The changing landscape of the European car industry

European car industry woes

The European car industry has been going through, and continues to experience, significant and unprecedented changes and challenges. There is a lack of consistency in, and ever-changing timings on, the market-by-market legislation that is heralding the death of internal combustion engine (ICE) powered cars, and the increasing emergence and proliferation of electric vehicles (both plug-in hybrids – PHEVs, and battery electric vehicles - BEVs). There is also huge divergence in the penetration of, and government investment in, electric charging infrastructure in different markets across Europe as well as a removal of EV subsidies for consumers that sees some markets, like the UK and Germany, adopting electric powered vehicles at a far slower rate than others such as Nordic countries. Perhaps the one positive for the industry that one can spin from the recent introduction of the US ‘reciprocal’ tariffs on automotive imports is that the strict combustion engine ban, and associated fines, facing European manufacturers may be delayed and softened at local market levels, as we have seen in the UK this month. 

The recent introduction of said tariffs by the new US administration is going to have the biggest impact on the global automotive market in recent memory, and will hit European manufacturers hard as they account for 25% by value of US global car imports. And all this at a time when the new German government is advocating for “openness to technology,” which in practice might mean nothing more than creating an attractive environment for the extended use of cars with internal combustion engines. The thinking is to give traditional OEMs and suppliers a financial boost, together with the belief that the combustion engine still has enormous potential for further developments that can lead to an improvement in fuel consumption, efficiency and a reduction in pollutant emissions, especially in combination with future synthetic fuels. At the same time, being aware that China wants to be climate neutral by 2060 and as the biggest future global market already today has got a 60% market share in sales and production of EV (McKinsey, 2023), this also could turn out to be a backward decision for Europe and other markets if their hopes and beliefs about a new potential future for ICE don’t materialize. The consequence might be an increased knowledge gap regarding EV technologies and consumer needs and a future competitive disadvantage. In any case, the enormous change the automotive industry is currently going through and the actual political landscape will force companies to prepare for many different kinds of negotiations and power/dependency scenarios upfront.

The European car industry employs roughly 7% of the whole European workforce and Germany has the highest number of automotive manufacturing jobs therein. Partway through 2025, the German economy continues to struggle with a crisis in the country's all-important car industry, significantly contributing to its woes. Last year, VW originally had announced it was planning on culling thousands of jobs in the next few years, and there were also fears of mass lay-offs at Germany’s other major car manufacturers. In the specific VW case, an agreement has been closed with the workers’ council, which will avoid any lay-offs but forced both parties to make significant compromises on their original objectives.

Global microchip shortages triggered by a change in consumer consumption habits caused by COVID-19 created massive supply pressures in the industry from suppliers and resulted in huge production delays. Recent economic impacts have seen inflationary pressures hit suppliers, with manufacturers either refusing to accept any price increases or struggling to be able to pass these costs on to their customers. This has contributed to a rise in huge claim negotiations as part of the commercial challenges complicating relationships between suppliers and OEMS. 

And running alongside the myriad of issues has been a lower than expected uplift in electric vehicle sales and an overall drop-off in new car registrations that has hit the industry hard and seen levels still substantially lower than before the pandemic despite a slight growth year-on-year in 2024. 

The rise of China

Perhaps most significantly, whilst these issues have been happening, we have seen the rapid rise of China as the global leader in car exports, driven by its emergence as the superpower for electric vehicle (EV) production and export. Information sourced from Gavekal Research and the Financial Times shows that between 2010 and 2021, car exports globally were dominated by Japan, Germany and South Korea. But since 2021, China has seen exponential growth in its exports from around 500k units in 2020/2021 to exports rising by almost 2m cars per year since then, to a level of over 4.2m vehicles being exported in 2023 to lead the world in car exports.

The European Union, concerned over the impact of Chinese EV imports and its lack of competitiveness in this area, imposed from Oct ’24 tariffs of up to 35% on Chinese EV imports. And the concern is certainly valid. Between 2020 and 2023, Chinese EV imports have exploded by over 1,600 percent compared to only a 325% increase in the same time from other EV imports into the Union. In 2023, the EU imported over €11bn of battery EVs from China, accounting for 49% of all imports.

Batteries are powering China’s dominance of the EV market 

One of the key factors in why Chinese imports are so much cheaper than European-produced equivalent models is down to the cost of battery production. Batteries make up as much as 40% of production costs in some longer-range EV models, and the Chinese government has reportedly supported the over-production of batteries by its manufacturers, which has seen them able to purchase key components like Lithium at below market rates. As an example of this, data from UBS shows that the battery element of Chinese manufacturer BYD’s Seal model is 29% cheaper to produce than the battery in VW’s ID3 equivalent model in Europe. In fact, Chinese state subsidies for car manufacturing overall are estimated by the OECD to be 9 times greater than in other developed countries, including European markets.

Today, China makes over 80% of all the batteries that go into EVs globally and they also make up to 96% of the components that go into those same batteries. Forecasts suggest that if Chinese dominance continues then their battery type (cheaper, easier-to-produce LFP Lithium Iron Phosphate batteries) will go on to dominate the market substantially through to 2030, further increasing global dependency on China (source: Thunder Said Energy).

And this negative differential in cost of production in Europe vs China is evident across all core component groups that make up car production costs; electronics, interior, chassis, wheels, labour etc. This is seeing added pressure being brought to bear throughout the European car industry as manufacturers seek to put pressure on their suppliers to lower costs to try and be more competitive with the import threat from China.

The biggest weapon to date in Europe’s arsenal to counter the Chinese threat has been the aforementioned import tariffs, but significant changes in the location of vehicle and automotive component production are offering the Chinese manufacturers a back-door into Europe that bypasses the current tariff barriers. In particular, Morocco.

Morocco, the gateway to Europe 

Until Trump’s tariffs, Morocco had a free trade agreement with the US. Since the introduction of the tariffs, automotive exports into the US from Morocco will attract a 25% tariff. Given that Trump has increased tariffs on all goods imported from China to 145%, countries like Morocco have become even more attractive for Chinese automotive OEMs who are already developing extensive production capabilities there. At the same time, Morocco enjoys a free trade agreement with the EU and the UK, making it, again, a perfect gateway for Chinese OEMs.

And Morocco’s expansion has been rapid – in 2023 its automotive exports rose 30% to over €15bn, and whilst China still leads the list of importers of completed vehicles into Europe, Morocco is now the largest overall ‘automotive’ importer into Europe given its focus on component production, especially power-train and wiring elements.

Furthermore, Morocco is well-placed to also profit from a focus on battery production in the coming months and years. The Moroccan government has proposed reducing duties on lithium-ion cells imported from Asia from 40% to 17.5% in an effort to drive local battery production in the country. And Morocco has recently seen a $1.4bn giga factory investment from Chinese battery maker, Gotion, which will be up and running by the end of 2026. It is the over-dependence on Chinese battery technology/production that is one of the biggest threats the European industry needs to overcome, and therefore one of the biggest opportunities that Morocco potentially represents for European manufacturers.

Morocco is not, however, the only country that Chinese car companies are looking at, with BYD, China’s largest EV manufacturer, opening a car manufacturing plant in Turkey and a battery production facility in Hungary. However, Morocco’s aforementioned free trade agreements, geographical proximity to Europe, expansive government investment support and relative political stability mean it will likely continue to attract interest from Chinese EV makers vs other African locations.

Issue or opportunity?

So, does this spell even more pressure for European manufacturers in the face of the already significant Chinese threat? Not necessarily, because Morocco (and in part other low cost countries like Hungary and Turkey) also offers benefits to both the European car manufacturers themselves and their suppliers if they can work together to exploit them, not least through significantly lower labour costs but also, as Morocco’s battery production capabilities increase, access to much cheaper battery components for their cars as well as cheaper costs of more established elements like wiring and drive trains that Morocco is already manufacturing.

It is worth noting that Morocco is not a new option - manufacturers like Stellantis, Renault and VW have been there for a while. Morocco’s attractiveness does represent a potentially increased competitive risk for existing suppliers to the major car manufacturers from businesses already in, or planning to move to, Morocco. But the existing larger-scale suppliers also have the option of leveraging Morocco for themselves, as Valeo has already done, as just one example. Relocating production and R&D facilities from expensive, leading European countries into places like Morocco, Algeria and Turkey has clear short-term cost (and possibly labour/union) implications for suppliers for sure, but such an approach also represents a chance to work more collaboratively with their manufacturer customers – and vice-versa.

In a classic win-win opportunity, approaching such investments in changes to the location of production as joint initiatives between manufacturers and suppliers can see both sides benefit from cheaper costs and more profit. It would also help address the skills gap in emerging technologies with European manufacturing - rather than trying and recruit workers from places like Morocco, it may be easier to simply set up shop over there.  The need/opportunity is for joint investment decisions to be made between manufacturers and key suppliers to establish a new way of working, and doing it fast will be key to staying ahead of the Chinese threat. The knock-on effect would ideally be mainstream European car brands that consumers know and trust being offered at lower prices that can compete more effectively with Chinese imports. So that would be a win-win-win! And the need to drive greater efficiency and cost savings has been thrust into the spotlight as a way to try and counter the impact that.

However, this evolved approach to negotiating commercial deals between giant car manufacturing groups like VW and Stellantis and their critical suppliers requires a mindset shift on both sides. From a negotiation standpoint, one should always consider the balance of power between the negotiating parties in terms of where it sits and how to shift it in favour of one side or the other to secure the best deal. But in the case of the European car industry and its current predicament, it should not be about how to leverage power necessarily as a supplier or a manufacturer over the other side, but instead the focus should be on how both sides can work together more effectively to shift the balance of power away from the Chinese competition.

The challenge is that the entire industry has a long tradition of competitive negotiations. In addition, with all the disruptions in the past, claim negotiations have proven to be absolutely crucial as well as they are considered one of the significant revenue and profit drivers. Due to the fact that those negotiations are often worth hundreds of millions of Euros, it is a certain level of hierarchy, often including the board, that is involved. And those are the same people who then should work together collaboratively as described above.

So, this kind of change doesn’t happen easily and both sides need to lean into it. Often, issues sit at the individual level high up in major organisations that create challenges lower down for those teams actually negotiating commercial deals. As an example, Stellantis, the world’s third-largest car manufacturing group, has for years had a combative relationship with its suppliers, with a position from their now ousted CEO, Carlos Tavares, that they would not accept any price increases from suppliers despite heavy inflationary market conditions. This message gets passed down the chain of command and becomes outwardly embodied by the actions of commercial teams in dealings with suppliers. This creates a reciprocally aggressive and intransigent approach from suppliers, as was evidenced in the US, where litigation was initiated. The net effect when this happens in any industry is a destruction of trust and a stifling of opportunities to grow together. For a commercially aggressive, well-supported and agile competitor like the Chinese EV industry, this internal conflict in the European car industry is just what they want.

However, the departure in December 2024 of the widely criticised Tavares after a reported fall-out with the rest of the Stellantis board has seen the interim leadership, led by Chairman John Elkann, already make moves to reverse some key decisions made by Tavares and a tacit attempt to rebuild trust and relationships with dealerships and factory sites in the US. If such a moderating approach can also be brought to bear in how a major manufacturer like Stellantis approaches commercial negotiations with its core supplier base, then it augurs well for being able to set the whole manufacturer/supplier situation up to optimally address any challenges they face, especially those of the Chinese.

What is needed is a collective effort across the industry, supported by appropriate legislation to protect European manufacturers and investment to encourage the adoption of EVs more consistently.

Tips for successful collaboration 

Clearly, a lot goes into being able to work collaboratively with each other, so here is a list of 10 areas to consider from a negotiation standpoint:

• A long-term mindset. This is essential if issues are to be effectively identified and planned around collaboratively. To use a car analogy, when you drive you don’t look at the end of the bonnet/hood of the car, instead, you look past it as far down the road as conditions allow/require to ensure you are better able to spot and then respond proactively and calmly to issues.
• Planning is key. Time is important and sharing information is a must. ‘Help us to help you’ is a mantra that should be front and centre wherever possible on both sides of the fence. 
• Language is important. Don’t allow what may have happened in the past to cloud your vision for the future and how to behave most appropriately to secure the best joint outcome. Use what you learned from the past to ensure that whatever mistakes may have been made by either side are not repeated. And own the mistakes you make – humility is a great way to show trustworthiness. 
• Trust is not an optional extra! More than ever, if we are looking at changing how the car industry operates, and both sides (hopefully) recognise that they need to work together, trust is critical. What are you doing to ensure that trust is repaired (if needed) and nurtured on-going?
• Keep talking. What is your ongoing contact and communications strategy with your counterparty? Those ’partners’ who only really speak when there is an issue or when they are at the negotiation table are most likely to be the ones who ‘talk’ about ‘partnership’ but are in fact far removed from it.
• Optimism is not a strategy. Change what you do and how you think – certainly China will continue to profit if the European manufacturers are not able to effectively compete. In-fighting between suppliers and OEMs takes the eyes off the ball and allows the competition to take advantage. Trump’s tariffs have added a layer of complexity and cost, but they have ushered forward the ‘change agenda’ that needed to be embraced by both sides anyway.
• Power balance. Worry less about where it sits between supplier and manufacturer and spend time and effort to work out together how to shift the power away from Chinese competitors. 
• Collaborate or compete? The decision is simple but should inform everything that follows.
• Internal alignment. Who is making the decisions about the approach to take? How empowered are your negotiators to make decisions and secure a change in the outcome?
• Stop focusing on win and lose outcomes. Collaborative settlements are needed – suppliers are unable to unlock value for manufacturers unless they are allowed, in turn, to make savings elsewhere.  The resultant value can be a shared improvement in output and profitability. For example, both sides could agree that the settlement of a claim will be contingent upon a proportion of the settlement amount being invested into mutually beneficial areas, such as setting up production in new, cheaper locations, that will help drive lower costs and greater efficiencies within the total partnership.

To strengthen the European car industry against foreign competitors, it's crucial for manufacturers and OEM suppliers to work together more collaboratively. Shifting from a competitive mindset to one of cooperation can help balance the power away from Chinese competitors and build a more resilient industry. Achieving this goal will require a collective effort from everyone involved.

How The Gap Partnership can help you 

The Gap Partnership specializes in transforming negotiation into a strategic advantage. With our expertise, we equip your teams with the skills and mindset to negotiate effectively, help standardize your negotiation processes for consistent success and work with your leadership to foster a culture of collaboration and alignment across departments. Let us partner with you to embed negotiation into your organizational DNA, ensuring sustainable growth and a competitive edge in every negotiation.

About the author 

Tim Green is a Principal at The Gap Partnership where he leads strategic growth and supports global client teams as part of the EMEA leadership. He began his career in global FMCG and later founded a consultancy specialising in sports sponsorship negotiations. Passionate about the psychology of negotiation, Tim writes for The Negotiation Society and holds a BA in Business and Marketing.