The European Automotive Industry at a Crossroads

Just before the holidays, I was asked to keynote an event sponsored by the German American Chamber of Commerce. This article is an updated version of that presentation. It is even more relevant today following CES 2025 and the news streaming out of Europe.

1.    Introduction

In 2019, I co-authored a short paper with Stephen Zoepf titled “The Automotive Industry at a Crossroads.” Our article identified the challenges incumbent automakers faced from autonomous vehicles and mobility services and the crossroads they brought them to. At the time, automakers decided to invest in and compete with startups. As we predicted, the automakers’ efforts to address those challenges and navigate that crossroads were unsuccessful because while they invested in technology, they failed to make other necessary transformations.

Today, the automotive industry, especially the European automotive industry, faces even greater challenges. These challenges are not from technology startups but from more formidable forces. China has become an international competitor, and its market is no longer an opportunity for incumbents. Vehicle sales, including sales of battery electric vehicles, are slowing, leading many companies to miss their financial targets and reconsider previously announced investments relating to electric vehicles. The regulatory environment is becoming more restrictive but also less reliable in terms of long-term goals and guidance for the industry. At the same time, Software-Defined Vehicles and AI require large capital investments at a time when the industry is cutting costs and continues to show an inability to deploy capital in the areas that will matter in the future. Labor is reacting to the automakers’ actions and introducing new work-life balance demands.

As a result of these challenges, European automakers and their suppliers have arrived at a new, more complex crossroads. Management teams are working to determine which challenge to focus on and assess the implications of their decisions.

 2. The Challenges

European automakers and their suppliers are facing five challenges: 1) the emergence of Chinese competition, 2) declining demand for new vehicles in the European Union (EU) and Chinese markets, 3) complying with new emissions, safety, and other regulations, 4) investing in new technologies, and 5) addressing labor-related issues. Trump’s election in the US may create another challenge if the newly elected president follows through with the protectionist trade policy he campaigned on and imposes new tariffs on vehicles imported from Europe, an action that could prove particularly detrimental to German automakers. The impact of these challenges is evident in the VW Group.

2.1 China

China represents a multifaceted challenge. Chinese automakers entered the European market with low-cost electric vehicles, many of which incorporate technologies found only in expensive European vehicles. It is broadly assumed that Chinese automakers have a thirty-plus percent production cost advantage over incumbent automakers.  China controls many of the raw material sources needed for battery electric vehicles and has a commanding lead in battery production. Many of the Chinese vehicle models from automakers such as NIO, XPeng, Zeekr, and others are already software-defined and more technologically advanced in terms of driving automation, AI-driven user experience, and energy management than the new energy models from European automakers. Newcomer Chinese automakers develop a new vehicle in half the time it takes incumbent automakers. These advantages combined with processes that foster rapid innovation provide Chinese automakers with product differentiation.

The demand for Chinese vehicles is increasing steadily despite the tariffs that have already been imposed and others that are threatened. Chinese EV automakers are slashing prices to boost sales volumes and capture market share at an alarming rate. In 2024, China will produce nearly nine million more vehicles than it will sell domestically, three million of which are EVs. Chinese automakers will export six million vehicles, up from 5.2 million in 2023 and one million in 2020. Three million of these vehicles will be battery-electric.

2.2 Market demand

According to data published by companies such as TomTom and Inrix, in many cities globally light vehicle traffic has returned to the pre-pandemic levels. Despite this fact, the European light vehicle sales are two million units below the pre-pandemic level. New vehicle registrations remain below last year’s numbers. In addition, the demand for European vehicles in the Chinese market is rapidly declining. VW’s CFO stated that the company will need to decrease its annual production by five hundred thousand vehicles.

Even if we focus on sales of battery electric vehicles, we see that while still growing, the market for these vehicles is experiencing a global slowdown. Analysts are projecting that electric vehicle sales will grow by 12.7 percent in 2025. However, this is a significant drop from the 59.7 percent growth observed between 2021 and 2022. The global population’s broader economic anxieties relating to inflation and geopolitical instability, combined with the high prices of new vehicles, are major contributors to declining new vehicle sales. The decline in the sales of new energy vehicles can be attributed to their high prices, anxiety about the state of the charging infrastructure, and lack of customer understanding about the advantages and benefits of software-defined vehicles. The recent financial performance of incumbent European automakers, e.g., Stellantis, VW, BMW, and Mercedes, and their suppliers, e.g., Aptiv, Valeo, and Forvia, is broadly attributed to these conditions.

2.3 New regulations

The EU’s regulations, starting with emissions-related regulations, represent another challenge facing European automakers. According to the Zero Emission Vehicle (ZEV) regulation, at least twenty-two percent of vehicles sold in the EU this year must be zero-emission. By 2030 eighty percent of the vehicles sold must be zero-emission and by 2035 one hundred percent. Manufacturers that fail to hit these quotas could be fined fifteen thousand euros per car. BMW, Mercedes, VW, and Stellantis were above the European Union limit for 2023 and may need to pay up to thirteen billion euros in fines under the new regulations. VW’s portion may be as high as 8.4 billion euros. In addition to the fines, adhering to the regulations will impact the production costs of automakers and their suppliers. A recent Frontier Economics study estimated that the Euro 7 emissions standards, which are part of the EU’s zero-emission strategy, could add €180-450 to the cost of each light-duty vehicle. Incumbent automakers propose that the EU delay its 2025 emissions targets by two years. Additional regulations, e.g., the EU Data Act and the upcoming AI Act, also challenge European automakers.

2.4 New mobility requires expensive technology investments

Competing effectively for market share, adhering to regulations, and improving market demand while controlling costs requires that automakers make heavy technology investments. The shift to software-defined new energy vehicles that are automated or autonomous necessitates investing in AI, software, hardware, semiconductors, and materials technologies.

Let’s focus just on AI since it is attracting so much attention. As I’ve been writing for several years, AI takes center stage in new mobility because it can impact every function, from autonomy to vehicle design to manufacturing, sales, service, support, and operations. AI development and deployment will require incumbent automakers to make massive investments to stay competitive. As an example of the scale of investment, consider that during 2024 Microsoft, on its own, would have invested nineteen billion dollars in AI and plans to invest ninety billion dollars in 2025. The 2024 capex of BMW, Mercedes, and the VW Group is twenty-seven billion dollars. Tesla is investing ten billion dollars toward its AI initiatives. xAI, Musk’s AI company that collaborates closely with Tesla and X, has invested $6 billion to date and will invest another $20-25 billion over the next few years. Recent interest in autonomous vehicles resulted in thirty-one new investments with a combined value of over ten billion dollars, including the recent investment in Waabi, Wayve, and Waymo.

To date, the automotive industry has not deployed capital appropriately and efficiently due to corporate cultures that are defined by risk aversion, legacy systems and processes, and supply chain challenges. EU countries with strong automotive industries have not digitized adequately. For example, according to data published in 2023, Germany ranks seventh within the EU  based on its digitization level.

2.5 Labor

Changing market conditions and the adoption of new technologies will require the automotive industry to reduce the size of its workforce, invest in its upskilling, and change its composition. Today, Germany’s automotive industry employs one million people, whereas France’s, Italy’s, and Spain’s employ over two hundred thousand each.

In response to increased competition and lower demand Stellantis, VW Group, Michelin, and Schaeffler have already announced layoffs. European suppliers cut 54,000 jobs in 2024 with more job losses likely to occur in 2025. Automotive News Europe reports that the number of job cuts is greater than those announced in 2020 and 2021 combined. Labor unions are mobilizing in response to such layoffs, even though a 2024 European Trade Union Institute report discusses how changes in technology, globalization, and outsourcing have eroded workers’ bargaining power.

The use of embodied AI in automotive manufacturing will make the situation worse. The adoption of humanoid robots has the potential to improve manufacturing productivity and reduce costs by completely changing the characteristics of the assembly line. But it will likely lead to workforce reductions. Imagine an automotive assembly line with 500 employees and 3.5 employees per robot and consider the impact of having instead 500 humanoid robots and 50 employees, the same number of employees it takes to run a modern data center.

Automakers will need to invest to upskill certain of their employees and continue to participate in the war to hire new talent with the right areas of expertise. The upskilling investment will be significant. For example, Amazon stated that by the end of 2024, it plans to spend 1.2 billion dollars to upskill more than three hundred thousand employees in generative AI.

3. The Industry’s Options at the Crossroads

Crossroads means that the traveler has choices. As they consider options, European automakers are analyzing whether:

1. The annual European light-duty vehicle Seasonally Adjusted Annual Rate (SAAR) will return to fifteen million vehicles or stabilize to around twelve million. To date, European automakers supplied eighty percent of the European SAAR. The Chinese automakers’ entry is changing this. The imposed and promised tariffs on Chinese EVs may not slow down China. Instead, they could adversely impact European automakers and the economies of several EU member countries based on China’s countermeasures.
2. The US market will enable them to compensate for the EU market share losses and be serviced without building new factories in the US. Today European automakers sell 1.2 million vehicles in the US with the lion’s share supplied by German automakers.
3. The market opportunity in the rest of the world, e.g., Africa, Southeast Asia, and India, is attractive and can be serviced by vehicles manufactured in the EU.

These analyses are important because, in addition to the financial results, they impact a) the number of people that will need to be employed by the European automotive industry as factory automation increases, vehicles become software-defined, and pressure to reduce costs continues to increase and b) the size of investment that will be necessary.

Unfortunately, none of the European automotive industry’s choices are appealing. The next five-plus years will be difficult for the industry and will require radical transformations rather than the small incremental changes the industry has been making over the years. Addressing the challenges will require swift action by both the EU and the industry, and the allocation of significant financial resources. However, neither the automotive industry nor the EU is known for fast decision-making. Moreover, the members of the new five-year European Parliament that were voted in last year must be educated on the severity of these challenges, appreciate the urgency to address them at a time when the EU faces additional equally important challenges, and take the necessary actions. Finally, even after action is taken, it will take time before the expected results are generated. The industry’s period of strong profit margins and high earnings per share will not return for a while, and for some, maybe never.

In his recent report on the European Union’s competitiveness and productivity, Mario Draghi states that because the EU lags behind the US and China in economic growth and productivity, it must focus on innovation, climate, and security. In his April 2024 report, Enrico Letta recommends consolidating strategic sectors, using state aid to support pan-European initiatives, and reducing regulatory burdens. The Letta and Draghi reports provide high-level recommendations that emphasize the need for investment and regulatory simplification. The European automotive industry must build upon these recommendations and focus on partnerships both between the industry’s members and a more effective partnership between industry and government. The driver for these partnerships will be how to continue thriving in the established markets, where the opportunity will be smaller, and take advantage of new markets as they form.

However, these need to be “unorthodox partnerships” rather than the typical partnerships the industry has pursued over the years. Unorthodox partnerships involve working even with competitors. Partnering even with competitors can have multiple advantages. It will enable the partners to take advantage of their differentiated competencies, share the costs of new technology investments, shorten the time to address important market opportunities, and learn critical new processes. For example, VW recently partnered with Rivian to develop scalable software-defined vehicle platforms and with XPeng to produce software-defined new energy vehicles with high levels of driving automation for the Chinese market. In both of these cases, VW brings to the partnership its manufacturing prowess and global distribution capability, whereas Rivian and XPeng bring their software-defined vehicle technology strengths.

The recently announced partnership between Stellantis and Leapmotor aims at capitalizing on the fast, iterative automotive design and production processes developed by Chinese OEMs. As Carlos Tavares, ex-CEO of Stellantis, stated: “The best way to compete with the Chinese is to try to be Chinese ourselves.” Even though OEM partnerships have not worked out in the past, e.g., Ford and VW, the challenges facing the industry today, should compel the partners to work harder together and achieve their stated goals.

The partnership between European automakers and the EU should be about creating new pan-European mobility- and automotive-specific R&D ecosystems. These ecosystems could capitalize on the AI ecosystems currently planned by the EU. The partnership should also address how to upskill and retrain automotive employees who will be displaced as the industry’s manufacturing is reconfigured and becomes more automated.

The opportunity in new markets, e.g., Africa, will require that European automakers rethink their model lineups and production models so that they can profitably produce lower-cost vehicles that are suited to the economic conditions of these markets. As I wrote in The Flagship Experience, the software-defined vehicle based on a zonal architecture has several cost advantages in manufacturing, servicing, support, and software-based configurability compared to vehicles based on electromechanical architectures. These characteristics will enable automakers to enter several new markets with the same vehicle platform that is properly configured through software to address the target market’s needs. Standardizing on a technology stack that uses AI effectively from skateboard to software platform and APIs across all models provides further economic improvements. The Geely Group demonstrated that this is possible, and BMW is attempting to do the same with the Neue Klasse. However, to achieve this goal, automakers must accompany technology investments with a transition from vehicle- to customer-centricity. This transition requires the automaker’s cultural transformation and a deep understanding of customer mobility needs.

4. Conclusion

The European automotive industry is facing several challenges. Automakers and their suppliers must navigate a new complex crossroads that requires hard decisions and radical transformations at the core of which will be unorthodox partnerships. Germany has been a driving force behind Europe’s economy for decades, helping the region through many crises. It is Europe’s largest domestic market, and its automotive and mobility products have been popular exports around the world. However, this time around, the successes German automakers experienced over the past seventy years globally are not a predictor of their future state. To successfully navigate the crossroads in front of it, German automakers and their suppliers, together with the rest of their EU competitors and the EU’s leadership must determine the best way forward at the crossroads they arrived.