China Automotive in Europe: Stop Diagnosing, Start Fixing, Ideally Yesterday

Europe doesn't have a diagnosis problem anymore. Mario Draghi produced over 400 pages on the automotive sector. The European Commission ran a Strategic Dialogue, then an Industrial Action Plan, then an Automotive Package on top of that. Every bank and consultancy has drawn the same chart by now: Chinese share climbing, European margins falling. What's genuinely scarce is the collective nerve to act on that diagnosis at the speed the numbers actually demand. This piece sets out what European automotive industry restructuring actually needs to look like across manufacturers, Germany specifically, and Brussels, and why the next 24 months matter more than the next white paper.

What Does Europe's Automotive Industry Actually Need to Do Now?

Four things, done together and quickly. Manufacturers need to cut faster and partner with the Chinese competitors beating them rather than only lobbying against them. Suppliers need to consolidate and co-invest in battery technology at genuinely industrial scale. Germany needs to reform the governance mechanisms currently blocking its own largest employer from executing a survival plan its own board has already endorsed in principle. Brussels needs to convert its trade leverage into binding investment and technology-transfer commitments rather than settling for a tidier tariff regime. None of these four actions alone saves the industry. All four, executed together, might.

Why "Too Big to Fail" No Longer Means Safe

The scale here is worth restating, because it gets lost in the noise around individual model launches. The automotive value chain supports between 13 and 14 million jobs across the EU and accounts for around 7 per cent of EU GDP. That's not a sector. It's a load-bearing pillar of the European economy, too big to fail in exactly the sense that mattered to finance ministers in 2008. But unlike the banks, there's no US-style TARP sitting on a shelf, no single balance sheet to recapitalise, no government weekend crisis meeting that fixes it. This is a slower, plant-by-plant unwind, and it doesn't get solved with a bailout cheque.

For two decades, the European car industry ran on a subsidy nobody called a subsidy: profits earned in China quietly cross-financed expensive production at home. That mechanism has failed. Volkswagen China joint venture profit decline tells the story on its own: close to €1 billion of operating profit in 2025, forecast to fall to somewhere between €200 million and €600 million in 2026, with China deliveries down more than a third year-on-year in the second quarter. Mercedes-Benz and BMW posted comparable declines in the same market over the same period. Nobody in Brussels switched this mechanism off. BYD, Geely and Chery did, by out-competing German premium brands on their own former home turf.

At the same moment, the cost base that subsidy used to disguise is now fully exposed. Volkswagen's own internal benchmarking puts overhead costs some 20 per cent above comparable competitors, with roughly half of that gap down to personnel costs. Management understands the arithmetic. The workforce understands the arithmetic. The governance architecture, built for a more forgiving era, is actively blocking the response the arithmetic requires. That's a strategic failure two decades in the making, as we've argued before, and the diagnosis has stood for at least three years now. The only live question left is what gets done in the next 24 months.

What Manufacturers Need to Do, and What They're Already Doing

Cutting Faster Than the Board Wants To

Volkswagen's leadership has said explicitly that a recalculation on current labour costs implies another 50,000 job reductions worldwide on top of the 50,000 already agreed, and that the group is prepared to halve its 150-model line-up to concentrate capital on fewer, better platforms. Every European OEM carrying an equally bloated portfolio should be running the same arithmetic out loud, rather than waiting for a shareholder revolt to force the conversation.

Partnering With the Competitor Instead of Only Lobbying Against It

More genuinely radical is Volkswagen's own admission that it's exploring building China-developed, China-costed platforms in Europe, and potentially sharing plants with Chinese partners on the continent. For a decade the European instinct has been to treat Chinese manufacturing know-how purely as a threat to tariff away. The smarter play, increasingly being adopted, is to treat it as a capability to absorb instead. Stellantis Leapmotor Zaragoza is the clearest live example: building the B10 compact SUV at the Zaragoza plant, sharing the same platform for an upcoming Opel model, with a second Leapmotor model due in 2027. This isn't capitulation. It's arbitrage of the one thing Chinese entrants genuinely have that legacy European engineering organisations currently lack, a cost and speed advantage on affordable EVs. Any European OEM without a Chinese platform partnership already signed should be actively negotiating one.

Converting Underused Capacity Rather Than Mothballing It

Underused capacity is the other lever available immediately. Volkswagen's CEO has flagged partnering with the defence sector as the preferred option for underutilised plants such as Osnabrück, a sensible answer to two problems at once: automotive overcapacity and Europe's defence industrial ramp-up, which needs exactly the precision manufacturing and supply chain skills the auto sector already has in abundance. This dual-use conversion should become a standard template, actively brokered by governments rather than left to individual OEM discretion.

Fixing the Governance Structure, Not Just the Strategy

Manufacturers also need to confront their own governance. Volkswagen is reportedly weighing carving passenger cars and components into separate legal entities, specifically to route around the constraints Volkswagen Law co-determination reform would otherwise require through slower, harder-fought channels. Whatever one thinks of the politics, the instinct is correct: if a corporate structure inherited from the 1960s can't execute the restructuring the 2020s demand, change the structure, not the ambition.

Turning Battery Weakness Into the Next Decade's Strength

The Scale of the Dependency

Europe's supply chain vulnerability concentrates, brutally, in one component: the battery. Transport & Environment's own analysis shows Chinese battery imports into the EU rose sevenfold between 2020 and 2025, even as tariffs successfully pulled Chinese-built EV assembly's share of the EU battery-electric market down from a 2024 peak of 22 per cent to 17 per cent in the first quarter of 2026. In other words, the tariff wall worked on finished vehicles and simply pushed the dependency one layer further down the value chain, into cells and cathodes. Fixing the visible symptom while leaving the underlying dependency intact isn't a solution. It's cosmetic surgery on a structural problem.

What the EU Is Already Doing About It

The European Commission's €1.8 billion Battery Booster package, combining €1.5 billion in interest-free loans with €300 million for critical raw materials, plus 31 newly designated Strategic Projects covering lithium, nickel, cobalt, manganese and graphite, is the right instrument. The European Commission's own Battery Booster Facility documentation sets out the detail, but the sums involved are still small relative to the state capital China has deployed into CATL, BYD and their supply base over fifteen years.

Three Accelerants Worth Adding

Three things would help close that gap faster. First, European battery consortia should be actively encouraged to co-invest in next-generation chemistry, solid-state, sodium-ion, rather than compete wastefully in parallel, which is precisely what Draghi report automotive competitiveness recommendations argue for when they call for clearer guidance on coordination between competitors. Second, recycling and circularity need to move from pilot to industrial scale now, since a genuinely closed-loop European battery material stream is the only realistic long-term route out of raw-material dependency on China. Third, tier-one suppliers facing the same cost squeeze as the OEMs above them should be consolidating aggressively across borders. Germany's Mittelstand supply base can't absorb this shock company by company.

Welcoming the Investment, Not Just the Imports

There's also a case, uncomfortable as it sounds, for welcoming Chinese manufacturing investment into Europe rather than only resisting Chinese imports. Chinese EV manufacturing investment Europe is already well underway: BYD's new Szeged plant in Hungary is running at 150,000-unit capacity, Chery is producing in Barcelona, and further Chinese-linked capacity is confirmed or under discussion in Slovakia and the UK. Every one of those factories creates European jobs and tax revenue, and if structured correctly through joint ventures and local-content requirements, European technology transfer too. The policy goal shouldn't be keeping Chinese manufacturing out of Europe. It should be ensuring that when it arrives, it arrives on terms that build European capability rather than simply relocate an assembly shed.

Germany's Governance Problem: What Policymakers Can Actually Fix

Reforming Co-Determination Without Dismantling It

Germany carries the heaviest burden of adjustment, and it's also where the most politically difficult reforms sit. The co-determination model giving labour representatives and Land governments effective veto power on the supervisory board serves workers well in stable times. In an existential restructuring, as the Volkswagen board vote demonstrated, it can block the very changes needed to save the jobs it exists to protect. This doesn't require dismantling German industrial democracy. It requires a narrowly scoped reform, ideally negotiated jointly by government, IG Metall and the OEMs, creating a fast-track mechanism for restructuring decisions tied to demonstrable existential competitive threats, with binding worker protections, retraining, redeployment, extended notice, wage guarantees, attached as the trade-off rather than plant preservation as an unconditional veto. This is the same governance and speed constraints already reshaping the case for whether Germany can compete without working like China, and the two problems are really one problem viewed from different angles.

Fixing the Energy Cost Gap

Energy costs sit squarely in national governments' hands as the second lever. Draghi's recommendation on competitive power purchase agreements and industrial energy pricing reform remains largely unimplemented in Germany, where industrial electricity prices still sit well above those in China and the US. An automotive industry can't compete on cost while paying a multiple of its rivals' energy bill for the electrification transition it's being mandated to deliver.

Coordinating on Investment Terms Instead of Competing for Jobs

Governments should also stop treating the Chinese factories arriving in Hungary, Spain and Slovakia purely as a bidding war for jobs, and start coordinating through the Commission on shared local-content and technology-transfer conditions, so member states aren't undercutting each other into a race to the bottom on the very safeguards that would make this investment strategically useful rather than merely photogenic for a ribbon-cutting.

Drawing Down the Funds Already Available

Finally, the European Globalisation Adjustment Fund has already been amended to allow support before layoffs occur, and the Commission's €90 million Pact for Skills fund and new Fair Transition Observatory are designed to flag redundancy hot spots before they happen. National governments need to draw these funds down aggressively and pair them with genuine reskilling into adjacent sectors, defence manufacturing, grid infrastructure, battery recycling, rather than treating them as a cushion for managed decline.

Brussels: Using Trade Leverage to Buy Investment, Not Just Protection

The Minimum-Price Mechanism

Brussels' most consequential recent move is the shift from blunt tariffs toward EU minimum price undertaking Chinese EVs, a mechanism the Commission finalised guidance on in January 2026 after more than a year of negotiation with Beijing. Volkswagen's Cupra Tavascan became the first model granted a tariff exemption in exchange for a minimum price and volume quota in February 2026, and the guidance explicitly states the Commission will factor in Chinese EV makers' European investment commitments when assessing future offers.

That's the right instrument, and it needs to be used more assertively: every undertaking negotiated with a Chinese manufacturer should carry binding local production, local content and technology-sharing commitments as the price of market access, converting a defensive tariff regime into an active industrial policy tool. A pure price floor with no investment conditionality simply protects margin without protecting jobs or capability, and does nothing to close the innovation gap Draghi identified.

The CO2 Recalibration and What Still Needs Faster Rollout

The December 2025 Automotive Package's revision of CO2 standards, allowing carmakers a pragmatic path to the 2035 target via a 90 per cent tailpipe reduction with the remaining 10 per cent covered by low-carbon steel, e-fuels or biofuels, is a sensible recalibration rather than a retreat from decarbonisation. It buys manufacturers technological flexibility without diluting the destination. The corporate fleet electrification mandate and expanded social leasing schemes, modelled on France's programme, are demand-side measures that deserve faster rollout across all 27 member states rather than the current patchwork Draghi rightly criticised as incoherent.

Regulatory Coherence Is the Cheapest Fix Available

Analysis of the Draghi recommendations found that regulatory coherence and predictability carries the highest political viability of any automotive measure and requires no public investment at all. That should be delivered first, precisely because it's cheapest and least contested: a single, harmonised, genuinely predictable EU regulatory environment for connected, automated and electric vehicles, replacing the twenty-plus overlapping data-sharing regulations currently in force. Every month this drags on is a month Chinese competitors, unencumbered by 27 separate regulatory regimes, extend their lead on cost and cycle time.

The Bottom Line: Four Actions, Executed Together

• Manufacturers cut faster and partner rather than only lobby. Halve bloated model portfolios, sign Chinese platform partnerships, and convert underused capacity through dual-use arrangements like defence manufacturing.

• Suppliers consolidate and co-invest in battery technology at industrial scale. No single Mittelstand company can absorb this shock alone, and duplicated national efforts on next-generation chemistry waste capital that should be pooled.

• Germany reforms the governance mechanisms blocking its own restructuring. A narrowly scoped, fast-track mechanism for existential competitive threats, with binding worker protections attached, replaces an unconditional veto that no longer serves the workers it was built to protect.

• Brussels converts trade leverage into binding investment commitments. Every minimum-price undertaking should carry local production and technology-transfer terms, and regulatory coherence across all 27 member states should be delivered first, since it costs nothing and unlocks everything else faster.

  
  

The 2008 parallel is instructive precisely because of where it breaks down. The banks were saved with public capital because the alternative was systemic collapse within days. The automotive industry is too big to fail in exactly the same structural sense, 14 million jobs and 7 per cent of GDP don't unwind quietly, but there's no equivalent rescue mechanism sitting on a shelf in Frankfurt or Brussels, and there shouldn't be. This isn't a liquidity crisis a recapitalisation fixes. It's a competitiveness crisis that only faster products, lower costs, smarter partnerships and braver governance can fix. The manufacturers, suppliers, unions and policymakers who move first, and move together, will still have an industry in ten years. The ones still commissioning studies will not.

Talk to Madox Square about what this means for your organisation if you're weighing up where your own restructuring, partnership or market entry decisions sit inside this picture.

Frequently Asked Questions

1.Why are Volkswagen's China profits falling? 

Chinese joint venture operating profit fell from close to €1 billion in 2025 toward a forecast €200 to €600 million in 2026, driven by China deliveries dropping more than a third year-on-year, as BYD, Geely and Chery out-compete German brands on cost, speed and technology.

2.What is the EU's Battery Booster programme? 

A €1.8 billion package combining €1.5 billion in interest-free loans to European cell producers with €300 million for critical raw materials, alongside 31 newly designated Strategic Projects covering lithium, nickel, cobalt, manganese and graphite.

3.How does the Volkswagen Law affect restructuring? 

It's part of the governance architecture giving labour representatives and the Land government of Lower Saxony effective veto power over major restructuring decisions, which has blocked plant closures and job cuts management and the workforce both acknowledge are economically necessary.

4.What is the EU's minimum price undertaking mechanism for Chinese EVs? 

A trade instrument finalised in January 2026 letting Chinese manufacturers avoid tariffs by committing to a minimum price and volume quota, with the Commission now also factoring in European investment commitments when assessing these offers.

5.Why is Stellantis partnering with Leapmotor in Spain? 

To access Leapmotor's cost and development speed advantage on affordable EVs, building the B10 compact SUV at the Zaragoza plant and sharing the platform for an upcoming Opel model, with a second Leapmotor model due in 2027.

6.What did the Draghi report recommend for European automotive competitiveness? 

Among other things, competitive industrial energy pricing, clearer coordination guidance for competitors co-investing in next-generation technology, and a harmonised EU regulatory environment for connected and electric vehicles, with regulatory coherence flagged as the cheapest and most politically viable fix available.