The European auto industry may appear, like the proverbial swan, to be sailing serenely on, but it is working furiously beneath the surface to survive and ward off the threat from China.
Europe’s carmakers seem to be functioning well. Sales have stabilized and are set to hold steady this year. Leading manufacturers have ridden out the storm set off by the U.S. tariff changes and a spate of profit warnings, with much talk of profit margins being restored in 2026.
But the threat from China hasn’t gone away and some say it is being encouraged by European Union regulations. These rules mandate a cut in carbon dioxide emissions so severe only new electric vehicles will be available for sale by 2035. Chinese automakers, with their 30% price advantage, are known to be ready and able to fill the EV gap; Europeans are struggling to do this profitably. Currently, the European industry and automaking countries are trying to persuade the EU to end its plan for this EV monopoly and open up the market to any technology. Without this dilution, the industry says it faces an existential threat. Green groups oppose the changes.
The introduction of tariffs on EVs last year by the European Union might have caused a momentary hiccup but China is poised to resume its attack with products increasingly made in Europe. Europe is likely to be forced to close many factories which are becoming surplus to requirements. This is would undermine profits and cripple the region’s most prestigious industry which employs millions and pays high wages.
Factory closures and temporary production halts
A spate of factory closures and temporary production halts demonstrates the gravity of the problem, led by Volkswagen and Stellantis and their many brands. Stellantis has introduced temporary shutdowns at six plants across Europe. Volkswagen has acted on a similar scale, with its EV production particularly impacted. VW brands lead sales charts across Europe and Stellantis is number two. Together, they account for about half of the new sedan and SUV market.
GlobalData, in its monthly report on the outlook for Western Europe, paints a sanguine picture, saying the new U.S.-EU trade deal has smoothed out trade policy uncertainty.
“When combined with rising real wages and increased government spending particularly in Germany, the outlook for the region has improved since mid-year,” GlobalData said.
GlobalData expects sales of sedans and SUVs to be broadly flat this year at just over 11.5 million. This sounds fine until you remember that before Covid, sales were about 4 million a year higher.
European manufacturers have finally got to grips with their production of electric vehicles and now have competitive products, according to Berenberg Bank.
Europe improving its electric vehicles
“The September Munich Motor Show finally showcased European products now approaching or on par with Chinese competitors in terms of specifications — and at significantly improved cost levels. The BMW iX3 “Neue Klasse” is potentially on track to approach internal combustion engine/battery electric vehicle margin parity by 2026,” the bank said in a report.
Matt Schmidt, founder of Schmidt Automotive Research, agrees, saying the Europeans have done their homework and now have EVs on a par with the Chinese.
“Previously Europeans had to make cost cuts to get EVs as close to positive profit margins as possible. Now, as battery prices come down and they adopt to using (cheaper) LFP they are the best of both worlds of profits and being able to return some of that windfall into higher quality interiors,” Schmidt said.
But evidence mounts that the Chinese threat not only hasn’t gone away, its potency is increasing. As Schmidt concedes, outside rich Western Europe, Chinese products make a compelling price case at the lower end of the market in the rest of the continent.
The British market is said to be the most threatened. Michael Dunne’s latest edition of Dunne Insights reports that experts say, led by MGs, BYDs and Chery Jaecoos, Chinese market share in the U.K. hit 13% in September, and could reach 30% in two years.
Dunne said Chinese automakers are faced with huge overcapacity in their home market, wiping out profits.
“How China Is Gutting Western Automakers”
“This extreme overcapacity has ignited brutal price wars at home, causing profits to vanish. This is forcing Chinese automakers to face an ultimatum: export or die,” Dunne said, in the latest edition of his newsletter headlined “How China Is Gutting Western Automakers”.
The signs of impending doom for Europe mount. Consultants AlixPartners said in a report because of subdued demand and Chinese competition, as many as eight factories in Europe could be surplus to requirements by 2030.
AlixPartners said European car factories are running at an average 55% of capacity. Between one and two million vehicle sales will be lost to China, which will reach a market share of about 5% this year and could reach 10% by 2030 led by BYD and SAIC’s MG.
Investment researcher Jefferies has said Chinese brands could account for up to 6% of European production by 2028 or about 860,000 vehicles, including BYD plants in Hungary, Turkey, and maybe Spain too.
According to investment bank UBS, data for September showed strong sales of the MG HS, BYD Seal U and Jaecoo 7 plug-in hybrid, which pushed Chinese market share to a record 7.3% in the five largest European markets.
China dominates rare earths, batteries
It’s not just China’s manufacturing competence that endangers Western competition. Dunne also points to the Chinese domination of key automotive manufacturing components from rare earth magnets to battery materials. Without these products, factories in Europe and the U.S. would soon grind to a halt.
“The real test now is whether companies and governments can work together to build new and reliable supply chains and secure access to the materials that power the modern world. If the world does not act collectively, it could soon wake up to find the entire mobility industry – and the technologies that flow from it – running on China’s terms,” Dunne said.
The West has taken comfort from the belief that the consequences of a long-reported possibility of a China invasion of Taiwan would so devastate its own economic progress that it was insurance policy against it ever happening.
China could be too successful
Does the same reasoning apply to an overly aggressive automotive policy? If China is too successful, the EU might seek to defend its industrial base by seeking to shut out China completely. The problem for Europe is that would also mean their automakers led by BMW, Mercedes, VW and its Audi and Porsche subsidiaries, would lose their hugely profitable business in China, although that is a shadow of its former self.
“The pain for Western automakers is real. As a group, they are selling eight million fewer vehicles in China than they did five years ago,” Dunne said.