The EU Industrial Accelerator Act: EU Unicorns or Chimera?

The European Commission’s latest proposal to boost European Union (EU) competitiveness cuts across multiple regulatory areas and will add another layer to an already complex regulatory landscape.  The IAA would make significant changes in EU public procurement, foreign direct investment (FDI) and critical raw materials (CRM) regimes.  The proposed Industrial Accelerator Act (IAA) aims to increase the EU  manufacturing sector’s share of 14% of GDP in 2024 to 20% by 2035.  According to World Bank data, the EU’s 14% level is just under the worldwide average of 15%, and well above the U.S. level of 11%; the only major economies exceeding 20% are China, Japan and Korea.

The IAA would introduce “Made in EU” and/or low-carbon requirements for public procurement and public support schemes in sectors including steel, cement, aluminium, cars, and net-zero technologies, and potentially other energy-intensive sectors such as chemicals. To encourage reciprocity, the IAA would provide equal treatment to countries with EU free trade area or customs union agreements, or where the World Trade Organization Agreement on Government Procurement (the WTO GPA) applies.

Supplementing the forthcoming Foreign Direct Investment Regulation, foreign investments exceeding €100 million in strategic sectors such as batteries, electric vehicles, photovoltaics and CRMs would be subject to new requirements where the relevant country (rather than the specific investor(s)) controls more than 40% of global manufacturing capacity.

On the other hand, the IAA would streamline permitting procedures for industrial manufacturing projects. Member States would have to set up a single digital permitting process subject to clear time limits.  Member States would also have to designate “Industrial Manufacturing Acceleration Areas,” which will benefit from investor profiling and support for skills development.

The IAA’s provisions, and open questions, are discussed in more detail below.

     I.         STRENGTHENING EU STRATEGIC INDUSTRIAL VALUE CHAINS

To strengthen EU industrial value chains and promote decarbonisation, Chapter III sets out new “Union origin” requirements for public procurement and public intervention measures relating to energy-intensive industries (i.e., paper and paper products, coke and refined petroleum products, chemicals and chemical products, rubber and plastic products, non-metallic minerals, and basic metals), the automotive sector and net-zero technologies.  Public contracts, concessions, and utilities covered by EU public procurement rules involving procurement of products from energy-intensive industries will be subject to these requirements:

• At least 25% of steel in buildings, infrastructure and civil motor vehicles must be low-carbon;

• At least 5% of concrete and mortar in civil buildings and infrastructure must be low-carbon and of Union origin; and

• At least 25% of aluminium in civil buildings, infrastructure and motor vehicles must be low-carbon and of Union origin.

These requirements would also apply to public intervention schemes supporting the construction or renovation of residential and commercial buildings and infrastructure and the lease and purchase of motor vehicles. As mentioned, companies from countries with free trade area or customs union agreements with the EU, or where WTO GPA rules apply, will be treated as having Union origin.  Exceptions would be available, e.g. where the relevant goods or services can only be supplied by one specific economic operator and no reasonable alternative or substitute exists.

Specific Union origin rules will apply to vehicles subject to these public tenders and intervention schemes under Part I of Annex III.  For a vehicle to qualify as “Union origin” (with some exceptions), the following requirements must be met:

• the vehicle is assembled in the EU;

• the ratio between the total ex-works price of vehicle components (excluding the battery) originating in the Union and the total ex-works price of all components is at least 70%;

• the vehicle’s traction battery contains at least three main specific components, including the battery cells, originating in the EU;

• the vehicle’s traction battery contains at least five main specific components, including the battery cells, the cathode active material, and the battery management system, originating in the EU;

• the ratio between the total ex-works price of e-powertrain components originating in the EU and the total ex-works price of all e-powertrain components is at least 50%; and

• the ratio between the total ex-works price of main electronic systems originating in the EU and the total ex-works price of all main electronic systems is at least 50%.

   

    II.         FOREIGN INVESTMENT RESTRICTIONS

Chapter IV imposes a new mandatory pre-approval procedure for certain proposed investments, on top of approvals required under existing and future FDI regimes.  The IAA pre-approval requirement would apply to FDI over EUR 100 million in emerging strategic manufacturing sectors (i.e., battery technologies and value chains for battery energy storage systems; certain electric vehicles and related components; solar photovoltaic technologies; and CRM extraction, processing and recycling) where more than 40% of the global manufacturing capacity is held by the relevant third country. These requirements would not apply to investors and investments covered by economic partnership and free trade agreements in force or provisionally applied, investments targeted at providing services and “portfolio investments” (i.e., those intended purely for financial investment and without any intention to influence management or control (thereby excluding typical private equity portfolio investments)).

Proposed FDI subject to the IAA notification requirement must be prohibited based on four or more of the following six criteria: (a) the foreign investment exceeds 49% of an EU target;  (b) the investment is made through a joint venture (which must ensure effective participation of Union partners in management, technology transfer, and capacity building); (c) the foreign investor has licensed its intellectual property rights (IP) to the EU target, which must fully and exclusively own all IP it develops; (d) the foreign investor annually directs at least 1% of the EU target’s gross annual revenue to R&D spending in the EU; (e) at least 50% of all workforce categories consists of EU workers receiving adequate training; and (f) the investor publishes its strategy for enhancing EU value chains and prioritising the sourcing of manufacturing inputs from the EU (with a target of at least 30% of inputs used for products sold in the EU).

Although FDI reviews under the IAA will normally be conducted by Member State “Investment Authorities,” the Commission may take over the assessment where the FDI’s value exceeds EUR 1 billion or the FDI may “significantly impact added value creation in the Union market” (i.e., it is of particular strategic importance; has considerable economic impact in more than one Member State; potentially disrupts the security of supply of that emerging strategic sector or related value chains or security in more than one Member State; has potentially detrimental environmental effects in more than one Member State; or is of a particularly high value compared to other investments in that emerging strategic sector).

Although it is unclear how the 40% requirement will be calculated, this requirement likely targets China.   According to the Commission’s 2025 FDI report, China accounted for 9% of EU foreign direct investments notified under the existing FDI cooperation mechanism in 2024 (up from 6% in 2023).  The report does not break down national FDI notifications by sector, but in terms of overall notifications the manufacturing sector accounted for 25% of notifications and 50% of Phase II investigations under the existing mechanism.

   III.         INDUSTRIAL PRODUCTION AND DECARBONISATION INCENTIVES

Chapter II includes several “enabling conditions” to expedite “industrial manufacturing projects,” defined as the construction, conversion or extension of industrial sites for manufacturing activities under the EU’s NACE code framework (except tobacco products).  Member States will be required to establish a single permit-granting procedure covering all permits required for industrial manufacturing projects. The competent authority must acknowledge that the application is complete or request any missing information needed to process the application within 45 days.

Permitting applications will be processed via a single access point to automatically attribute applications to the relevant authority, inform the applicant about the procedure’s status and authorities’ decisions, and enable the applicant to check compliance with applicable deadlines.  “Energy-intensive industry decarbonisation projects” (defined by reference to a 2003 tax directive and Annex I to the IAA) will be treated as “strategic projects” benefitting from expedited environmental assessments under the Commission’s proposed regulation on speeding-up environmental assessment.

  IV.         INDUSTRIAL MANUFACTURING ACCELERATION AREAS

Under Chapter V, each Member State must designate at least one “industrial manufacturing acceleration area” based on impact on the EU’s security of supply in strategic sectors; potential to support production capacity, strengthen Union value chains and innovation potential and foster strategic projects and other initiatives; the number of SMEs and SMCs that would benefit; and level of development.  Member States must also take account of a variety of potentially conflicting objectives including environmental and industrial considerations.

To promote the development of industrial manufacturing acceleration areas, Member States will have to facilitate financing by ensuring coordination between authorities and streamlining internal procedures; promote research and innovation investments; coordinate with EU network development plans;  exchange information on relevant supply chains and potential bottlenecks, and coordinate on critical raw materials issues via the European Critical Raw Materials Board established under the Critical Raw Material Act (CRMA); facilitate participation in the CRMA’s joint purchasing mechanism;  support the development and availability of a highly skilled workforce; exchange information on employment issues via the EU Industrial Forum expert group; and promote synergies under the EU Pact for Skills.

Member States will also be required to adopt “baseline” permits covering the permits and administrative authorisations required for the industrial manufacturing projects Industrial manufacturing projects in an industrial manufacturing acceleration area would be required to obtain only those additional permits or authorisations that fall outside the scope of the baseline permit.  All industrial manufacturing projects located within an acceleration area shall be considered strategic projects contributing to resilience and decarbonisation or resource efficiency benefiting from accelerated environmental assessment processes.

    V.         TAKEAWAYS

The IAA offers a combination of sticks and carrots.  The two main sticks are new requirements for (i) EU-origin and low-carbon conditions in public procurement and other public interventions in sectors including steel, concrete and vehicles, and (ii) for certain Chinese investments, including a new prior approval requirement, a 49% ownership cap and technology-sharing and EU workforce requirements.  The two main carrots would facilitate permitting for certain industrial manufacturing projects and encourage investment in new “Industrial Manufacturing Accelerator Areas,” without however offering new funding.

The Commission claims that the IAA delivers on the 2024 Draghi Report.  In some respects, the IAA is much more limited in scope than the Draghi Report recommended, for example applying EU origin requirements in only a few sectors (not including e.g. defense, tech and healthcare).  The IAA is also more restrictive in some respects; the Draghi Report did not call for caps on foreign ownership or mandatory IP licensing.  These requirements recall China’s 1979 Equity Joint Venture Law.  Western companies were willing to comply with the 1979 law to invest in China; query whether Chinese investors will feel the same about investing in the EU?

More generally, the IAA adds new, complex requirements in already highly regulated areas.  After five years’ experience with the existing FDI cooperation mechanism, the EU is set to adopt a tighter FDI regulation. Significant Chinese acquisitions of EU targets are also likely to trigger notification requirements under the 2023 Foreign Subsidies Regulation, as well as merger notifications.  Does the EU really need an additional regulatory framework for Chinese FDI?  Chinese investments account for less than 10% of notifications, and manufacturing sector notifications already attract a disproportionate share of in-depth FDI investigations.  The EU also already has initiatives encouraging investment in innovation, clean technologies and underdeveloped regions.  It remains to seen how much the IAA’s new permitting and IMAA provisions will add.

The IAA does deliver on some of the Draghi Report recommendations.  But the Draghi Report also called for regulatory simplification to strengthen the EU’s competitiveness, guided by a new Commission Vice-President for Simplification.  What would a Vice-President for Simplifcation make of the IAA?