Can European Automakers Compete with China in EVs?

The landscape of the European automotive market is undergoing a profound transformation, faced with challenges from electric vehicles (EVs), competition from China, sluggish sales, and ominous profit warnings. Traditionally, predicting the future of the European car market was straightforward—sales would either be stable, on the rise, or in jeopardy of decline. Investors relied on a few economic indicators and the performance of automakers to guide their decisions, favoring those producing desirable vehicles while avoiding less competitive brands.

However, the situation has become increasingly complex as the automotive industry grapples with an existential crisis triggered by the emergence of electric vehicles and stringent governmental mandates. The European Union (EU) has implemented policies requiring that all new sedans and SUVs sold after 2035 must be electric, effectively phasing out combustion and hybrid vehicles. This regulatory environment has created a precarious landscape for automakers, as they navigate a combination of declining sales and increasing production costs.

Current sales figures remain significantly below pre-pandemic levels, resulting in an oversupply of sedans and SUVs. Consequently, automakers are faced with factory closures and profit warnings. Recently, Volkswagen announced that its profits would fall short of expectations, a sentiment echoed by BMW and Mercedes, which also issued similar warnings in September. This trend raises concerns among investors about the future growth of the EV market, which is essential to meet ambitious government targets.

The EU has set stringent requirements for the automotive industry, mandating that approximately 20% of new car sales must be electric vehicles by 2024, escalating to 80% by 2030, and reaching a full ban on combustion vehicles by 2035. Many European manufacturers, with the exception of multi-brand automaker Stellantis, are contesting this aggressive agenda. A significant factor in the slow adoption of EVs in Europe is the higher cost of vehicles compared to cheaper alternatives available from Chinese manufacturers, who are reportedly enjoying a 30% cost advantage in the market.

In response to these challenges, the EU has attempted to counteract the influx of Chinese imports through tariff barriers. However, if these tariffs hinder the sale of EVs, they could jeopardize the EU’s climate goals. The EU now faces a critical decision: whether to prioritize its climate change targets or protect its domestic automakers and the jobs they provide.

GlobalData has consistently downgraded its sales forecast for Western Europe, originally predicting nearly 5% growth for 2024. The latest forecast suggests only a marginal increase of 0.2%, bringing total sales to approximately 11.58 million vehicles. This figure includes the five largest markets: Germany, France, Britain, Italy, and Spain.

Berenberg Bank has reported that expectations for a sales recovery in Europe are diminishing. There is waning demand for high-margin European luxury vehicles in China, including those from BMW, Mercedes, and Volkswagen’s Audi, further compounded by ongoing tariff disputes. While the bank anticipates a robust product launch schedule for 2025, it hinges on falling interest rates and an economic rebound in key markets like Germany. Additionally, uncertainties surrounding the upcoming U.S. presidential election are contributing to investor apprehension.

The investment bank highlights that trading volatility is primarily driven by regulatory pressures related to CO2 emissions, the deceleration of EV adoption, persistent challenges within the sector and macroeconomic issues in China, and tensions arising from trade and restructuring efforts. Competitive pressure on EV pricing and related technologies remains a concern, but Berenberg notes that more cost-efficient platforms are set to deliver their first products soon. The current cycle of hybrid and internal combustion engine (ICE) vehicle production may provide some financial support for cash flow and profit margins in the interim.

HSBC Global Research points to additional challenges for European manufacturers, who are facing rising content costs due to new regulations related to cybersecurity and the EU General Safety Regulation. These regulations are expected to increase the cost of each vehicle by between €500 ($560) and €1,000 ($1,120), costs that manufacturers have thus far absorbed. As a result of the pandemic, cars have become more expensive and are likely to remain so, with affordability being a significant barrier to EV adoption in Europe. This lack of affordability is also a primary reason private buyers have been slow to return to the market. Without an improvement in consumer confidence or affordability, a recovery in sales volumes seems unlikely.

On a more optimistic note, investment bank Morgan Stanley suggests that European manufacturers may find solutions to their EV challenges through partnerships with Chinese companies. The bank notes that, despite setbacks in the global EV rollout, manufacturers are recalibrating their strategies and exploring collaborations with Asian EV players. Such partnerships could facilitate a mutually beneficial scenario that would enhance global EV adoption.

Stellantis is at the forefront of this trend, collaborating with Leapmotor of China to assemble the Leapmotor TO3 in Tychy, Poland, with potential for further expansion. Volkswagen has also invested in Xpeng, a Chinese EV manufacturer, aiming to produce vehicles for the Chinese market, which may also target Europe. Additionally, BYD is establishing a plant in Hungary for EV production, while other significant Chinese manufacturers are considering setting up operations in Europe.

Although mass adoption of EVs is a long-term goal for both the global auto industry and policymakers, the shift towards strategic partnerships and joint ventures with Asian EV manufacturers is being recognized as a new approach to succeed in this rapidly evolving market. Morgan Stanley anticipates that numerous joint ventures will form between Chinese and European manufacturers over the next year, aimed at producing, distributing, and servicing Chinese vehicles in Europe. The report suggests that volume manufacturers, particularly French automakers, are better positioned to thrive in this environment.

Ultimately, creating affordable EVs is critical to revitalizing the market. However, the majority of current EV offerings remain out of reach for average European consumers. To meet the EU’s ambitious targets, the market for EVs, currently around 2 million, must nearly quintuple by 2030. Achieving this will require more affordable entry-level EV options priced around €10,000 ($11,200), a feat that European manufacturers seem unable to deliver, but which Chinese companies, such as BYD with its Seagull model and Wuling with its Bingo, are already accomplishing.