For decades, the automotive sector has anchored Europe’s economic strength, yet the industry now confronts significant transformation with the shift toward electric mobility. As Europe navigates this transition, the balance between opportunity and disruption will shape the continent’s economic future.

Europe has been a global leader in the automotive industry for decades, consistently setting benchmarks for safety and fuel efficiency. European manufacturers have pioneered advanced safety features that contribute to some of the world’s safest roads and have led the way in stringent fuel economy standards, shaping industry norms worldwide.

However, Europe’s auto industry is now grappling with a new and formidable competitor — Chinese electric vehicle (EV) makers. These manufacturers are threatening both market share and Europe’s strategic autonomy. In response, the European Union (EU) has taken decisive steps, from tariffs to regulatory adjustments, in an urgent effort to maintain control over its EV transition amid a growing Chinese presence and influence. 

European automakers face challenges in the EV transition

The EU has outlined bold climate targets aimed at achieving climate neutrality by mid-century, with a swift transition to electric vehicles at the forefront. For example, in March 2023, the European Commission introduced stricter emissions targets for cars, underscoring the urgency of this shift. According to International Energy Agency (IEA) estimates, reaching the EU’s climate goals will require battery EVs (BEVs) to comprise approximately 65% of all new car sales by 2030, with a complete shift to fully electric new car sales by 2035.

After experiencing a downturn in EV sales in 2022, further progress in the uptake of electric cars and vans was made in all 27 EU Member States in 2023. Electric vehicles accounted for 22.7% of new car registrations and 7.7% of new van registrations. In total, 2.4 million new electric cars were registered in 2023, up from 2 million in 2022. Registrations of new BEVs grew by 37%, while the number of newly registered plug-in hybrid cars fell by almost 4%. In addition, a total of 91,000 new electric vans were registered in 2023, most of which were battery electric.

However, despite these promising developments on the demand side and being one of the world’s largest auto manufacturing hubs, Europe has struggled to gain a competitive edge in EV production, largely due to its longstanding investments in internal combustion engine (ICE) technologies. Europe’s automotive industry, which employs nearly 14 million people and contributes 7% to the EU’s GDP, is facing a confluence of challenges. 

European automakers are undergoing a costly and complex transition from traditional combustion engines to electric vehicles (EVs). Key brands like Stellantis, Mercedes-Benz, and Volkswagen have lost ground in the global market, hindered by high production costs and a shortage of new models, while BMW remains a rare success among European manufacturers. Particularly concerning is the drop in market share for European brands in the BEVs segment. 

Europe’s EV market is also grappling with the reduction of subsidies and incentives for purchases, underinvestment in charging infrastructure and grid capacity, higher overall ownership costs of BEVs, and regulatory pressures focused on CO2 emissions compliance. As a result, these challenges have raised doubts about European automakers’ ability to meet the EU’s target for all new cars to be zero-emission by 2035.

Transport & Environment (T&E) offers a relatively optimistic outlook for European automakers, suggesting they have the potential to narrow the emissions compliance gap and position themselves to meet rising demand for BEVs. T&E projects that BEVs could capture a 20-24% share of the EU market by 2025, driven by increasingly competitive pricing. Germany, as the largest EV market in the EU, recently introduced new incentives to further accelerate the green transition, signaling a supportive policy environment. Nevertheless, while European carmakers strive to launch affordable EVs for the mass market, their pace and progress vary, with intensifying pressure from Chinese competitors.

The rise of Chinese competition in Europe's EV market

European automakers face intense competition from China, whose EVs are quickly gaining traction globally and across the continent. The sharp increase in Chinese EV imports adds a layer of complexity to Europe's energy and economic security, as EU policymakers — alongside their US counterparts — are trying to balance ambitious climate targets with concerns over growing dependence on Chinese technology.

China’s growing EV sector has leveraged low production costs, high-quality manufacturing, and government support to make significant inroads into European markets. Between 2020 and 2023, EV imports from China — including those by foreign brands with manufacturing operations in the country — rose sharply from $1.6 billion to $11.5 billion. According to recent analysis by T&E, nearly one-fifth (19.5%) of all EVs sold across the European Union in 2023 were built in China, a figure that could climb to as high as 25% this year. T&E also projects that BEVs originating from China will claim an 11% share of the market this year, and grow to 20% by 2027. 

Meanwhile, Chinese battery giant CATL commands over a third of the global EV battery market, producing solid-state and lithium-ion batteries for international automakers such as Germany’s BMW and illustrating the deep integration of Chinese firms in global EV supply chains. Moreover, China holds a dominant position in critical battery material supply chains, particularly in Africa and Indonesia, and accounts for around 67% of global lithium processing — essential for EV battery production. 

Chinese-made EVs sold at less than half of those in Europe — and the US — last year, highlighting the competitive pricing hurdles Western automakers face in matching Beijing’s cost advantage. European automakers are striving to reduce production costs and explore affordable EV solutions, while securing a foothold in the entry-level EV market — a segment crucial for European sales. Several European carmakers are developing or planning to release small EVs in Europe that cost under €20,000, notably Renault, Stellantis, and Volkswagen. 

China’s EV industry consolidation, marked by subsidy cuts and the exit of low-end producers, is pivoting toward research and development (R&D) and export-ready vehicles, which could create more formidable global players. The true competitive frontier could be in autonomous driving and software, as companies like Huawei and Xiaomi collaborate with local automakers on vehicle technology. In fact, this is already underway. Chinese tech giants branching out into the EV market, with Huawei’s Stelato S9 and Xiaomi’s SU7 leading the charge, intensify the competitive landscape for Western automakers. 

This development brings fresh challenges to European policymakers, as they consider the security and economic implications of Chinese tech integration into their automotive markets. The expanding presence of Huawei and Xiaomi in the EV space has almost certainly heightened Western policymakers’ concerns about market dependence, supply chain resilience, and the security of emerging tech infrastructure.

Europe’s protectionist shield

With Chinese EV brands like BYD and Geely rapidly gaining ground in Europe, the EU has taken steps to curb imports through a range of tariffs. In response, this selective tariff approach is designed to cushion European automakers while limiting China’s footprint.

Citing the risk of market saturation and the potential for economic dependency on China, the European Commission recently imposed tariffs of up to 48% on Chinese-made EVs. The tariffs , which vary by manufacturer — 17% for BYD, 18.8% for Geely, and 35.3% for state-owned SAIC — are part of a broader strategy to protect the EU’s automotive industry from being outcompeted on cost. 

Not all EU Member States were fully on board with the new tariffs. While France, with strong support from Italy and the Netherlands, backed the new duties, Germany, Sweden, and Hungary opposed them. It is easy to see why. Facing high costs and rising competition, European carmakers are seeking strategic partnerships — including with some of their Chinese rivals. Germany’s Volkswagen, for example, is heavily invested in the Chinese market and has partnered with Chinese firms such as Xpeng, notably executing a $700 million deal for EV development. Similarly, Stellantis has invested €1.5 billion in China’s Leapmotor.

Indeed, Chinese firms, rather than simply exporting to Europe, are establishing joint ventures and research centers abroad to circumvent tariff barriers, secure local market integration, and drive competitive gains in Western markets. For instance, Chinese manufacturers have already begun directing EV-related foreign investments toward the EU, with Europe receiving roughly 30% of China’s EV sector foreign direct investment (FDI) in 2023. These investments have largely focused on Germany, France, the UK, and especially Hungary, which received over half of China’s total FDI in 2022 and 2023.

In retaliation, China has initiated anti-dumping probes on EU agricultural imports, such as dairy, and instructed its automakers to halt or reconsider investments in EU countries that supported the tariffs or abstained from voting. Such geopolitical tensions reflect China’s strategy to defend its trade interests and the competitive edge of its automotive industry, which is increasingly focused on technological advancement, including autonomous driving.

Balancing innovation with protectionism in the EV sector

With Chinese automakers targeting 20% of the European EV market by 2027, European brands, including Stellantis and Renault, are lobbying for EU support to combat the mounting competition. As French leaders push Brussels to delay stricter emissions regulations, Germany and other EU countries are debating whether, and if so how to reframe its green transition to ensure space for both European and Chinese products.

These tariffs aim to level the playing field for European companies amid concerns about national and economic security. Despite resistance, the EU passed these tariffs. China has responded by launching its own anti-dumping investigations into European imports. This escalating trade conflict underscores the geopolitical dimensions of the EV market.

France, Germany, and Italy are stepping up their focus on research into more advanced EV technologies to remain competitive. On the heels of the tariff policy, these countries have been pushing for stronger financial support and direct government investments to sustain European competition. At the same time, there are clear political challenges, as policymakers strive to balance the economic benefits of Chinese investment in Europe with the need to protect domestic industries. 

As it stands, the EU’s protectionist policies reflect mounting fears about Chinese dominance. The expansion of Chinese firms into Europe challenges policymakers to find an equilibrium between innovation and competition. Despite the EU’s efforts to preserve its market share, Chinese EVs are now synonymous with cost-effective and innovative electric mobility, making it clear that global competition in the EV sector has only just begun.

Meanwhile, China’s EV sector is set to consolidate further, leaving behind only the most robust players, which could ultimately produce even more formidable competitors. As China’s government pushes automakers to limit investments in countries backing the EU tariffs, European automakers brace for an extended period of competition with increasingly sophisticated Chinese rivals, a rivalry that extends beyond Europe’s borders to global markets.

Europe’s automotive sector, long a cornerstone of its economic strength, is undergoing a rapid transformation under dual pressures from Chinese competition and regulatory demands. Chinese EVs, bolstered by substantial subsidies and superior technology, continue to capture European market share despite new EU tariffs, which have been met with swift countermeasures by Beijing. As Europe recalibrates its approach to clean energy and tech sovereignty, the ongoing trade conflict highlights a broader struggle for technological dominance, in which the automotive industry stands as a key battleground.

Conclusion

Europe’s automotive industry is facing a defining moment, caught between the challenges posed by Chinese competition and the demands of ambitious environmental regulations. The EU’s decision to impose tariffs reflects its recognition of the need to protect its EV market from foreign dominance while striving to balance climate goals, economic resilience, and geopolitical priorities. As Chinese EV brands continue to grow their presence in Europe, the EU’s evolving policies on clean energy and tech sovereignty signal a broader contest for technological supremacy. With the automotive sector at the heart of this struggle, the race to secure a leading position in the global EV market is only beginning.