Tariffs may slow Chinese competition, but they cannot fix Europe’s deeper problems.

Wang Kai

European automotive industry is shrinking at an unprecedented scale. Alongside Volkswagen’s announcement to cutting as many as 100,000 jobs as part of a sweeping restructuring, BMW, Mercedes-Benz and other major manufacturers are also reducing costs and capacity. Across the supplier industry, more than 100,000 jobs were cut in Germany in 2024 and 2025, according to European Automotive Suppliers Association (CLEPA).

Germany -- the traditional heartland of European carmaking -- is bearing much of the pain. The German Association of the Automotive Industry (VDA) estimates that the country’s automotive industry could lose another 125,000 jobs by 2035 unless competitiveness improves and the transition to new technologies is managed more flexibly.

The investment outlook is equally troubling. A VDA survey found that 72% of automotive suppliers and medium-sized manufacturers surveyed plan to postpone, relocate or cancel investments originally planned for Germany. Of these, 28% intend to shift investment abroad. The survey also found that 64% of respondents had already reduced employment in Germany in 2025, most citing the country’s declining industrial competitiveness as a major factor.

Europe has built more automotive capacity than its market can now absorb. Boston Consulting Group estimated that, at an 80% utilization benchmark, Europe now has more than 20% excess automotive capacity—equivalent to roughly 5.4 million vehicles, or the output of more than 35 assembly plants.

Blaming China’s competition is convenient—and understandable. Batteries, software and AI, three of the pillars of the future automotive industry, are precisely the areas where China has built an unassailable ecosystem.

Last year, 77% of the battery cells used in electric vehicles produced in Europe in 2025 were imported from Asia, according to Deloitte. In June, a Chinese-developed intelligent-driving operating system became a core reference in the global open-source repository for intelligent-driving software, implying that automakers worldwide can use this technology as the foundational reference when developing intelligent driving software. And then there is AI. Virtually all major German automotive groups—including Volkswagen, Mercedes-Benz, BMW and Audi—are deepening partnerships with Chinese AI and software companies, making such cooperation an increasingly important part of their strategies.

But China is not the whole story.

The more uncomfortable conclusion is that Europe’s automotive problems are increasingly structural. Tariffs might slow the arrival of Chinese-made cars, but they cannot make an expensive factory competitive, restore lost technological ground or create demand that is no longer there.

Problems tariffs can’t fix

The European automotive market has been hit by a succession of shocks. The pandemic disrupted supply chains; geopolitical conflicts have pushed up energy and security costs; inflation and high interest rates weakened household purchasing power; and the transition from internal-combustion engines to electric vehicles fundamentally changed the economics of automotive production.

The pressure is now compounded by the US tariff regime. European carmakers have incurred more than €8 billion in tariff costs since the US raised duties on imported automobiles, according to the Financial Times. Volkswagen alone reported €3.6 billion in tariff-related costs, while BMW and Mercedes-Benz faced costs of about €2.1 billion and €1.3 billion respectively.

Beyond these immediate shocks, the car itself is changing.

“The car of tomorrow is not the car of today,” said Ferdinand Dudenhöffer,founder of the Center Automotive Research and director of the Center for Automotive Research in Bochum. Tomorrow’s vehicle, he argued, will increasingly feature automated driving, a smart cockpit and integrated entertainment and digital functions. Chinese tech companies such as Huawei, Tencent and Horizon Robotics, have been moving more rapidly into automotive applications.

Underlying all these pressures is a deeper problem: Europe’s traditional industrial heartlands are becoming increasingly less competitive as production bases, with high labor costs, tax burdens, and inadequate infrastructure driving up logistics and production expenses.

Ferdinand Dudenhöffer points to the burden of social costs, arguing that roughly one-third of employee compensation is absorbed by social contributions. On corporate taxation, he contrasts Germany, where more than one-third of corporate profits go to the state, with Hungary, where the burden is below 10%.

These cost disadvantages are compounded by an infrastructure system that is increasingly struggling to support a modern industrial economy. An aging rail network, inadequate investment and inefficient management have resulted in frequent disruptions and an on-time performance rate of less than 60%. This summer, the Rhine River -- through which roughly 80% of Germany’s inland waterway freight passes -- saw water levels fall to near seven-year lows amid high temperatures and drought, forcing cargo capacity to about one-third of normal levels and driving up transport costs. Road freight, the main alternative, has long faced a shortage of truck drivers, while geopolitical tensions have pushed up fuel prices, further squeezing capacity and raising logistics costs.

The European Association of Automotive Suppliers estimates that European production faces a 15% to 35% cost gap compared with the most competitive global locations. Without structural reforms, 23% of Europe’s automotive component value creation could be at risk by 2030, threatening up to 350,000 jobs.

“Cooperation is becoming a competitive strategy.”

Seeking to attract Chinese automakers to Europe, revive underused factories and tap their technological expertise, German policymakers have floated the idea of Chinese manufacturers taking over idle capacity at Volkswagen plants such as in Zwickau, but high wages, taxes and operating costs make such investments economically unattractive. Chinese and European manufacturers alike are instead turning to southern and eastern Europe, where costs are lower and industrial ecosystems remain competitive. BYD, for instance, is building a plant in Hungary with an annual capacity of 300,000 vehicles, scheduled to start production in the fourth quarter of this year. Leapmotor, SAIC, Chery and Geely are eyeing idle plants in Spain, where labor costs are roughly one-third of Germany’s, energy is cheaper, and established supply chains and skilled workforces offer additional advantages.

“It is imperative for Germany to lower its cost structure,” Prof. Dudenhöffer said.

He acknowledges, however, that such reforms will be difficult. “To renovate and reform would be an uphill battle,” he said, as doing so requires political and social acceptance at a time when voters are reluctant to give up existing welfare benefits. Meanwhile, higher defence spending could place additional pressure on public finances,” he said.

For businesses, they need to find a new business model.

“The old formula of German engineering+ Chinese manufacturing is giving way to deeper localization, joint development and technological cooperation,” he observes. In key areas shaping the future of the automobile, Chinese and German companies have complementary strengths: the former excels in software, digital technologies and user-oriented product development, whereas the latter brings deep expertise in vehicle engineering, safety, reliability and system integration.

“Volkswagen’s In China, for China strategy offers an example,” he said. The company is selling models in the Chinese market 100% developed and engineered in China to respond more quickly to demand and optimize costs.

Similarly, Stellantis is leveraging Leapmotor’s technology platform to produce electric vehicles at its European factories. Mercedes-Benz and BMW are also seeking similar success factors to halt the declining sales trend in the Chinese market that has persisted for several consecutive years.

German automakers, Dudenhöffer argues, must adapt simultaneously to three major markets. In the United States, tariffs are pushing manufacturers towards greater local production. In China, competitiveness increasingly requires technological cooperation and localized R&D. Within Europe, meanwhile, production is likely to continue shifting towards lower-cost locations in southern and eastern Europe.

“The future competitiveness of Europe’s automotive industry will depend on global resource integration and technological collaboration, rather than the manufacturing capabilities of a single country,” he said.

“The German car industry has a future, but possibly not in Germany.”