Car manufacturing is one of the strategic pillars of the European economy, an exporting juggernaut that has generated prosperity and high-paying jobs for decades. Now, with sales falling and the much-heralded switch to electric vehicles stalling, auto companies face tough choices to negotiate the road ahead.

The European automotive industry produced around 16% of the world’s cars in 2024, according to the European Automobile Manufacturers’ Association, and generated a trade surplus equivalent to nearly 1% of Europe’s GDP.

It employs 13 million people, directly and indirectly, and its heavy investment in research and innovation generates positive spillover effects for the wider European economy in related sectors such as components, distribution, transport and financial and insurance services.

However, demand has been in decline since 2019, with vehicle sales in the EU of 5.6 million units from January to June 2025 representing a 1.9% year-on-year decline. France showed the biggest decline, followed by Germany and Italy – although Spain and the UK, the biggest market outside the EU, both grew.

Sluggish GDP performance across Europe has impacted consumer spending at the same time as supply chain bottlenecks and the rising cost of materials and technology have pushed up prices.

Meanwhile, new US tariffs on automobile imports from the European Union have caused significant uncertainty among European manufacturers as the United States remains a key export market.

If this was not enough, the EU’s commitment to net-zero greenhouse gas emissions by 2050 means manufacturers must also potentially accept the end of combustion and hybrid vehicles and a wholesale switch to electric vehicles (EVs).  

Billions of Euros have been invested in the technology and infrastructure but the rollout of electric cars is slower than anticipated.

In the first half of 2025, the market share of battery-powered electric vehicles (BEVs) grew to 15.6% from 12.5% the year before. To meet the net-zero targets, EV sales must accelerate significantly – for example, in Spain, BEVs should represent 25% of all new registrations – but a Shell survey in June 2025 showed EVs were up to 30% more expensive than comparable petrol and diesel models.

Europe’s automotive industry must produce electric vehicles that are both compliant and competitive but they are up against determined Chinese rivals selling EVs that are affordable, high-quality and well-designed — factors that helped China surpass Japan in 2023 as the world’s top vehicle exporter.

An investigation by the European Commission in 2024 concluded that China’s entire EV value chain – including research and development – is supported by state subsidies, a practice that is largely restricted in Europe. This led to provisional tariffs of up to 37.6% on Chinese EV imports, in addition to the existing 10% duty.

The impact was immediate: the China Association of Automobile Manufacturers said Chinese EV sales in Europe dropped 10.4% in 2024, contrasting with 81% growth in 2023. In the first half of 2025, Chinese EV imports to the EU fell nearly 16%.

However, the response from Beijing was tough with the Ministry of Commerce urging companies to suspend major investments in Europe and restricted exports of raw materials needed for battery production – China controls roughly 70% of the global supply of battery-critical raw materials.

The EU is implementing several strategies and an industrial action plan to boost the competitiveness of its automotive sector. Over €3.5 billion has been identified to help in specific ways while targets to reduce emissions have been made more flexible.

There are plans for accelerated deployment of EV charging infrastructure, support for European semiconductor manufacturing – critical for advanced vehicles, – and help with securing strategic battery materials and reducing dependency on non-EU countries.

The plan is yet to produce substantial results in terms of production or in regaining global market share but is still in its infancy. However, with time working against the industry, doing nothing is not an option.