.

President Joe Biden spoke during an event celebrating the passage of the Inflation Reduction Act
President Joe Biden speaks during an event celebrating the passage of the Inflation Reduction Act © Getty Images

The EU has been accused Washington violated the rules of the World Trade Organization and establish a task force and the Biden administration to resolve their differences. It has asked for changes to nine provisions in the law involving a subsidy program totaling $231bn, saying they create a “race to the bottom” in funding for business.

Brussels estimates the EU will need to increase annual investment by €520bn over the coming decade to meet its carbon reduction and environmental protection goals.

While the IRA affects manufacturers in fields ranging from advanced machinery to heavy industry, EU executives are particularly concerned about the impact on the automotive sector. Only electric cars made with parts from North America and assembled there will qualify for the $7,500 tax rebate for consumers.

Europe is home to more than a quarter of global EV production, and 20 percent of the supply chain, according to the International Energy Agency. The US has only 10 percent of EV production and 7 percent of battery production capacity.

Luisa Santos, deputy director general at BusinessEurope, a pan-European lobby group, said the US legislation had sent a “dangerous signal” that could encourage other jurisdictions to take protectionist measures.

But far from offering to extend the break to EU vehicles, Katherine Tai, the Biden administration’s most senior trade official, told the FT that the EU should introduce more subsidies.

Katherine Tai, the Biden administration's most senior trade official
Katherine Tai, the Biden administration’s most senior trade official, expressed ‘every confidence’ in finding a resolution © Bill O’Leary/POOL/AFP/Getty Images

While he expressed “every confidence” to find a resolution, it remains unclear what concessions the United States can make without involving Congress, which is unlikely to reopen the act.

Carlos Tavares, the head of Franco-Italian carmaker Stellantis which is also home to big US brands such as Chrysler, is one of the executives who has publicly called on Europe to consider reciprocal measures or change its rules. State-funded electric car purchase subsidies in France, for example, apply to all vehicles regardless of origin or manufacturer.

Quick solution for electric vehicle is possible. Last week three members of Congress introduced a bill that would delay IRA requirements for North American supply chains by three years, as many US automakers will struggle to make the necessary changes before then.

European Union officials are reluctant to match US subsidies or, according to one official, “do things that are incompatible with WTO and state aid rules.”

“We designed our rules to be open and not to give preference to European companies: now we are victims of our own purism,” he said.

German finance minister Christian Lindner told the FT: “We will not prevent European companies from disinvesting and moving to the US . . . by entering competition for subsidies, but by creating very favorable conditions for investment in Europe.

In contrast, France has pushed the EU to adopt its own “buying a European act” because he is looking for tips to play the field again in his favor.

“Europe cannot be the only place in the world that does not have a European Purchase Law and the only place in the world where you still have a state aid system that sets the rules as if there is no external competition,” Macron said last week. .

The European Round Table for Industry, a business lobby group, said Washington’s carrot-based approach could help the US catch up with Europe in the adoption of green technology. It said regulatory uncertainty in the EU was hindering green technology, calling for “concentrated efforts” to speed up renewables investment permits.

Our Spanish Iberdrola, among the world’s largest energy companies, raised US investment to almost half of the global total from 2023-25, compared to 23 percent in the EU. Ignacio Galán, executive chair, told the FT that the US is now a “very” more attractive place to invest.

For renewable hydrogen, for example, the US provides support of about $100bn in IRA while the EU offers only $5bn, he said.

Compounding the pressure is higher energy costs in the EU. France’s Safran, a major supplier of aircraft engines and other parts, is one of the companies rethinking its investment plans.

France's Safran is rethinking its investment plans
France’s Safran is rethinking its investment plans © Remy Gabalda/AFP/Getty Images

It is already planning a second factory near Lyon focused on lightweight carbon brakes marked as a research center for the technology. But now it is offloading more of its landing gear production to Asia and the US as it puts off a decision on a new French plant for at least another 18 months.

“My duty is to make sure any investment is economical,” chief executive Olivier Andriès said recently. Despite efforts to hedge against rising prices, French Safran’s electricity costs are set to increase almost fivefold between 2019 and 2023, Andriès said, while they remain stable in the US and Malaysia, where the group also produces carbon brakes.

“It is not just a question of getting through the winter. There is a deeper problem, which is about the competitiveness of France and Europe,” he said.

Reporting by Sam Fleming and Andy Bounds in Brussels, Richard Milne in Stockholm, Sarah White in Paris, Guy Chazan in Berlin and Barney Jopson in Madrid

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