China has an established supply chain dominance
Chinese manufacturers already owned the end-to-end supply chain for critical raw materials and battery cells. The EU’s strict Bruegel EV Investment Strategy points out that European automakers lack domestic battery cell capacity, making them reliant on imports or joint ventures heavily influenced by Chinese tech. Allianz’s study on the Chinese Challenge to the European Automotive Industry proposes that
“policymakers could seek reciprocal trade terms with China and the US, as well as promote BEV adoption through improved charging infrastructure. Moreover, allowing Chinese investment in local car assembly could have more value added generated in the region, while increasing self-sufficiency in raw materialscritical for battery manufacturing and investing in next-generation battery technologies will further help Europe’s automotive sector prepare for tomorrow’s challenges”.
Can Europe keep out Chinese EVs?
Protectionism appears unable to keep Chinese carmakers out. As tariffs failed to significantly slow Chinese manufacturers’ expansion into the European market, the European Commission proposed the Industrial Accelerator Act (IAA). The legislation would link eligibility for certain public procurement contracts and public support schemes to “Made in EU” requirements, including final assembly within the European Union and a requirement that at least 70 percent of the value of non-battery vehicle components originate in the EU. The measure is intended to strengthen domestic supply chains and reduce dependence on foreign manufacturing. In response, several Chinese automakers have accelerated plans to establish manufacturing facilities in Europe. Companies such as BYD have invested in production sites within the region, seeking both to avoid EU anti-subsidy tariffs and to position themselves to comply with emerging local-content requirements.
BYD has achieved notable success in Europe’s plug-in hybrid market. Its Seal U plug-in hybrid SUV emerged as the top-selling model in its segment in 2025, supported in large part by a competitive pricing strategy. In Germany, the vehicle was introduced at a starting price of €39,900 (approximately US$46,400), around 20 percent below the price of Volkswagen’s Tiguan plug-in hybrid. Building on this momentum, BYD subsequently expanded its European lineup with the introduction of two additional plug-in hybrid models.
Meanwhile, Zhejiang Leapmotor Technology has pursued a different market-entry strategy by capitalizing on its partnership with Stellantis. Europe was selected as the company’s first major overseas expansion market in 2024, allowing Leapmotor to utilize Stellantis’ established distribution and sales infrastructure. This approach has yielded rapid growth: according to data from the European Automobile Manufacturers’ Association (ACEA), Leapmotor’s EV registrations in the European Union exceeded 28,000 vehicles during the first four months of 2026, representing more than a sixfold increase compared with the same period a year earlier.
The company’s strongest-performing model has been the T03, a compact electric vehicle positioned at the lower end of the market. In Italy, the model’s starting price falls to approximately €4,900 after subsidies, making it one of the most affordable EVs available. This aggressive pricing strategy contributed to the T03 becoming Italy’s best-selling battery-electric vehicle in April, with sales surpassing 4,000 units.
What’s the solution?
Trying to keep China out entirely isn’t really feasible in an open EU market, and pushing that framing would also conflict with WTO rules and Europe’s own industrial need for investment, batteries, and scale. What EU policymakers can do—legally and realistically—is reduce strategic dependence on Chinese firms while strengthening domestic competitiveness, so European EV makers win more sales on merit.
The European Union can strengthen the competitiveness of its automotive industry by designing industrial incentives that more effectively support domestic production and innovation. Existing initiatives, including proposals under the Industrial Accelerator framework, could be expanded to prioritize European-made vehicles in public procurement programs, government fleet purchases, taxi fleets, and other publicly supported mobility schemes. At the same time, eligibility criteria should place greater emphasis on European value creation, including battery production, critical materials processing, software development, and power electronics, rather than focusing solely on final vehicle assembly.
Given the price advantage currently enjoyed by many Chinese manufacturers, European policymakers should focus on reducing the structural cost burden faced by domestic producers. This could include lowering industrial electricity costs for automotive manufacturing, supporting the retooling of legacy production facilities operated by firms such as Volkswagen, Stellantis, and Renault, and reducing regulatory fragmentation across member states. A more integrated European EV market, combined with streamlined approval procedures for new vehicle platforms, would help accelerate innovation while lowering compliance costs. Eligibility for public subsidies and industrial support programs could also be tied to EU-based research and development activities and intellectual property generation, encouraging greater investment in European innovation ecosystems.
Reducing dependence on external suppliers will also require the development of a fully integrated European battery value chain. Batteries remain the most strategically important component of the EV industry, and Europe’s continued reliance on foreign suppliers presents a significant vulnerability. Policymakers should therefore expand support through the Important Projects of Common European Interest (IPCEI) framework, accelerate permitting for domestic mining and refining projects, and support the development of lithium, nickel, and rare earth processing capacity within Europe. Additional measures could include the establishment of strategic reserves of critical minerals and the use of European Investment Bank-backed long-term offtake agreements to improve investment certainty across the supply chain.
Beyond manufacturing, Europe must also compete in the software and digital dimensions of the automotive sector. Chinese manufacturers increasingly derive competitive advantages from integrated software ecosystems, advanced battery management systems, and connected vehicle platforms. The EU should support the development of common European vehicle software standards, invest in next-generation operating systems and battery management technologies, and expand fast-charging infrastructure under harmonized technical standards. Support for European mobility platforms, charging networks, and data governance frameworks would further strengthen the continent’s position in the emerging software-defined vehicle market.
Finally, long-term competitiveness will depend on affordability. Trade defenses and industrial policy can provide temporary support, but they cannot substitute for cost-competitive products. European manufacturers should be encouraged to develop mass-market EV platforms in the €20,000–25,000 price range, while policymakers promote greater standardization of components across the industry to reduce duplication and achieve economies of scale. Expanded cooperation on shared vehicle architectures and platforms could further lower development costs and improve the competitiveness of European-made electric vehicles both within the EU and globally.
Tax cuts are a must, but not enough
The EU already uses a mix of tax incentives, subsidies, and state-aid rules to support the automotive industry. However, compared with the U.S. Inflation Reduction Act or China’s industrial policies, many analysts argue that Europe’s approach remains fragmented and less generous.
The EU generally does not provide large-scale tax cuts specifically for automobile manufacturers’ profits.
Instead, support tends to be tied to investment, decarbonization, R&D, and battery production. Europe has traditionally preferred conditional support rather than broad corporate tax reductions. Instead of rewarding profits, the EU rewards specific activities. For example, an automaker company may receive a tax credit if it builds a battery plant, or an accelerated depreciation if it invests in EV production. Overall, reducing the corporate tax rate for everyone without restrictions would be more beneficial, just like in America.
However, if one’s goal is to increase European automakers’ market share and investment, the biggest gap is not the absence of tax cuts. The larger issue is that Europe’s support remains less predictable and less generous than U.S. and Chinese industrial policies. Many industry groups, including the European Automobile Manufacturers’ Association and companies such as Volkswagen, Stellantis, and Renault, have argued for stronger investment incentives, lower energy costs, and reduced regulatory burdens in addition to targeted tax relief. Thus, it can reasonably argued that the EU should expand existing investment tax credits and manufacturing incentives rather than simply cutting corporate tax rates across the board.
China’s success in the automotive sector has been driven in large part by a consistent and long-term industrial strategy. For nearly two decades, the Chinese government has supported manufacturers through subsidized land and electricity, low-cost financing, consumer incentives, large-scale battery investments, local procurement preferences, and state-backed supply chains. This policy stability has enabled firms such as BYD and SAIC to make long-term investment decisions with confidence.
The United States has adopted a similarly investment-oriented approach through the Inflation Reduction Act, which provides predictable production tax credits, battery manufacturing incentives, consumer EV tax credits, and clean energy subsidies for qualifying firms.
By contrast, the European Union relies primarily on state aid approvals, national support schemes, and temporary funding mechanisms. As a result, manufacturers often face uncertainty regarding the availability, duration, and timing of support. The challenge for Europe is therefore not the absence of public assistance, but the lack of a stable and predictable industrial policy framework. Expanding long-term investment tax credits and manufacturing incentives would help strengthen the competitiveness of Europe’s automotive industry.
How can Europe compete with China?
To strengthen the competitiveness of its automotive industry, the European Union should focus on developing a fully integrated EV supply chain and manufacturing ecosystem. This includes expanding domestic capacity for battery refining, lithium and graphite processing, cathode and anode production, battery cell manufacturing, and recycling facilities to reduce dependence on Chinese suppliers, which currently dominate many of these segments of the battery value chain. The collapse of Northvolt underscored the challenges Europe faces in building a competitive battery industry. In parallel, policymakers should reduce industrial electricity costs—one of the sector’s most significant competitive disadvantages—by accelerating grid expansion, simplifying renewable energy permitting, expanding reliable low-cost energy generation, and reducing energy taxes for industrial users. The EU should also streamline regulatory requirements, including environmental reporting, sustainability disclosures, supply-chain compliance rules, and permitting procedures, to lower costs and encourage investment. Finally, Europe should pursue greater manufacturing scale through cross-border industrial projects, large battery clusters, integrated pan-European supply chains, and, where appropriate, industry consolidation. Together, these measures would help European automakers achieve the economies of scale, supply-chain resilience, and cost competitiveness necessary to compete more effectively with Chinese manufacturers. [2 – end. The 1st part was posted here]
