Mario Draghi, former President of the ECB and one of Europe's great economic minds, was tasked by the European Commission to prepare a report of his personal vision on the future of European competitiveness. Among other topics, the challenges facing the automotive sector.
The automotive industry has traditionally been one of Europe’s industrial engines. Nevertheless, the industry is undergoing rapid, profound transformation with a shift in demand to third markets, towards green mobility and software-defined cars. As a result, the EU’s traditional leadership in the automotive industry has been eroded. The automotive supply chain in the EU is currently suffering competitive gaps, both concerning cost and technology.
The automotive industry, a structurally important segment of the EU’s economy
It is a major employer, providing directly and indirectly (downstream industry) jobs for 13.8 million Europeans, representing 6.1% of total EU employment. 2.6 million people work directly in the manufacturing of motor vehicles, which is 8.5% of the EU’s manufacturing employment. The automotive industry contributes 8% of European manufacturing value added, and it has a EUR 117 billion surplus in (extra-EU) trade, which corresponds to approximately one-fifth of the value of automotive production. The EU remains a net exporter of vehicles both in terms of the value of net trade and the number of vehicles, and it is also a net exporter of car parts. Around 75-80% of the value of vehicles traditionally comes from car part suppliers. Automotive can also be considered a sector with important upstream and downstream linkages. The sector is an important source of input demand from upstream industries, such as metals, chemicals, plastics, and textiles, and it generates demand in downstream sectors, including ICT, repair, and mobility services.
The automotive sector is undergoing the biggest structural transformation in over a century
Its transformation combines an evolution in the industry’s geographical footprint and the formation and convergence of multiple value chains (including the EV, digital, mobility and circular economy value chains) which differ substantially from the production and the lifecycle of traditional internal combustion engine (ICE) vehicles.
The rise of electric vehicles (EVs)
ICE markets have been shrinking and EV markets, comprising battery electric vehicles (BEVs), and plug-in hybrid vehicles (PHEVs), have been growing strongly in recent years. Globally, the market share of EVs in new passenger car sales has increased from 14% in 2022 to 18% in 2023, and it is expected to further expand to 30% in 2026. In 2023, EVs accounted for 22.3% of new car registrations in Europe (14.6% BEVs, 7.7% PHEVs). The transition of automotive manufacturing towards EVs means a far-reaching change in the technology, production processes, skills demand and inputs needed by car manufacturers and supplier networks. Major industry reorientation is needed, including the reskilling of workers and leaner supplier networks, as well as the development of charging infrastructure. Electromobility eliminates not only tailpipe CO2 emissions, but also other exhaust emissions (NOx, atmospheric particulate matter) and noise, which improves air quality, particularly in urban agglomerations.
AI and digital value chain
Artificial intelligence (AI) and digital technologies will change car-based mobility in the areas of connected vehicles, advanced controls for driver support, and autonomous vehicles. The digitization of vehicles requires new skills and infrastructure in automotive manufacturing and mobility services. This includes the emergence of new business models, such as car sharing, new financing models, and energy services. The availability of charging and refueling infrastructure for low-emission cars is a key enabling condition for the take-up and development of a large domestic market for EVs. The European Commission’s Impact Assessment for the 2040 climate targets quantifies overall investment needs for recharging and refueling infrastructure of EUR 15 billion per year during 2031-50, based on an assumption of around 20% of zero- and low-emission vehicles in traffic by 2030, of which around EUR 4 billion relate to fast-charging points along the Trans-European Transport Network (TEN-T) in line with the AFIR (minimum) targets.
Remanufacturing, the new frontier relates to batteries
Integration with the circular economy value chain in the automotive sector. Recovery and recycling of end-of- life materials relate especially to batteries, but also extends to other components (car bodies, electronics and plastics), where the EU can currently leverage a strong position in terms of the regulatory framework, collection networks, and technical know-how.
China vs Europe, the signs of eroding competitiveness
In this fast-moving context of shifting demand and value chain reconfiguration, the EU’s position in the sector already shows signs of eroding competitiveness. The number of vehicles produced in the EU has been declining over the past two decades, while the number of vehicles produced in China has been growing fast. After accounting for the increased quality and value of cars, also the production in EU automotive at constant prices declined in 2019 and during the COVID-19 pandemic, and it has not yet recovered to previous levels. EU vehicle exports in unit terms have fallen from 7.45 million vehicles sold abroad in 2017 to 6.26 million in 2022, a decline by 16%. At the same time as vehicle production in the EU weakened, EU vehicle imports from China have increased strongly. China is now the largest source of car imports into the EU in terms of the number of cars (a fivefold increase from 114,000 vehicles in 2017 to 561,000 in 2022). In 2022, China accounted for 14% of the vehicles imported into the EU, making it the biggest non-European supplier. In particular, the EU is lagging in the fast-growing ‘New Energy Vehicle’ space (BEVs and PHEVs). European brands accounted for only 6% of BEV sales in China in 2022 (compared to 25% of ICE vehicle sales). Conversely, Europe is leaving room in this area of the market. Chinese brands accounted for almost 4% of BEV sales in the EU in 2022, up from just 0.4% three years earlier. Moreover, Chinese carmakers’ market share for EVs (BEV and PHEV) in Europe has risen from 5% in 2015 to almost 15% in 2023. By contrast, the share of European carmakers in the European EV market (new registrations) has fallen from 80% to 60% during the same period.
EU automotive production is suffering from higher costs, lagging technological capabilities, increasing dependencies, and eroding brand value
Estimates suggest approximately 30% higher overall vehicle productions costs in the EU compared to China, with significant differences in transformation cost between EU Member States. Chinese OEMs are one generation ahead of Europeans in terms of technology in virtually all domains, including EV performance (e.g., range, charging time, and charging infrastructure), software (software-defined vehicles, autonomous driving levels 2+, 3 and 4), user experience (e.g., best-in-class Human Machine Interfaces and navigation systems), and development time (e.g., 1.5 to 2-year development time, compared to three to five years in Europe). About critical raw materials, it is estimated that, without action, only a very minor share of European raw material needs will be covered by projects in Europe by 2030. China, to the contrary, will control most of the upstream value chain (including more than 90% of lithium refining capacity at present, and more than 70% of the supply of lithium-ion battery cells). Innovative EVs have, finally, also eroded brand value and customer loyalty towards EU companies, as indicated by the decline in market share of European OEMs.
Transition ICE to BEVs, far-reaching implications for the network of car part suppliers
Traditional ICE vehicles are mechanically more complex, notably with respect to the mechanical components of the powertrain, and car part suppliers highly specialized in this environment have provided largely complementary products in the past. BEV powertrains, by contrast, are more compact and easier to manufacture, and suppliers therefore increasingly compete in this area to provide OEMs with similar components. This increased competition among suppliers threatens their existence. Competition in the supplier market is reinforced by new entrants from outside the industry (e.g., manufacturers of electric engines, electronics, software, and batteries) and through the insourcing by OEMs of car part production to keep their staff, given reduced demand for classical manufacturing jobs (metal and machinery workers) in BEV production. Similarly, more software and data-driven vehicles are likely to affect the ability of car part suppliers to compete with OEMs in the aftermarket (maintenance and other services). In areas in which the transition from ICE cars to BEVs fundamentally alters car part demand (notably the engine or powertrain), existing production sites may be closed and rebuilt in different locations, depending on relative investment and production costs, instead of converting existing facilities. From the perspective of global competition, many European car part producers have been global market leaders in their market segments, but Chinese OEMs are catching up to produce vehicles using less content from European car part suppliers.
The loss of EU competitiveness in the automotive sector
EU climate policies set ambitious targets for low-carbon road transport (primarily EVs), as well as for the production of less polluting ICE vehicles. However, the EU’s supply chain is taking time to adjust. At the same time, China has moved faster and at a larger, coordinated scale across the entire EV value chain and can now enjoy lower costs (know-how, economies of scale, lower labor costs) and a technological edge. By contrast to the EU, the US has reacted with large stimulus (IRA) combined with trade barriers to respond to an increased global supply of Chinese EVs.
EU’s climate policy
The EU’s climate policy is demanding ambitious targets from the automotive sector in terms of GHG emission reduction for road transport. These targets set in motion a shift to zero tailpipe CO2 emissions for new LDV (car and van) registrations by 2035. Furthermore, they introduce a target to reduce HDV (truck and bus) tailpipe CO2 emissions for newly registered vehicles by 65% by 2035, and by 90% by 2040 compared to 2019 values. At the same time, more stringent norms are being introduced to produce less polluting ICE vehicles, including Euro norms entailing a reduction of exhaust and particle emissions. In addition to this, national or local authorities in Member States have established vehicle emission limits for urban access (Urban Access Regulations). Starting in 2027, road transport will also be integrated in the EU Emission Trading System (ETS 2) by including emissions from transport fuels. The costs of ICE vehicle mobility will raise by implication, strengthening the incentives for the adoption of low-emission cars, especially BEVs. The EU emission legislation has not succeeded so far in reducing CO2 emissions from road transport. The technological neutrality principle, which has been a guiding principle of EU legislation, has not always been applied in the automotive sector. With the latest review of the legislation setting CO2 emission standards for vehicles based on a ‘tank to wheel’ approach, the EU has set up a framework for the rapid market penetration of zero-emission vehicles (ZEV), and in particular BEVs. The ambitious target of zero tailpipe emissions by 2035 will lead to a de facto phasing out of new registrations of LDVs with internal combustion engine (ICE). The legislation also includes the call for the Commission to make a proposal allowing the registration of vehicles running on CO2 neutral fuels after 2035. Carbon neutral alternative fuels would be based on a net or life cycle emission assessment. Related regulations outside the EU vary across countries. Targets in the U.S., for example, are more varied or softer (no nation-wide regulation, but nine States plan to ban ICE car sales starting in 2035). Following additional provisions in the legislation on CO2 standards for LDV, the European Commission is also working on a methodology (by 2025) for those manufacturers who may want to report voluntarily data on CO2 emissions throughout the full life-cycle of cars and vans sold in the EU market. The carbon footprint of EVs (emissions associated with the production of the vehicle and its components) is generally higher than the one of ICE vehicles at the production stage, due to the energy intensity and the carbon footprint in battery manufacturing at current technologies (including raw material mining and processing).
EVs supply chain conversion, what about in EU?
The push towards rapid market penetration by EVs has not been followed in the EU by a synchronized push towards the conversion of the supply chain. In the mid-2010s, several Member States started to provide incentives for the adoption of electric vehicles (purchase subsidies, tax incentives, and infrastructure development). However, the European Commission only launched in 2017 the European Battery Alliance (EBA) to build a sustainable battery value chain in Europe – covering all steps from access to raw materials to battery recycling. The EBA strives to reduce the dependency on imports and to strengthen the EU’s competitiveness in the rapidly growing battery market. China’s strategy aiming to dominate the global auto industry
The ‘Made in China 2025’ strategy and the ‘14th Five-Year Plan’ covering the period 2021-25 declared New Energy Vehicles a strategic industry. China has focused on the development and deployment of BEVs since 2012 with large and simultaneous investments (at least EUR 110-160 billion by 2022) in all the industries involved in the EV lifecycle, from raw materials mining to battery production and recycling. In particular, China has secured access to volatile and concentrated raw material markets and has developed at scale the required battery production capacity, at the beginning privileging lower production costs over higher performance. In addition, China has employed various strategies to encourage foreign automotive OEMs to produce and sell in the Chinese market, or form partnerships with Chinese OEMs (e.g., through joint ventures, or technology transfer agreements). China is today the largest market for EVs, having accounted for 60% of new EV registrations worldwide in 2023, which allows Chinese producers to reap economies of scale in production.
US and Europe face the Chinese invasion with higher import tariff and provisional countervailing duties
The US has reacted to the ascent of China’s EV industry by increasing import barriers and targeted stimulus to the domestic value chain. The US standard Most Favored Nation (MFN) import tariff for passenger cars is 2.5%, but tariffs on car imports from China are 27.5%. The latter was recently increased to 100% for EVs from China. The US has stimulated investment throughout the value chain, starting upstream, particularly through producer and consumer tax credits in the Inflation Reduction Act (IRA). The EU has also increased tariffs on EV imports from China recently. In July 2024, the European Commission has imposed provisional countervailing duties ranging from 17.4% to 37.6% on imports of BEVs from China, on top of the existing 10% overall import duty for cars, based on the conclusion that BEV production in China benefitted from unfair subsidization. Consultations continue with a view to reaching a solution that addresses the concerns raised by the EU. The provisional duties will apply for a maximum duration of four months, within which a final decision must be taken on definitive duties (for a period of five years), through a vote by EU Member States.
Operational expenses also affect the cost competitiveness of EU car manufacturing in addition to higher investment costs
Structurally higher energy costs and labor costs (up to 40% higher nominal unit labor cost in the EU compared to China) today contribute to the serious competitive disadvantage for the EU on the cost side. Higher energy costs are especially relevant for the energy-intensive battery production. Labor is becoming an increasing bottleneck for the automotive transition, not only in terms of labor costs, but also because of relevant skills shortages. The automotive industry is a leader in robotization, accounting for around one-third of industrial robot installations per year. China is investing substantial amounts in robotization, despite having lower labor costs than Europe. Automation tends to substitute lower-skilled workers, such as assemblers, machine operators or metal workers. Projections for 2020-30 expect engineering and ICT occupations to account for 90% of job growth in the EU’s automotive industry (90,000 jobs). In the labor market, the automotive sector will then compete increasingly with all other sectors employing ICT skills at an increasing scale.
Charging infrastructure, closely related to the spread of electric vehicles
The installation of charging infrastructure for electric passenger cars and vans (LDVs) has increased in recent years, and the market has become increasingly competitive. Charging capacity (the location and number of public charging points, multiplied by their performance) still varies across Member States, in close correlation with the uptake of EVs. An increase in the number of EVs throughout Europe will require a large and geographically broader roll-out of charging capacity. The conditions for the electrification of heavy-duty vehicles (HDV), requiring more powerful chargers, are still more complicated. While there are clear regulatory frameworks for carmakers (emission targets) and corporate logistics (corporate sustainability reporting, inclusion of road transport in ETS 2) that increase the demand for EVs and charging infrastructure, there is no parallel obligation for energy providers to supply stable and powerful grid access of sufficient capacity for charging. Access to space may also become a relevant constraint for charging infrastructure (urban areas, motor- ways) as the fleet grows, which would call for fast charging options, in turn requiring a more powerful grid.
EU risks losing ground
In this context, if the EU is not able to rapidly adjust to this new competitive environment, the automotive sector may lose ground at an even faster pace. According to some industry experts, even more than 10% of local EU production may be displaced in the following five years.
Objectives and proposals
Finally, to ensure that the EU remains a leader in the global automotive industry, preserving jobs, R&D facilities, and manufacturing within the region, two key objectives should be pursued with different time horizons:
- In the short term, avoid the radical displacement of production away from the EU’s automotive sector or the rapid takeover of EU plants and companies by State-subsidized competitors.
- In the medium term, re-establish a competitive leading position for the EU for the ‘next generation’ of vehicles and maintain the European production base with current technological advantages as long as international markets show demand.
