The European Union’s plan to impose an electric-vehicle monopoly on the new car market by 2035 in the name of saving the climate has inspired much automotive industry angst but achieved little.
The German auto industry crisis, now made more urgent by Volkswagen’s problems, may finally prompt some action, with politicians being forced to protect Europe’s flagship industry and its high-paying jobs with higher tariffs or by diluting climate change action.
News last week that Volkswagen may double its planned layoffs to 100,000 and shut 4 German plants, after recent profit warnings from BMW, Mercedes and VW subsidiary Porsche could be the trigger for belated EU action. If anyone doubted the scale of VW’s problem, Manager Magazin, which often breaks news stories about the company, said it was planning to spin off its own name core brand.
Profits from China, which used to be a virtual license to print money for the Germans, are slumping. The European market is still stagnating at sales nearly 4 million short of its pre-Covid high. President Trump’s increased U.S. tariffs have weakened another big earner.
China has turned the tables on its former teachers from Europe and the U.S. in general and Germany in particular, making vehicles just as good or even better for about 30% less. If that wasn’t serious enough, the European Union planned a strict timetable for EVs, culminating in a monopoly by 2035, without noticing that its own industry wasn’t ready to withstand the already well-prepared Chinese. The rules impose a ban on carbon dioxide emissions by 2035 from sedans and SUVs.
Chinese autos now account for just under 10% of the European market, and according to global consultancy AlixPartners, will rise to 16% by 2030. That spells trouble for European actors in a stagnant market.
Will EU seek more tariff protection?
The Financial Times Lex column said these layoffs and profit warnings would persuade EU politicians to intervene with more protection. There are already rumors that the EU will extend its EV tariffs to plug-in hybrid electric vehicles. The EV tariffs, of up to 45.3%, have made little difference apart from inspiring PHEV buying, and any increased tariffs on Chinese vehicles might well mean retaliatory tariffs on German and European sales in China.
“Stand back, and VW’s restructuring plan is a combination of a cry for help, threat and genuine attempt to make a bad situation a little better. It won’t be enough to solve the pressing problem – but it definitely makes the urgent need for a solution impossible to ignore,” Lex said.
Professor Ferdinand Dudenhoeffer, director of Germany’s Center for Automotive Research, agrees that high tariffs will be counterproductive.
“I am absolutely convinced that the EU Commission’s approach of building a high tariff wall around the EU is the wrong path and will set us back further. What matters is competing with China in the marketplace, not relying on bans. China is a global technology leader in many areas, and it would be foolish not to learn from them. Cooperation with China—not a wall—is the way of the future,” he said.
High officials from the European Union, including Commission President Ursula von der Leyen, have shied away from suggestions the CO2 regime should be significantly diluted. They say EU climate targets are demanded legally and provide certainty for investment. But if the certainty means job losses, factory closures, bankruptcies and a clear win for incoming Chinese brands, that is likely to whip up reaction from voters, and politicians will seek serious action. Meanwhile, current negotiations have suggested after 2035, a 10% market share for hybrids should be left open.
Leave it to markets
Andy Mayer, Energy Analyst at Britain’s Institute of Economic Affairs, a free market think tank, said political targets for low-carbon electrification were meant to create the industries of the future but Volkswagen workers are among the latest to feel the costs.
“The E.U. and its Member States have weakened their competitiveness by replacing energy markets with subsidies, mandates and regulations that favor particular technologies. This makes life harder for domestic manufacturers. Producers in countries such as China often benefit from lower energy costs, lower production costs and economies of scale, while European industry bears much of the cost of climate policy,” Mayer said in an email exchange.
“Expanding carbon border tariffs is unlikely to solve the problem. They risk embedding higher costs throughout the economy, further eroding industrial competitiveness and ultimately raising prices for consumers. They also risk retaliation, turning a climate policy dispute into a wider trade conflict, while creating incentives to route goods through third countries to minimise tariff liabilities.”
“The long-term answer is not for politicians to pick winners but to leave it to markets. The E.U. can set environmental objectives, but drivers should choose the cars they want to buy, and manufacturers should compete to offer the best technologies to meet that demand,” Mayer said.
No patience
Green groups have no patience with the automotive industry’s attempts to dilute the CO2 rules. Mercedes CEO Ola Kaellenius, Stellantis Chairman John Elkann and former Renault CEO Luca de Meo have warned that Europe risked losing industrial competitiveness if regulation became detached from market demand and affordability.
Brussels-based Transport and Environment didn’t reply to questions. But it has argued Volkswagen’s struggles and the broader German automotive problems stem from outdated business strategies, delays in affordable, mass-market EVs, rather than a systemic crisis in the EU’s green transition.
But this latest serious news from VW can’t be dismissed as a mere wrinkle. Even if the industry has been lax, the current blood-letting demands action from regulators.
Meanwhile, Chinese manufacturers have a huge incentive to be successful in Europe. Their home market is currently also in crisis with cut-throat competition paring profits to the bone. The Chinese seem to be aware that if they are too successful in Europe, this might jeopardize a huge investment.
This has led to a wave of Chinese plans to make cars in Europe and establish joint ventures. SAIC’s MG has announced a new plant in Galicia, Spain. Chery will take over the surplus assembly line at the Nissan’s plant England. Stellantis will make Leapmotors in Spanish plants and is expanding its partnership with Dongfeng to assemble vehicles at its plant in Rennes, France. BYD is building a factory in Hungary.
