Europe’s automotive industry is entering a decisive decade but lacks a clear map for navigating it. While global competitors accelerate their shift toward electric vehicles, Europe’s strategic focus remains clouded by fragmented interests, path dependencies, and short-term pressures. This policy paper aims to sharpen the debate by highlighting three core insights. First, hitting the breaks on electrification is not a viable strategy - it will deepen, not avoid, disruption. Second, there is no deep-seated demand deficit for electric vehicles, the real bottlenecks are persistent price premiums and inconsistent policy signals. Third, Europe’s car industry is not destined to decline. National industrial policies show early success, but without EU-level coordination, significant risks remain. What is needed now is a shared strategy to keep Europe in the race.
- Introduction
Europe’s automotive sector remains a cornerstone of the continent’s economic and social fabric, accounting for around 7% of the EU’s GDP and about 13.8 million direct and indirect jobs across the bloc. Built on deeply integrated, cross-border value chains, it has long driven industrial activity and employment opportunities across member states, contributing to economic cohesion within the bloc.
Today, however, Europe’s car industry is losing its technological grip. While global competitors have surged ahead, European carmakers were slow to embrace battery electric vehicles (BEVs), missing the window to turn their early engineering strengths into lasting leadership. In contrast, Chinese car manufacturers – bolstered by decades of strategic industrial policy – are scaling rapidly and competing on cost, quality, and innovation. The roles have reversed: it is now European automakers scrambling to regain ground after a slow start.
At the same time, Europe’s transition to electromobility is stuttering. Recent BEV sales across the EU have fallen short of earlier expectations, while delays and disruptions in flagship battery projects have cast doubt on Europe’s ability to build a competitive, homegrown BEV value chain. As structural pressures become more evident, rising announcements of job cuts and plant closures are stoking fears of a broader decline in the sector.
This challenge is compounded by mounting external headwinds. Recently imposed US tariffs on automotive imports from Europe have added pressure on EU carmakers. But a more consequential blow has come from China, where market shares and sales of European brands are slipping. Once a reliable engine of profit, the Chinese market is now defined by fierce price competition and a rapid shift from internal combustion engine (ICE) vehicles to BEVs – leaving many EU automakers struggling to keep pace.
Yet the EU still lacks a shared diagnosis of the problem. Instead, fragmented interests, deep-rooted industrial path dependencies, and short-term political pressures continue to crowd out strategic clarity. This is evident in continued divisions over trade measures designed to respond to the influx of Chinese-made BEVs as well as persistent political pushback against core regulatory elements – most notably the 2035 phase-out of CO2-emitting vehicles. The EU’s recent Automotive Action Plan reflects this broader ambiguity: while it identifies many of the right levers to support electrification, it largely avoids firm commitments. At the same time, it led to a relaxation of fleet-wide emission performance standards, which has only prompted further calls to weaken the 2035 target - underscoring the continued absence of a coherent, joint industrial strategy for the sector. As a result, confusion persists over what the core challenges of the sector actually are – and what role policy should play in addressing them.
Against this backdrop, this policy brief examines the root causes of Europe’s automotive malaise and provides a clearer vantage point for strategic reflection – distilling three key learnings to inform the current debate:
First, sticking to the status quo is not a viable strategy. The sector has been undergoing structural changes for more than two decades. Slowing the shift to electrification will not dodge disruption – it will deepen it. As global competitors race ahead, Europe risks falling further behind by standing still.
Second, there is no fundamental demand deficit. Attributing the stuttering BEV transition solely to reluctant consumers oversimplifies the problem, obscuring more actionable barriers to adoption – chiefly persistent price premiums over ICE vehicles and erratic policy signals.
Third, Europe’s automotive industry is not doomed to decline. Recent national initiatives demonstrate that well-designed industrial policies can attract investment, revitalize legacy production clusters, and build new BEV value chains. What's missing is a coordinated European strategy to turn so far disparate efforts into a lasting and collective competitiveness.
- Can Standing Still Save Europe’s Automotive Industry?
A steady drumbeat of headline-grabbing lay-offs and rumours of plant closures has intensified concerns that the goal of rapid electrification is increasingly destabilising Europe’s automotive base. In response, calls to slow down the shift to electric vehicles – often through regulatory rollback – have gained traction, as these are viewed by some as the best hope for preserving factories and jobs.
However, this perspective underestimates the effects of two key dynamics.
First, it assumes the status quo is fundamentally stable. This ignores the long-term structural trends that have already weakened the industrial foundations of traditional automotive strongholds like Italy and France, and which are now increasingly affecting even the well-functioning, highly integrated cluster spanning Germany and central and eastern Europe (CEE).
Second, it downplays the impact of global market dynamics – particularly China’s significant momentum in advancing electrification – which are structurally undermining demand for European internal combustion engine (ICE) vehicles and rendering the existing model increasingly unsustainable without a transformative restructuring.
The Illusion of Stability: Structural Decline in France and Italy
Historically, Germany, France and Italy have formed the core of the European automotive sector, home to major legacy manufacturers such as Volkswagen, Mercedes-Benz, BMW, Renault, Peugeot, and Fiat. Around these firms, dense regional clusters have developed, characterised by close co-location of final assembly plants, research and development (R&D) hubs, and networks of engine and component suppliers. Yet for some of these core regions – particularly in France and Italy – this industrial strength has steadily declined for over two decades.
In fact, the redrawing of the EU’s automotive map began long before electric vehicles grabbed the headlines. By the early 2000s, as protective barriers – both internal and external to the European Single Market – largely fell away in the automotive sector, structural pressures started to mount. Italian and French automakers, traditionally specialising in small and compact car segments with narrower profit margins and higher price sensitivity, were confronted with intensifying competition, particularly from Japanese and South Korean manufacturers. At the same time, consumer preferences across Europe increasingly gravitated towards larger vehicles.
As profitability became harder to sustain, automakers such as Renault and Stellantis progressively relocated their production lines, especially for small and compact cars, to lower-cost factories in central and eastern Europe, Turkey, and northern Africa. Consequently, the share of Renault’s and Stellantis’ (formerly PSA) production in France, relative to their total production in the EU and neighbouring countries,[1] fell sharply – from 64% in 2003 to just 25% in 2020.
Figure 1
Source: Eurostat (lfsa_egan22d; NACE C29)
The cumulative impact has been substantial. Domestic vehicle production in both countries has declined sharply. In Italy, passenger car output dropped by 62%, from 1.42 million cars in 2000 to just 0.54 million in 2023. France saw a similarly steep decline, with car production decreasing from around 2.88 million in 2000 to just under 1.03 million in 2023. This relocation of production gradually hollowed out many legacy manufacturing plants in France and Italy, leaving them underutilised and economically fragile, with cascading effects on national supplier networks. Employment trends reflect these contractions, with France seeing around half its automotive manufacturing jobs disappear between 2008 and 2024 (see Figure 1).
Successful Restructuring: The Emergence of the German-CEE Cluster
At the same time, the centre of gravity within Europe’s automotive landscape shifted eastward. Following the fall of the Iron Curtain and the EU’s 2004 “big bang” enlargement, CEE countries like Czechia, Slovakia, Poland, Hungary, and Romania evolved into vital automotive hubs. By 2023, these five countries alone assembled around 3.71 million passenger cars – nearly a third of the EU’s total output that year. Growth has been particularly striking in Czechia and Slovakia, whose respective output has tripled and nearly quintupled since EU accession. The eastward shift has been driven not only by lower labour costs but by a combination of structural advantages, including skilled workforces, attractive national investment incentives, substantial EU cohesion policy funding, and proximity to western European markets and supply chains. Spain too has emerged as the bloc’s second-largest car-producing member state, assembling up to 1.86 million passenger cars in 2023, trailing only Germany’s 3.96 million and further underlining how manufacturing capacities within the EU are being redistributed (see Figure 2).
Figure 2
Source: OICA; Note: Selected CEE comprise CZ, HU, PL, RO, and SK.
Crucially, the expansion of automotive production in central and eastern Europe did not necessarily come at the expense of all legacy producers; on the contrary, for German automakers it became a catalyst for growth. German producers strategically leveraged CEE economies as extensions of their domestic production systems. Unlike their French and Italian counterparts, who largely offshored production as a defensive cost-cutting strategy, German manufacturers developed an integrated, complementary division of labour – coupling lower-cost manufacturing in CEE countries with high-value flagship plants at home focusing on R&D and premium-segment production. This cross-border integration enabled German automakers and their supplier ecosystems to sustain profitability and global competitiveness, preserving domestic output and employment despite the country’s comparatively higher production costs (see Figure 3).
Figure 3
Source: Eurostat (lfsa_egan22d; C29); Note: Selected CEE comprise CZ, HU, PL, RO, and SK.
This regional synergy was further amplified by booming demand for German high-end vehicles in China. The rapid expansion of China’s middle-class consumer base fuelled high-margin exports of technologically advanced German cars, providing a healthy revenue stream for German carmakers. However, cracks in the model had already begun to surface, with German vehicle output declining as early as 2017 (see Figure 2) – well before the Covid-19 pandemic – driven by falling production and shrinking exports of ICE vehicles.
Global Market Dynamics Causing Cracks in the Germany-CEE Automotive Cluster
In recent years, the previously robust Germany-CEE automotive cluster has come under strain from two interlinked fronts. First, in an attempt to protect legacy technologies and prolong lucrative profits from traditional ICEs, German carmakers adopted a hesitant, often defensive stance towards electrification. Second, they underestimated the agility and quality of emerging rivals.
Long serving as a reliable profit engine for German automakers, the Chinese market has now shifted from prized asset to looming liability. In 2024, China still accounted for almost 32% of the Volkswagen Group’s global sales, 34% of Mercedes-Benz’s, and 29% of BMW’s. But the combined sales share of German brands in China fell steeply from 24% in 2019 to only about 15% in 2024 (see Figure 4). Volkswagen in particular has lost its market-leading position, with its share of the passenger vehicle market dropping from 19% in 2019 to 14.5% in 2023, overtaken by Chinese competitor BYD. Crucially, this disruption is intertwined with China’s rapid pivot toward electrification, driven by expansive industrial policies that stimulate both supply and demand. The scale of this shift is stark: the combined share of battery-electric, plug-in hybrid electric, and extended-range electric vehicles in China has surged – from well below 10% in early 2021 to over 50% by early 2025 (see Figure 5).
Figures 4
Source: China Association of Automobile Manufacturers (CAAM)
Figure 5
Source: China Passenger Car Association (CPCA); Note: Data comprises BEVs, PHEVs, and EREVs
These market shifts are already leading to unprecedented pressures to restructure. For the first time in its history, Volkswagen contemplated factory closures in Germany and dropped its long-standing job protection pledge, announcing plans to cut over 35,000 of its roughly 295,000 domestic jobs by 2030. Other VW brands are following suit, with Audi shedding 7,500 jobs and Porsche about 3,900 jobs by 2029. Similarly, Mercedes-Benz is pursuing workforce reductions via buy-outs and voluntary redundancies after a steep decline in profits in 2024, largely due to falling sales in China. Among major German automakers, only BMW has so far avoided substantial domestic layoffs, though it too is implementing cost-cutting measures.
However, the restructuring challenge extends well beyond the big carmakers. An even larger wave of risk is bearing down on the supplier industry, where traditional players like Bosch, ZF, Continental, and Schaeffler announced sweeping job cuts in 2024. Long central to Germany’s automotive strength, these firms are now squeezed from several sides: better-positioned competitors in high-value BEV technologies, declining ICE vehicle sales, and sluggish domestic BEV uptake, leaving their own production capacities underutilised.
Crucially, the repercussions will not be confined to Germany. Given deeply integrated automotive networks and the pivotal role the sector plays in CEE economies, a sustained contraction of Germany’s automotive industry would inevitably produce severe spillover effects. Assembly and supplier plants and jobs across central and eastern Europe would face heightened vulnerability if German carmakers’ market shares and sales volumes continue to decline, particularly in China. For instance, automotive exports - primarily from Volkswagen brands – accounted for 78.7% of Slovakia’s total exports to China.
Why Slowing Electrification won’t Preserve the Status Quo
Failing to adapt to structural shifts comes at a cost. The experiences of Italy and France show that inertia in the face of industrial transformation and shifting market dynamics does not lead to stability, but to sustained decline and hollowed-out manufacturing bases. The German-CEE cluster, at the heart of Europe’s automotive ecosystem, risks repeating this pattern if it fails to decisively change its course.
Germany’s recent trajectory makes this risk clear. Putting the brakes on electrification is not a sustainable solution. Rather than preserving the status quo, hesitation has exacerbated existing vulnerabilities, reinforcing reliance on declining ICE markets and allowing global competitors – particularly from China – to pull ahead. The rapid rise of EV market shares in China, and their growing presence in emerging export markets across Latin America and Southeast Asia, underscores that the global automotive transition will proceed regardless of Europe’s policy pace. The only real choice is whether Europe shifts into gear in time – or continues to lose ground in the process.
Infobox I: BEV vs. ICE value chains: Are job losses inevitable?
While BEVs feature fewer moving parts and simpler powertrains than ICE vehicles, the assumption that this necessarily reduces labour requirements in automotive value chains is increasingly being challenged. Early estimates, such as a 2017 technical report by Ford projecting a 30% reduction in labour hours per vehicle, still influence debates but reflect a partial and long-term perspective. In contrast, more recent research indicates that labour intensity at BEV assembly sites may in fact exceed that of ICE counterparts, particularly when production is being ramped up – and in some cases is projected to remain higher even after a decade. This is likely due to greater investment in new manufacturing technologies, a focus on more complex, premium BEVs, and growing vertical integration, as original equipment manufacturers (OEMs) may bring in-house those activities that they had formerly outsourced. Over time, labour needs may gradually decline as production scales up and efficiency improves, but short- to medium-term trends point to a more labour-intensive transition than often assumed.
However, while vehicle assembly jobs often dominate public discussion, these represent only a fraction of total employment in the automotive sector. In the EU, an estimated 45% of auto industry jobs are linked to the manufacture of vehicles, whereas up to 55% are concentrated among upstream suppliers that typically produce engines, transmissions and other components. Many of these roles are at risk, as key ICE components are set to become obsolete in the transition to BEV powertrains, suggesting that the most serious labour disruptions may occur further upstream in the value chain. At the same time, new employment opportunities are expected to emerge across the BEV ecosystem, including raw material extraction and processing, manufacturing of battery components and cells, system integration and end-of-life recycling. A recent study showed that, when battery production and assembly are included, the labour intensity required for manufacturing components for a BEV powertrain is greater than for its ICE equivalents – underlining the potential for job creation in newer segments of the auto industry.
Still, the broader implications for automotive employment remain uncertain. Alongside the BEV transition, a parallel process of growing automation and digitalisation is reshaping the sector, further affecting labour market dynamics. First, these shifts are set to alter the composition of the automotive workforce and the demand for specific skill sets and occupational profiles. This will call for substantial retraining and up-skilling efforts, particularly in regions with high concentrations of ICE-related employment. Second, new jobs will not necessarily emerge in the same locations – or even in the same countries – as those where current ones are disappearing. Many activities central to the BEV value chain, such as battery component production and materials processing, are only partially established in Europe today. The extent to which these new segments take root in the EU will be a decisive factor in shaping the labour market outcomes of the transition in the automotive sector.
- Are Europeans Simply not Ready for Electric Cars?
As European carmakers lose momentum in China and other key export markets, defending the bloc’s market during the shift to electric vehicles has become even more critical. Broad-based BEV uptake in Europe is not only essential for decarbonising the EU’s transport sector – a long-standing laggard – but also as a strategic lever for scale. A strong domestic BEV market helps European manufacturers to reach the production volumes and cost structures needed to remain globally competitive.
However, Europe’s transition to electric vehicles has been stuttering. Following robust growth up until 2022, BEV sales in Europe showed signs of slowing in 2023 and largely plateaued throughout 2024 – even as sales continued to soar in other global markets, particularly in China (see Figure 6). Moreover, BEV penetration still varies considerably across EU member states, with countries like Denmark, Sweden and the Netherlands leading the rankings, while uptake remains especially low among many central and eastern European member states (see Figure 7). While Q1 2025 saw a modest rebound – with BEVs accounting for 15.2% of new car registrations across the bloc, up from 12% a year earlier – the current pace still falls short of the trajectory required to ensure a smooth transition toward the EU’s objective of selling solely zero-emission vehicles by 2035.
Figure 6
Source: IEA
Figure 7
Source: EAFO; Note: 12 EU countries (BE, CZ, DK, FI, DE, IE, IT, LU, NL, SI, ES, SE) are updated for Jan-May 2025.
Against this backdrop, Europe’s BEV slowdown is routinely pinned on consumers’ supposed reluctance to go electric. According to this view, consumer demand cooled throughout 2023 and 2024 as inflation, higher borrowing costs, and volatile electricity prices squeezed household budgets. Abrupt cutbacks in state-led incentives to encourage BEV purchases, most notably in Germany, further dampened consumer appetite, while patchy public charging coverage sustained anxieties about BEVs’ range. Taken as a whole, this “demand-deficit” narrative peddled repeatedly by industry voices such as ACEA, BMW, VW, and Mercedes-Benz, draws a convenient conclusion: European consumers are simply not ready for electric vehicles and, until subsidies return, macro-economic headwinds ease, and chargers blanket the map, the transition must slow. Yet this misreads the problem, and risks inviting strategic complacency.
Charging Infrastructure and Range Anxiety: Still Relevant, but Increasingly Overstated
Persistent range anxiety and insufficient public charging infrastructure are regularly cited as key barriers to mass-market BEV demand. And to some extent, these concerns remain valid, as regional disparities in charging infrastructure endure: while the overall charging coverage has improved greatly in northern and western Europe, infrastructure development in southern and especially central and eastern Europe continues to lag (see Figure 8). These gaps are linked to persistent practical bottlenecks, including slow grid connections, diverse national permit procedures and uncertain business models for private operators, particularly in regions with low BEV uptake.
Figure 8
Source: EAFO
Yet in light of recent progress, the prominence of these issues in public discourse appears increasingly overstated. Between 2023 and 2024, public charging capacity across Europe expanded by 37%, outpacing BEV uptake. By Q1 2025, nearly 934,000 public recharging points were in operation across the EU, with about 16% being fast chargers using direct current (DC) (see Figure 9). Moreover, most EU member states met their 2024 EU targets for public charging infrastructure under the EU’s Alternative Fuels Infrastructure Regulation (AFIR), which also mandates a gradual increase in minimum fast-charger density along core transport corridors across Europe. Importantly, the EU’s Automotive Action Plan aims to accelerate the implementation of AFIR and grid connections by providing technical and financial assistance.
Battery performance has also advanced significantly. In 2023, the sales-weighted average range of BEVs registered in Europe was around 430 km (see EEA or ICCT) – well above the daily driving range of many Europeans. Even in the €20,000-€35,000 price bracket, models offered an average range of about 217 km by early 2024, with many capable of adding significant range after just 20 to 30 minutes of fast-charging. As more upcoming mass-market BEVs are expected to exceed 300 km, the reasons for range anxiety are likely to erode further in the coming years.
Figure 9
Source: EAFO
Supply Shortcomings and Policy Uncertainty: The Real Obstacles
The real problem is not a structural lack of European demand for BEVs. Rather, the prevailing focus on demand-side weaknesses obscures persistent supply-side shortcomings. As the early-adopter segment – typically higher-income, higher-education households – nears saturation in several European markets, further BEV uptake increasingly hinges on winning over mass-market consumers. Survey data consistently indicate that a majority of consumers value the climate benefits of electric vehicles over ICE vehicles and would be open to switching – if their concerns about affordability, battery driving range and charging speed are credibly addressed. Yet to date there remains a notable mismatch between what cost-conscious, mass-market consumers are looking for and what most European carmakers have brought to the market.
Despite their lower lifetime running costs, the price premium of BEVs over their ICE equivalents is still the primary barrier for many EU consumers. Surveys (for example, EAFO 2023, EAFO 2022) consistently support this finding. Only around a third of consumers are willing to pay a price premium for a BEV over a comparable ICE vehicle. But while affordability concerns have long been flagged, many European automakers have continued to prioritise premium BEVs, largely overlooking the volume segment, which is characterised by lower margins but key to widespread adoption as it represented 36% of total car sales in 2023. As a result, according to JATO Dynamics, average BEV prices in the Eurozone were still roughly 22% higher than those of comparable ICE models in 2024.
This gap has not gone unnoticed by international competitors. Chinese manufacturers are already offering high-quality, mass-market BEVs at or near price parity with equivalent ICE models in their home market, with some entry-level BEV models retailing for under €7,000. After years of delay, several EU automakers are now rushing to develop and release lower-cost models to avoid handing the mass segment over to faster-moving Asian competitors. In 2024, the cheapest BEV model sold in Europe – retailing for around €17,900 – came from the Romanian brand Dacia. The caveat? It was made in China.
Finally, policy signals in the last years have not helped to build consumer confidence. Over the last two years, Europe’s regulatory framework has grown more volatile, with political debates on rolling back the 2035 target for zero-emission vehicles, shifting subsidy regimes, and mixed messages from policymakers. Such uncertainty comes at precisely the wrong moment, since consumers and industry alike need clarity and confidence if they are to make long-term decisions. The mere perception that key climate regulations could be further weakened – or abandoned altogether – risks suppressing BEV demand by fuelling hesitancy among potential buyers and stalling crucial private investment. In this environment, political rhetoric questioning the speed or necessity of the shift to electromobility not only ignores global market realities, it also intensifies uncertainty, delaying the market shift Europe so urgently needs.
No Consumer Doom – but the Need for Policy Clarity and Affordable Supply
The diagnosis is clear: the stuttering uptake of BEVs in Europe should not be mistaken for a deep-seated resistance among consumers towards electric vehicles. Rather, it reflects the combined impact of temporary macro-economic headwinds, volatile policy signals and – most importantly – enduring shortcomings on the supply side, mainly the persistent price premium of BEV models over their ICE equivalents and the scarcity of affordable, mass-market options. If these issues are addressed, demand need not be the constraint many fear.
Infobox II: Are Chinese manufacturers flooding the European market with cheap BEVs?
Alarm bells are ringing in Europe over fears that cheap Chinese BEVs could flood the market at the expense of EU legacy manufacturers. While these concerns are not without basis, the picture is more nuanced than often portrayed.
Chinese BEV manufacturers enjoy a range of cost advantages through technological innovation, manufacturing efficiency, vertically integrated supply chains, economies of scale, and significantly lower labour and electricity costs. These advantages have been reinforced by decades of expansive industrial policy, including subsidies targeting both BEV demand and supply.
However, Chinese brands have so far adopted a margin-over-volume strategy in Europe. Amid fierce domestic price wars that have squeezed their profits at home, many Chinese manufacturers are seeking profitable growth abroad - including in Europe, where Chinese brands’ BEV market shares have been increasing (see Figure 10). Still, similar BEV models are often priced significantly higher in the EU than in China, with substantial export mark-ups. For instance, BYD has offered several models in Germany at double its Chinese price tags, aligning with market levels rather than undercutting them.
Figure 10
Source: ACEA
Rather than competing on price alone, Chinese brands aim to reposition themselves as high-quality, technologically sophisticated alternatives. Determined to shed the outdated perception of inferior quality, Chinese BEV makers are also introducing premium models in Europe and equipping even their entry-level vehicles with advanced features often absent in comparably priced European models. This value proposition appears to be gaining some traction. While brand loyalty remains high among European consumers, surveys indicate that younger buyers especially are increasingly open to considering Chinese BEVs.
Political considerations may also play a role in restraining the pricing strategies of Chinese BEV makers. With the US market effectively closed due to prohibitive tariffs, Europe is a critical export destination. Aggressively undercutting European rivals on their home turf could trigger a more severe policy backlash. Indeed, the EU imposed firm-specific, countervailing tariffs of up to 37.6%, in addition to the existing 10% duty, on BEVs imported from China, targeting unfair advantages stemming from subsidies granted in China. However, these tariffs have not closed the door completely. While room to adjust prices may have been reduced, Chinese firms continue to enjoy attractive profit margins on their EU exports.
So far, customs data show no sustained decline of Chinese BEV exports into the EU since the tariffs were introduced (see Figure 11). At the same time, exports of plug-in hybrids (PHEVs) and hybrid electric vehicles (HEVs) from China – which are not subject of the tariffs - have noticeably increased, indicating a flexible response from Chinese firms. Moreover, several Chinese manufacturers are pursuing a dual strategy: maintaining exports while also localising production as a means of sidestepping possible future trade frictions. The construction of new EU-based factories – like BYD in Hungary, Chery in Spain and Polestar in Slovakia – are part of a broader push to establish a permanent foothold in the region. However, the European Commission has already launched a foreign subsidy probe into BYD’s planned Hungarian plant, signalling that scrutiny is not confined to unfair competitive advantages linked to imports.
Figure 11
Source: General Administration of Customs of the People’s Republic of China
From an EU perspective, this highlights that defensive measures like tariffs may temporarily slow the pace of competition, but they are not a sustainable long-term solution. Instead, they must be part of a broader industrial strategy that focuses on revitalising EU-based value chains and supporting the roll-out of affordable, locally produced BEVs.
- Is Europe’s Automotive Industry Doomed to Decline?
As the global pivot to electric vehicles accelerates, concerns are mounting over Europe’s ability to maintain its position as a manufacturing and export powerhouse. The worry is that legacy manufacturers will struggle to match the technological and cost advantages of Chinese BEV pioneers, and that regions historically shaped by automotive production could face industrial decline, failing to gain a foothold in evolving value chains.
Yet while the risks are real, Europe’s automotive decline is far from preordained. Headlines often focus on job cuts, plant closures, and the struggles of high-profile European battery ventures such as Northvolt (see Infobox III). However, less attention is paid to emerging European success stories. In fact, the experiences of France, Hungary, Poland and Spain offer instructive lessons on both the prospects and pitfalls of industrial policy in navigating the automotive transformation.
Lesson 1: Coherent Industrial Strategies Can Drive Automotive Reinvestment and Renewal
Far from spelling inevitable decline, the shift to electromobility has opened new industrial opportunities for EU countries that pursue coherent strategies. Across the EU, industrial policies have proven capable of attracting major investments and transforming existing automotive clusters – or creating new ones – into potential hubs for producing EVs and batteries.
Poland, for example, secured an early lead in the EU’s emerging battery ecosystem. A pivotal moment came in 2016, when LG Chem chose Wrocław for Europe’s first large-scale battery cell gigafactory – an investment secured through a multi-layered incentive package, including generous tax breaks in Special Economic Zones, direct investment grants, a symbolic land sale of €1, and a €480 million loan from the European Investment Bank (EIB). This initial investment sparked a pronounced cluster effect, drawing in suppliers of battery components such as Umicore, and IONWAY (producing cathode-active materials) and SK IE Technology (for separators). This localised battery manufacturing hub has become tightly integrated into the European BEV value chain, supplying assembly plants across the continent. Moreover, the momentum has spilled over into BEV production, as Stellantis has assigned new BEV models of Jeep and Alfa Romeo to its Tychy plant and Volkswagen has since shifted its e-Crafter electric van production from Hanover to Września.
Similarly, Hungary is rapidly emerging as Europe’s largest hub for battery manufacturing, adopting and amplifying the industrial playbook first pioneered by Poland. Central to the country’s success is its extremely competitive fiscal environment, including the EU’s lowest corporate income tax at 9%, generous “VIP investment cash subsidies” tailored to individual firms, and substantial indirect support for enabling infrastructure – like electricity grids, water systems and transportation networks. This assertive approach has secured some of Europe’s largest gigafactory investments from Asian battery giants like Samsung SDI, SK On, CATL and EVE Power, cementing Hungary’s status as a continental battery powerhouse with a projected capacity of up to 226 GWh. As these anchor projects have started to take root, Hungary has cultivated supplier ecosystems, particularly among Asian firms specialising in cathode-active materials, separators, and battery recycling. The battery boom is accompanied by significant BEV production moves: BMW is building a dedicated BEV plant in Debrecen, Mercedes-Benz is expanding capacities at Kecskemét, and BYD is launching its first EU-based electric car plant in Szeged.
France, after years of declining vehicle output, has seized the shift towards electromobility as an opportunity to revive its shrinking automotive base. It began with an €8 billion pandemic-era rescue plan that tied financial support to commitments for producing domestically made BEVs and batteries, followed by the broader “France 2030” agenda for reindustrialisation, which earmarks nearly €5 billion for automotive transformation. Central to this strategy is the creation of a domestic battery ecosystem, supported through generous public funding under the EU’s Important Projects of Common European Interest (IPCEI) initiative and its Research, Development and Innovation (RDI) frameworks, as well as from EIB loans.
The approach has begun to yield tangible results: in northern France, long emblematic of industrial decline, a “Battery Valley” is taking shape. Among the flagship gigafactory projects are the European joint venture ACC, which repurposed a former Stellantis engine facility; the French start-up Verkor and Chinese-owned Envision AESC whose gigafactories are set to supply Renault’s “Electricity” production hub for BEVs – a cluster of upgraded legacy plants; and Taiwanese firm ProLogium, planning a solid-state battery facility, backed by €1.5 billion in French R&D support tied to technological transfer. This momentum has been fostered by a mix of low-carbon energy availability, robust infrastructure, proximity to legacy automotive sites, and substantial state support. Complementing this supply-side push, France has put in place vehicle purchase incentives, increasingly favouring models with low production-related emissions, effectively giving preference to BEVs that are made in Europe.
Similarly, Spain has treated electrification as a strategic opportunity. The government has embedded electromobility into its Recovery and Resilience Plan, making strategic use of EU funds. The plan combines demand-side purchase incentives for electric vehicles through the MOVES programmes, with supply-side support under the PERTE VEC scheme, which offers grants and loans designed to channel private investment into battery manufacturing and the broader BEV value chain. These national instruments are being complemented by regional subsidies, more streamlined procedures for granting permits, and local infrastructure upgrades – creating fertile ground for flagship projects to grow.
This incentive-based approach is already reshaping Spain’s automotive landscape. Major investments include Volkswagen’s PowerCo battery gigafactory in Sagunto and Stellantis and CATL’s planned battery plant in Zaragoza. Most projects are co-located with established automotive clusters, where legacy plants are being modernised for BEV production with PERTE VEC support. At the same time, new industrial nodes may emerge. For instance, in lithium-rich Extremadura, where Envision AESC is building a gigafactory, companies like Lithium Iberia are planning to set up upstream extraction and refining projects. In addition, a joint venture between Spanish Ebro and Chinese BEV maker Chery is set to launch production at part of Nissan’s former Barcelona facility.
Taken together, these examples are clear evidence that coherent industrial strategies and well-designed policies have the potential to transform vulnerable automotive regions into strategic hubs for Europe’s electric future, safeguarding jobs and securing a place in global value chains.
Lesson 2: Effective Industrial Policy Calls for Smart Design and European Coordination
While national experiences illustrate that industrial policies can drive Europe’s electric transition, closer inspection reveals that long-term success is all but guaranteed. Designing effective industrial policies requires several challenges to be navigated, such as: 1) securing local value capture, technology transfer, and positive spillovers; 2) avoiding new strategic dependencies and intra-EU fragmentation; and 3) ensuring strategic prioritisation and adaptability amid shifting conditions.
- Securing Local Value Capture, Technology Transfer, and Positive Spillovers
Well-timed and targeted industrial policies helped Poland and Hungary integrate into Europe’s emerging BEV value chain. But the extent to which these industrial gains translate into local value creation remains unclear. While the focus on attracting established Asian battery makers has enabled a swift set-up and scale-up of domestic battery production capacities, much of the sector’s highest-value R&D and intellectual property resources are still based abroad.
Moreover, many of these firms tend to rely heavily on imported components and labour, so far generating limited positive spillover effects for local suppliers or workforces, particularly in the more highly skilled segments. While this may evolve over time, especially in CEE member states, this risks replicating the structural asymmetries of the ICE era, during which many of these countries primarily served as low-cost assembly sites for western European carmakers.
To avoid this outcome, domestic value capture must grow in tandem with industrial capacity. Public support should be linked not just to the size of any investment but to binding requirements for technology transfer, local hiring and training, as well as the integration of domestic suppliers into the value chain. Without such commitments, European firms and workers risk being locked out of the most strategic and value-added segments of BEV value chains, undermining the long-term competitiveness such policies are intended to ensure.
- Managing Strategic Dependencies and European Fragmentation
Relying on non-EU battery manufacturers offers short-term operational certainty – but could bring with it long-term strategic risks. Given their proven ability to scale quickly and deliver reliably, Asian battery makers have secured substantial state aid across Europe. These investments have helped to anchor EU-based battery production and bridge near-term supply gaps for European carmakers. However, leaning too heavily on non-EU firms – especially when these are based mainly in one country – risks trading short-term operational challenges for long-term strategic vulnerability.
Nowhere is this tension more visible than in Hungary. The country has emerged as the primary locale for Chinese battery and BEV investment in Europe, hosting major projects from CATL, EVE Power, BYD and Sunwoda – many backed by extensive subsidies. While this industry momentum boosts overall EU production capacities, it also raises concerns about strategic dependence on China. The recent case of Chinese BEV maker Leapmotor relocating planned production from Poland to Spain, following Warsaw’s support for the EU’s countervailing tariffs on Chinese BEVs, is a clear sign of how foreign direct investment can be politically instrumentalised.
Beyond external vulnerabilities, this geographic concentration of investment in a single EU member state also poses risks within the EU itself. It may lead to industrial imbalances within the Union and complicate collective decision-making at the EU level. To mitigate both types of risk, industrial policies within Europe should be better coordinated and aim for greater diversification of support for foreign direct investments – while ensuring alignment with the EU’s broader goals of strategic autonomy, competitiveness, climate neutrality, and cohesion.
- Ensuring Strategic Prioritisation and Adaptability to Shifting Conditions
Industrial policies are not a one-off exercise. They require regular refinement, responsiveness to shifting market conditions, and the political will to make difficult strategic choices.
Spain’s PERTE VEC programme illustrates why constant refinement matters. Launched in 2021 to accelerate the automotive transition, the first funding call awarded just €735.8 million – only about a quarter of its intended scope – due to complex eligibility rules and tight timelines. Subsequent calls were restructured, enabling a wider range of projects to benefit. As a result, take-up improved significantly in the second and third calls. To channel remaining NextGenerationEU funds – namely €1 billion in loans and €250 million in grants – more efficiently, Madrid furnished a dedicated agency, SEPIDES, with a clearer mandate and greater flexibility to manage the funds.
The case of France highlights necessary trade-offs. The emergence of “Battery Valley” and the modernising of Stellantis’ legacy plants in eastern France are signs of tangible progress. Yet beyond these hubs, several legacy plants are facing continued strategic uncertainty. This highlights a hard reality: industrial strategies require prioritisation. Not all legacy plants and firms will find a future in BEV value chains. Where prospects are weak, policymakers may need to pivot – redirecting resources towards just transition policies such as skills development and regional diversification, to support workers and communities and to manage the political costs of industrial change.
But even supported flagship projects may face setbacks, underlining the need for adaptable policy frameworks. Against the backdrop of struggles in its European operations, Ford withdrew from Spain’s second PERTE VEC funding call, suspending the construction of its planned EV plant in Valencia in late 2022. In Hungary, BYD delayed mass production at its Szeged BEV plant until 2026, reportedly prioritising production in its planned facility in Turkey due to cost reasons. Meanwhile, ACC has faced difficulties in achieving high-quality, scaled battery output at its French gigafactory, shelving plans to open additional facilities in Germany and Italy. These examples reinforce a core principle: industrial policies must be adaptable. That means building in regular review points, pragmatic exit options, and conditionality – while retaining the flexibility to maintain support when projects remain strategically sound despite short-term hurdles.
Infobox III: European battery champions – a dream derailed?
From battery boom to battery blues
Battery cell manufacturing quickly emerged as a focus of the EU’s ambition to establish a domestic battery value chain. Given that the battery accounts for up to 40% of a BEV’s total value, it is no surprise that domestic battery cell production has become a strategic centrepiece of the EU’s efforts to rebuild and future-proof its automotive value chains. And on paper, the outlook appears strong: announced battery cell production capacities in Europe amount to more than 2,000 GWh by 2030, well above the projected European demand of 970 to 1,200 GWh for the same year. Yet beyond these headline numbers, serious doubts are mounting about whether this pipeline will fully materialise.
The early euphoria surrounding European battery projects has become notably muted. Amid persistent market and policy uncertainties, several high-profile EV battery projects have been delayed, scaled back, or even cancelled entirely. European ambitions were given a cold dose of reality in March 2025 when Sweden-based battery start-up Northvolt – long regarded as Europe’s best bet for a homegrown battery champion – filed for bankruptcy. Initially well-funded and politically backed, the company seemingly overreached by attempting to set up multiple gigafactories and capital-intensive operations across the entire value chain – simultaneously and across regions – while its flagship plant in Sweden was still struggling to achieve high-quality output at scale.
In retrospect, several battery projects now appear overly ambitious. European start-ups face an uphill battle in catching up to Asian technology leaders that enjoy a decade-long head start, lower input costs and mature production ecosystems. At the same time, start-ups must scale production at prices that are both competitive and profitable – within a domestic BEV market that has evolved more slowly than they may have anticipated. As a result, investor sentiment has taken a more cautious turn, with funding increasingly contingent on reliable, high-quality output and commercial viability. In response, many companies have consolidated or delayed their short-term expansion plans, prioritising select projects for which they see clearer pathways to scale these.
Asian battery makers: A strategic fixture in Europe’s BEV future
While not all announced projects will make it across the finish line, a substantial battery production footprint in the EU is firmly underway. With some projects unlikely to pass the reality check, Europe’s overall ramp-up is expected to fall short of the most optimistic medium-term projections. Still, despite current setbacks, Europe’s growing BEV market continues to serve as a powerful magnet for investment. In 2023, more than 20% of Europe’s battery demand was still met through imports, but battery production in general is expected to become increasingly localised. Shipping batteries over long distances is logistically complex, whereas regional price convergence and the risk of tariff hikes weaken the case for cross-continental supply chains. As a result, co-locating battery manufacturing near final assembly plants is likely to become the industry norm.
Nonetheless, Asian firms continue to play a dominant role in the EU’s battery cell production landscape – and are likely to do so for the foreseeable future. As of Q2 2025, Asian companies (LG Energy, Samsung SDI, SK On, and CATL) account for about 92% of the operational battery cell manufacturing capacity in the EU. In contrast, European battery makers, most notably Automotive Cells Company (ACC), represent a mere 8% of running capacity. This imbalance is unlikely to see a major shift in the short term.
However, the recent troubles at Northvolt should not be misconstrued as a broader failure of the European battery industry. Rather, these setbacks are emblematic of a high-risk, innovation-intensive sector still in its formative phase. At this stage of technological maturity, industrial competition inevitably brings consolidation, but one company’s faltering does not preclude other European players from achieving commercial viability or becoming relevant players in the future battery manufacturing landscape.
At the same time, many European carmakers and battery firms are now adopting a more pragmatic and diversified industrial strategy – one that blends short-term supply security with long-term capability building. First, recognising the immediate challenge of scaling up European-owned gigafactories quickly enough to meet short-term demand, European carmakers have increasingly turned to Asian manufacturers with established EU-based production lines to secure short-term battery cell supply and to power the roll-out of their BEV fleets.
Second, in parallel, carmakers are actively backing European battery start-ups, not only as “anchor customers” via purchase agreements but also as equity investors. This dual role helps to de-risk capital-intensive gigafactory projects and ensures close technical integration between battery formats and vehicle platforms. Prominent examples include ACC, co-owned by Stellantis, Mercedes-Benz and TotalEnergies; Renault’s partnership with French battery start-up Verkor; and Volkswagen’s in-house battery unit PowerCo.
Third, European industry leaders have come to recognise that narrowing the technological gap with Asian firms will likely not be achieved in isolation. The tables have turned: whereas European manufacturers once set the gold standard for internal combustion engines, they now find themselves needing to learn from Asian firms how to produce advanced EV batteries at scale. As a result, they are also investing in long-term capabilities through joint ventures, minority stakes and partnerships with leading Asian manufacturers, aimed at gradually internalising expertise in battery technologies and production processes. The path forward now appears to combine strategic cooperation with industrial learning to lay the foundations for eventual technological and manufacturing sovereignty.
While this cooperation-based approach of European legacy automakers vis-à-vis their Asian competitors appears to be a necessity, it should not be characterised by naivety. Such partnerships carry strategic risks, including the potential for entrenched technological dependency and limited long-term value capture within European companies. Joint ventures and minority shares, while valuable, offer no automatic guarantee of technological catch-up. To avoid locking in structural reliance, the focus must extend beyond securing short-term battery supply to include mechanisms for meaningful technology and knowledge transfer. Moreover, European firms would be well advised to diversify their industrial partnerships – not only by deepening cooperation with Chinese battery leaders but also engaging with South Korean and Japanese manufacturers – to avoid overexposure to any single player or political risk.
- A Shared Diagnosis of the Problem – Towards a coherent and coordinated EU Automotive Strategy
The absence of a shared diagnosis has left the EU without a coherent approach to the structural shifts and global market dynamics reshaping the automotive industry. As current debates remain clouded by short-term pressures and a growing sense of complacency, this policy brief has set out to provide a clearer vantage point for strategic reflection. It highlights three core lessons: first, slowing electrification will not stabilise the status quo – it will accelerate disruption, deepening Europe’s reliance on shrinking ICE markets while global competitors pull ahead. Second, attributing the stuttering BEV transition solely to reluctant consumers obscures more actionable barriers – above all, persistent supply-side shortcomings and inconsistent policy signals. Third, national experiences reveal both the promises and pitfalls of industrial policy in navigating the automotive transformation.
Ultimately, the decline in Europe’s automotive sector is neither inevitable nor irreversible. Yet reversing course requires more than reactive measures and disparate national efforts. What is needed is a coherent and proactive European industrial strategy, grounded in policy clarity, targeted incentives for affordable, EU-made BEVs, finely calibrated trade and foreign direct investment frameworks, and strategic investments in BEV value chains, skills, and infrastructure. If embraced in an integrated manner, these measures can enable the EU to move decisively away from reactive drift and towards strategic renewal, re-equipping Europe’s automotive sector not just to manage the transition but to shift into gear for sustained and collective competitiveness.
[1] This comprises plants in Turkey, Morocco, Algeria, Czechia, Slovakia, Romania, Slovenia, Spain, Portugal, UK, Italy, Germany, and France.