European automakers face a volatile year, squeezed by weak markets, a lack of profitability, uncertain European emissions regulations, and pressure for restructuring and mergers, while rushing to electrify and defend against burgeoning Chinese competition.
Despite the threat from China, European manufacturers are fighting back with products that are just as good, although often failing the price test, according to analysts. And Chinese manufacturers will have to prove they can match the European ownership experience.
European car sales are steady, but stand at millions less than before the Covid pandemic struck. The threat from China will hit high gear this year. The European Union has proposed important concessions to its manufacturers to ease their path to zero carbon dioxide emissions by 2035, but not enough to meet their demand for a neutral policy on technology choice. The European Commission, the EU’s executive arm, has also proposed incentives for Europeans to make much cheaper electric vehicles. These proposals will generate much heat during European Parliamentary debates this year.
And then there are sales of electric vehicles, which reached just under 20% of the EU market in 2025. Given the EU target is close to 80% market share by 2030, a substantial increase is required in 2026. Fat profits await geared-up Chinese EV makers.
Volkswagen leads European sales, but China on the march
In 2025, Volkswagen, with sales of 3.6 million sedans and SUVs up 5.1%, led Europe with 26.9% of the market. Stellantis in second place had just under half that, down 3.9%, according to the European Automobile Manufacturers Association (ACEA) . Sales were up 1.8% in the EU at 10.8 million. This total though is still over 2 million short of the pre-Covid pandemic.
GlobalData expects little change to the total in Western Europe in 2026. This includes the five biggest markets of Germany, France, Britain, Italy and Spain.
It was the activity at the bottom end of the market in 2025 that was potentially the most troubling. 10th from bottom was SAIC, otherwise known as the Shanghai Automotive Industry Corp, with sales of 306,000 mostly MGs in Britain, up 24.9% for a market share of 2.3%. 7th from bottom was BYD with sales of 188,000 (1.4%) up 268.6%, according to ACEA data.
Automotive investors will be wondering how much of the market these two Chinese giants will win in 2026, along with compatriots Zhejiang Geely Holding Group Co Ltd, Chery Automobile, and Great Wall Motor. Geely, just testing the water in Europe with its own name brand, also owns Volvo, Polestar, and Zeekr. Chery brands include Jaecoo and Omoda. All these companies offer combustion, hybrid and electric vehicle options.
EU wants to ignite small car sales
Another hurdle for Europe’s finest to navigate will include new rules from the EU on carbon dioxide emissions and its attempts to reawaken the truly affordable small car sector. The Commission, has already signalled proposals to smooth the obstacles for manufacturers to reach the 2035 deadline which used to be 100% CO2 free but now is 90%, but with such severe conditions as to only make it viable for noisy supercars like Ferrari, VW’s Lamborghini, and Aston Martin and serene limousines like VW’s Bentley, BMW’s Rolls Royce and Mercedes Maybach. The industry will be desperately seeking a change that will end the virtual EV monopoly proposal and allow freedom of technology choice. The European Parliament will debate these proposals.
This turmoil will also breed more uncertainty as China eats away at market share and under-pressure Europeans will be looking around for partners, merger candidates or job cuts.
Stellantis profits have been falling after problems in the U.S. and it will be under pressure to consolidate and sell off brands. It was rumoured last year to be considering a merger with France’s Renault. Chery of China was said to covet Chrysler in the U.S. Storied luxury Italian sports carmaker Maserati is a perennial candidate for sale. In Europe, its mass-market brands – Citroen, Peugeot, Fiat, Lancia, Vauxhall, and Opel – compete against each other. DS, Alfa Romeo and Abarth sit in the wannabe premium sector. In the U.S., as well as Chrysler, there’s Dodge, Ram, and Jeep.
Plenty of positives for Europe though
CEO Antonio Filosa plans a Capital Markets Day in the first half of 2026 to outline strategy to shareholers. Stellantis was created in 2019 by the merger of Fiat Chrysler and PSA Group.
There are calming voices though.
Schmidt Automotive Research said Chinese growth was exaggerated by special conditions in the second half of 2025 but will still be formidable.
“From the second half of 2026, we expect those growth levels to once again return to lower double-digit levels rather than the triple-digit figure we witnessed at the end of the year,” SAR said in a report.
Steve Young, managing director of British-based automotive retailing consultancy ICDP, said the initial success of MG, BYD and Chery might have been spectacular, but success wasn’t guaranteed.
“There are however more diverse opinions about what will happen over the next five years, say to 2030. Some believe that their initial success will fade as the result of poor ownership experiences with reliability, parts supply or collapsing residual values. Others believe that the established (manufacturers) will successfully fight back with shorter development cycles and new products that are more competitive in key areas where they are currently lagging, such as electrification and in-car technology,” Young said in his weekly blog.
Europe fights back
But Young believes Chinese brands will continue their advance, not only in Europe, but even the US.
Berenberg Bank agrees Europe’s manufacturers are fighting back, although it describes 2026 as a transitional year. In a report, it said earnings growth may return for the first time in three years. The easing of regulations by the EU, which allow prolonged hybrid and ICE sales, should provide relief to cash flows and profit margins. Cost restructuring has also helped.
“While we expect rather flat volumes globally, strong product launch momentum in 2026/27 should provide some support amid ongoing pricing pressure, particularly in Europe. Our findings show that the (manufacturers) under our coverage are renewing about 25% of their portfolio each year on average in 2026/27, versus about 15% on average over the past 10 years,” the report said.
“Volkswagen, including Audi, and Mercedes-Benz are showing strong momentum for 2026. Next generation products like the BMW iX3 “Neue Klasse” and MB CLA offer technological leaps, closing the gap with Chinese competitors in terms of specifications – and at significantly improved cost levels,” Berenberg Bank said.
