The crisis confronting Europe’s automotive industry continues to deepen. Despite robust growth in global vehicle demand—with annual sales rising from 66 million to 76 million units between 2012 and 2023—European manufacturers have seen production fall from nearly 13 million to just 12 million vehicles. The result has been a marked decline in Europe’s global market position, with its share of production slipping from 19.4 percent to 15.9.
These trends are cause for growing concern. The outlook becomes even more troubling when examining the global electric vehicle (EV) market. During the first quarter of 2025, six of the world’s ten largest EV manufacturers were Chinese, accounting for an overwhelming 93.6 percent of total sales among the top-ten producers. By comparison, one American manufacturer represented “3.1 percent of sales”, while three German manufacturers collectively accounted for just 3.3 percent.
Overall, European EV sales grew by roughly 20% year-on-year in September 2025. However, this performance has been supported in part by aggressive price reductions that have compressed profit margins, as well as the European Union’s tariff regime, which imposes duties of up to 35 percent on imported Chinese electric vehicles. The sustainability of this competitive position, therefore, remains uncertain, particularly as Chinese manufacturers continue to expand their technological capabilities, production scale, and global market presence.
The EU is to blame for its weakening car industry
The European Union’s stringent decarbonization agenda, including the planned phase-out of new internal combustion engine (ICE) vehicles by 2035, has imposed significant adjustment costs on the continent’s automotive industry. Legacy manufacturers have been compelled to channel substantial resources into the transition to electric vehicles, often at the expense of profitability and market competitiveness. At the same time, these firms have faced growing pressure from foreign competitors, eroding the market positions they historically enjoyed.
Here is a list of the key legislative pillars that have squeezed the profitability and competitiveness of European automakers:
Proposal to amend Regulation (EU) 2019/631 on CO₂ emission performance standards for new passenger cars and new light commercial vehicles (European Commission Automotive Package, 16 December 2025
The regulation states that “from 2035 onwards, carmakers will need to comply with a 90% tailpipe emissions reduction target, while the remaining 10% emissions will need to be compensated through the use of low-carbon steel made in the Union, or from e-fuels and biofuels. This will allow for plug-in hybrids (PHEVs), range extenders, mild hybrids, and internal combustion engine vehicles to still play a role beyond 2035, in addition to full electric vehicles (EVs) and hydrogen vehicles.”
This cornerstone policy mandated strict fleet-wide CO₂ emission targets, bringing the industry toward an aggressive zero-emission sales requirement. According to Regulation (EU) 2019/631, “if the average CO2 emissions of a manufacturer’s fleet exceed its specific emission target in a given year, the manufacturer must pay – for each of its new vehicles registered in that year – an excess emissions premium of €95 per g/km of target exceedance.” As a result, many automakers faced potentially billions in non-compliance penalties for missing targets, forcing them to heavily invest in EVs regardless of real-world profitability.
The “Fit for 55” Package
The “Fit for 55” is a comprehensive package of interconnected legislative proposals designed to reduce the EU’s net greenhouse emissions by 55 per cent, laying the groundwork for the EU to achieve climate neutrality by 2050. Under the European Commission Cars and Vans initiative, this framework required massive structural overhauls, shifting massive R&D spending away from legacy, profitable internal combustion engines (ICE) into battery technology.
Regulation (EU) 2024/1257, also known as “Euro 7”
As part of the European Green Deal and in accordance with the EU’s commitment to the Paris Agreement the Euro 7, further “tightens rules on polluant emissions” and “non-exhaust emissions” from braking and “tire abrasion”. The key summary of the regulation claims it aims to “lower air pollutant emissions from exhaust fumes and brakes by setting tighter European Union (EU)-wide rules on emission limits, fuel and electric energy consumption and battery durability for road vehicles”.
It is fair to say the EU zero-emission frameworks negatively impacted the European car industry by forcing a “rushed transition” to costly electric vehicles (EVs) against a backdrop of weak consumer demand, while stringent emission penalties resulted in substantial financial challenges.
It is clear as day that the European car industry made a significant miscalculation. “They believed that clean energy would be cheap and therefore encourage consumers to buy more cars; that green regulation would come with generous subsidies to production; and that European technology was not far behind China”. Instead, the EU’s overregulation decreased productivity and stifled innovation.
The EU’s aggressive climate agenda increased production costs
Non-fossil energy is expensive and subsidies are more scarce than expected. Regulatory compliance, material shifts, and factory retooling have escalated manufacturing expenses, which has led major European automakers to urge the EU for greater policy support.
To comply with increasingly stringent regulatory requirements—including the Euro 7 emissions standards and the broader objectives of the European Green Deal—European automakers have been compelled to undertake far-reaching changes across their production and supply chains. These adjustments have required substantial capital investment and operational restructuring at a time of intensifying global competition.
First, manufacturers have sought to reduce the carbon footprint of vehicle production by incorporating lower-emission inputs. This has included a gradual shift away from conventionally produced steel toward low-carbon alternatives, commonly referred to as “green steel,” which can significantly reduce embedded emissions without requiring major modifications to vehicle design.
Second, automakers have accelerated efforts to decarbonize manufacturing operations. Across Europe, companies are investing in renewable energy sources to power production facilities, while implementing circular manufacturing practices aimed at reducing waste, improving resource efficiency, and lowering overall emissions.
Third, and most significantly, the industry has been required to reorient production toward electrified vehicles. This transition has involved extensive retooling of assembly lines, large-scale investments in battery technologies and supply chains, and a gradual shift away from traditional internal combustion engine vehicles in favour of battery electric and plug-in hybrid models.
Adapting to these requirements significantly inflates per-vehicle production costs. Low-emission steel remains significantly more expensive to produce than its traditional blast-furnace equivalent. While costs vary, integrating green steel generally adds hundreds of euros in manufacturing expenses per car. What is more, the shift toward electrification requires massive battery components. Electric vehicle raw materials (like lithium, cobalt, and nickel) are costly and heavily dependent on complex global supply chains. For the internal combustion vehicles that remain in production, meeting stringent Euro 7 pollution limits requires advanced, complex exhaust after-treatment systems and onboard diagnostic tools. Studies by ACEA estimate these requirements add over €2,000 to the direct manufacturing cost of an ICE vehicle.
China gains momentum
Because European consumer demand for expensive EVs stagnated, carmakers were forced to artificially inflate ICE prices or slash EV prices to avoid penalties, severely squeezing profit margins.
The European Union’s rigid regulatory framework to eliminate carbon emissions placed a heavy burden on its domestic car industry while inadvertently handing China a massive competitive advantage.
The EU relied on a punitive framework—forcing manufacturers into electrification through the threat of massive fines. Conversely, China treated New Energy Vehicles (NEVs) as a strategic national priority. While Europe built a wall of bureaucracy, Beijing spent over a decade (2010–2022) pouring vast state subsidies into building raw material refinement, cheap labor structures, and localized component ecosystems.
China gained an even greater momentum in the industry following intense lobbying by automakers. Facing a severe crisis, the European Commission formally weakened the 2035 rule, replacing the 100% full ban with a 90% tailpipe emissions reduction target. While designed as a “lifeline” to allow plug-in hybrids (PHEVs) and e-fuel engines to survive, this policy backfired. Because China already heavily dominated advanced PHEV and Extended-Range EV (EREV) technologies, reopening this market gave Chinese manufacturers an even wider doorway into Europe.
China takes hold of battery production in Europe
Europe’s ambitions to establish a competitive domestic electric vehicle (EV) battery industry suffered a major setback with the bankruptcy of Swedish battery manufacturer Northvolt. Despite receiving substantial public support, including a €5 billion EU-backed financing package, the company was unable to overcome a combination of rising capital costs, supply chain disruptions, geopolitical uncertainty, and weakening market demand. Northvolt’s collapse has underscored the broader difficulties facing Europe’s battery sector. Across the continent, 11 of 16 planned battery gigafactory projects have been delayed or cancelled amid slowing EV demand and persistent challenges in scaling production and technological capabilities.
These setbacks have reinforced Europe’s dependence on imported battery technologies, particularly from China, which controls approximately 80 percent of global lithium-ion battery production capacity. Chinese manufacturers, most notably Contemporary Amperex Technology Co. Limited and BYD, benefit from significant technological advantages derived from years of sustained investment and industrial development. CATL became the world’s largest battery producer in 2021 and maintains a research and development workforce numbering in the tens of thousands, while BYD has been developing electric vehicle technologies since the late 2000s. This long-term commitment has enabled Chinese firms to achieve substantial economies of scale and offer batteries at highly competitive prices.
China’s dominance in the battery and electric vehicle supply chain is closely linked to broader structural advantages. Concerns over energy security, stemming from limited domestic oil and natural gas resources, have encouraged Beijing to prioritize electrification and battery manufacturing as strategic industries. At the same time, access to abundant and relatively inexpensive electricity has supported the rapid expansion of industrial production. While China has emerged as a global leader in low-carbon technologies, this industrial success has been underpinned by a power system that continues to rely heavily on coal generation. In contrast, many Western economies have pursued more rapid transitions away from conventional baseload energy sources, contributing to higher energy costs and raising questions about the competitiveness of domestic manufacturing sectors during the transition to a low-carbon economy.
The EU’s forced focus on premium vehicles
European car makers respond poorly to the market. To protect their crumbling margins under the weight of compliance costs, European manufacturers focused heavily on luxury, premium EVs. This created an enormous supply gap in the affordable, entry-level EV segment (€15,000–€25,000). Europe fails yet again! Highly integrated Chinese companies like BYD easily filled this vacuum with low-cost, technology-dense cars. However, there is a threat. ‘This influx of Chinese foreign direct investment presents Europe with a strategic dilemma. There are clear short-term benefits: Chinese investment expands production capacity, sustains regional jobs and accelerates the decarbonisation timeline. But it also brings significant risks including market distortions arising from allegedly subsidised competition, public security vulnerabilities linked to data access and foreign control of digital assets, long-term economic dependency, and the weaponisation of critical raw material exports.” [1 – continues]
