The EU automotive industry in transition
2025 Winter - Chiara Pappalardo
The automotive industry in Europe is facing significant headwinds. Production slumped between 2019 and 2022 before it bounced back again marginally in 2023. However, the number of newly registered EU cars is still lower than before the pandemic in 2019. The sector is weighed on by weak economic growth, high energy costs, disruption in key supply chains, geopolitical risks, and industrial policies of third countries, such as the United States Inflation Reduction Act and China’s extensive government interventions. Worryingly, the share of battery-electric and plug-in electric vehicles in European carmakers’ output is very low and has declined in recent months. In August 2024, registrations of electric cars dropped by 43.9% compared to the same month in 2023, driven by an astonishing 68.8% decline in Germany, considered the bloc’s industrial powerhouse.
The challenges associated with electric vehicles (EVs) include high costs and inadequate charging infrastructure. The average selling price of an EV in Europe is approximately €65,000, roughly double that of more traditional models. European incumbent companies are struggling to make profitable and affordable EVs, mainly due to the high cost of batteries. Only one of the world’s top 15 battery-electric vehicles is made in the EU. New companies from the battery and tech sectors have entered the market and leapfrogged the incumbents, especially as EVs are more uncomplicated to assemble than internal combustion engine vehicles. In this context, China has emerged as a global EV manufacturing hub. Vis-à-vis the EU, China is the main source of car imports, increasing by nearly 40% from 2022 to 2023. The country also dominates the production of almost every raw material and component (batteries, chips) used to make EVs. Meanwhile, Chinese investment in the EU along the EV value chain has been rising for the past few years.
A complicating factor for European automakers is EU Regulation 2023/851, which sets stricter standards for carbon dioxide (CO2) emissions from new passenger cars and light commercial vehicles. While the regulation bans the sale of petrol and diesel cars by 2035, subsidies for EVs were reduced in certain regions, with the European market increasingly having to rely on favorable company car taxation schemes. The law also imposes strict requirements on automakers. 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 of policy, industrial and economic trends, many EU factories are closing, raising questions of timing, social equity, and workers’ rights. The EU green growth agenda is becoming increasingly unpopular with voters. However, few would disagree that the EU automotive industry is too big to fall behind global competition, employing 13.8 million people (directly and indirectly) and representing 8.5% of total EU manufacturing employment. In Slovakia, Romania, Sweden, Czechia, Hungary and Germany it represents more than 10% of total manufacturing employment. The automotive sector also has major upstream and downstream linkages and comprises a complex network of cross-border supply chains, including a large number of specialized small and medium-sized enterprises. A case in point is Italy, which has a wide network of distributors and manufacturers and is a major exporter of auto parts.
How can the EU automotive industry move forward and stay competitive? Elected representatives and industry experts are taking a hard look at these questions. In a recent report, former president of the European Central Bank, Mario Draghi, suggested lowering energy and labor costs and increasing automation in the sector. He recommended developing a specific EU industrial action plan covering all value chain stages for the automotive industry. Furthermore, he advises supporting new essential projects of common European interest in innovative areas (such as affordable electric or autonomous vehicles and circularity in the value chain) and developing recharging and refueling infrastructure.
For their part, EU automotive industry representatives have urged the EU institutions to take urgent relief measures while political leaders have asked companies like Volkswagen and Stellantis to negotiate with labor unions and strike deals to prevent or defer planned layoffs.
Finally, the EU has taken steps to stave off competition on the trade side. In October 2023, the European Commission initiated anti-subsidy investigations into EU imports of battery electric vehicles from China, arguing that these imports were being subsidized and thereby detrimental to the EU industry. Provisional countervailing duties (ranging from 17.4% to 36.3%) entered into force on 5 July 2024. The Member States supported the definitive measures on 4 October 2024.
The future of the EU automotive industry is all but certain, yet one thing is clear: the road ahead is bumpy at best.