The European Commission has launched an investigation into whether BYD received unfair state subsidies from China to support the construction of its Hungarian factory, Telex.hu writes citing the Financial Times.

The EU could force BYD to cut production, repay subsidies, or pay fines of up to 10% of global revenue if the use of unfair state aid is confirmed. EU regulations prohibit foreign subsidies that distort the internal market, including direct state support, low-interest or interest-free loans, tax benefits, state-funded research and development, and government contracts.

Minister of European Affairs Janos Boka told the business daily that the government is not concerned about the ongoing inquiry as they had already assessed the level of Chinese state subsidies before approving the establishment of the factory in Szeged, near the Serbian border.

BYD announced the construction of its first European production facility in Hungary from an estimated €5bn investment in late 2023. The world's leading new energy vehicle maker is set to start production later this year with a starting 150,000 capacity, which could double later.

According to earlier reports, the carmaker planned to build a separate battery factory, also located in the southern part of the country, to supply its new plant, but the company dropped these plans and said batteries would be imported and assembled in Hungary.

BYD chose Hungary for its European production hub due to the country's strategic location in Europe, offering easy access to key European markets. Hungary's supportive government policies, including subsidies for foreign investments, and its relatively lower labour and operational costs made it an attractive option.

The country has a well-established automotive industry, with several major European car manufacturers, such as Audi, Mercedes-Benz and Suzuki, having plants in the country. This creates a skilled workforce and an established supply chain for automotive components, which would benefit BYD in terms of resources and logistics.

BYD is planning further expansion in Europe, with plans to set up new production facilities as it strives to become the leading EV manufacturer in Europe by 2030. Industry observers said that the EU pressure over state subsidies on the Chinese carmaker could thwart these projects.

The European Commission imposed additional tariffs on affected Chinese manufacturers after an investigation found that Chinese EV manufacturers were receiving unfair subsidies from the government, which gave them an advantage in the European market. The EU executive last July imposed additional tariffs on affected Chinese manufacturers, including BYD, to level the playing field, which Hungary rejected.

The Financial Times recalls that the Orban government has pursued an aggressive strategy in attracting Chinese investments, especially in EV and battery production sectors which now constitute a third of its manufacturing sector, to boost economic growth and create jobs. Hungary has emerged as China's leading investment destination for FDI, supported by generous subsidies, which have raised concerns in the EU over fair competition.