Electric Dreams vs. Diesel Realities:
Europe’s Car Industry in Crisis
Around the World
In November, Jaguar, the iconic British luxury brand owned by Indian automotive giant Tata Motors, dropped a major rebranding moment with its new logo. The classic silver cat was given a much more angular look, paired with a modernized typeface that mixes uppercase and lowercase letters. The new design didn’t sit well with the internet, though, with many users poking fun at how it seemed totally disconnected from the brand’s history. Some of the top comments on Instagram included:
“Is this a car brand or a makeup brand redesign?”
“Jaguar pronouns was/were.”
“RIP Jaguar. Worst move ever.”
This logo shift isn’t just about aesthetics; the company’s decision to go fully electric is rooted in its sales struggles. Jaguar’s sister brand, Land Rover, has been outperforming it, and the shift to electric is an attempt to stay relevant. It’s not just Jaguar, though — European automakers are facing a major crossroads, particularly with the rise of electric vehicles (EVs). There are sizable challenges facing the European automotive industry, specifically regarding the supply chain issues from the Russia-Ukraine war, especially after China’s head start in the electric battery race from the early 2000s.
The Russian invasion of Ukraine in 2022 triggered significant changes in commodity prices and exacerbated supply chain challenges worldwide, which were already strained by pandemic-related disruptions. The sanctions imposed by the EU and the United States against Russia led to the exodus of European car manufacturers from the Russian market, while Chinese automakers such as Great Wall Motor, Geely, and Chery moved in to fill the market void. This shift gave rise to parallel imports through former Soviet-bloc countries like Azerbaijan, Georgia, and Kazakhstan, which reexport vehicles to Russia, often subject to high taxes. Domestic vehicle prices in Russia surged as a result.
The persistent impact of sanctions extends beyond Russia, affecting European countries as well, with Germany particularly in contact with the consequences. The country’s economic model has long relied on cost competitiveness, technological leadership, and, crucially, geopolitical stability. Russia has historically been one of the top importers of German cars, ranking among the top 10 destinations for EU passenger vehicles in 2021. With these key factors now undermined, Germany finds itself grappling with a period of crisis and economic stagnation, significantly in its industrial sector.
Germany is the EU’s leader in vehicle production, but output has been steadily declining. In 2022, production dropped to 3.8 million vehicles, compared to 5 to 6 million units in previous years. Now, the industry faces significant challenges: the EU’s Green Deal, the 2035 ban on combustion engines, and increasingly stringent fleet emissions standards are disrupting a sector that still heavily depends on combustion engine technology. These rapid regulatory changes are putting substantial pressure on Germany’s automotive industry to either adapt or risk losing its competitive edge.
The cut-off of Russian gas, which accounted for 50% of Germany’s consumption, along with Russia being a major supplier of palladium (33% of global supply), neon gas, and nickel—all essential for auto parts like catalytic converters and semiconductor production—has led to increased car costs. Disruptions in Ukraine have further compounded these issues, reducing demand for companies such as Leoni AG, which produces vital wiring harnesses for vehicle manufacturing. Another issue is Europe’s lagging transition to electric vehicles (EVs), with Chinese manufacturers like BYD and American companies like Tesla leading the way and benefiting from a first-mover advantage. None of the top 10 best-selling EVs are made in Germany. Additionally, the production of EVs results in higher CO2 emissions compared to traditional vehicles due to the large batteries they require. These batteries, which demand resources such as lithium, cobalt, nickel, and rare earth metals, are largely produced in regions such as Russia, which has a high share of coal in its energy mix, further complicating Europe’s shift to cleaner transportation.
The delayed transition to electric vehicles (EVs) in Europe has allowed China to dominate the market, with 91% of Chinese EVs only sold domestically. In contrast, Germany, the third-largest EV producer, only sells 32% of its vehicles within its own market. The Chinese EV sector is extremely competitive, with manufacturers operating on narrow profit margins at home. When exporting, they raise their prices to improve profitability. On the other hand, foreign EV companies entering the Chinese market must lower their prices to compete with local brands.
In October 2024, the European Union implemented tariffs on Chinese cars, with rates of 17% for BYD, 18.8% for Geely, and 35.3% for SAIC—a state-owned company. There are concerns, especially from Germany, about potential retaliation from China, where German brands make up a significant 17% of new car sales. Additionally, brands like Smart, partly owned by Geely and Mercedes-Benz, face a 21% tariff, as their vehicles are manufactured in China. To bypass these tariffs, Chinese manufacturers are considering setting up production facilities in Europe, with BYD already operating a plant in Hungary.
At the turn of the millennium, China seized the opportunity to invest billions of yuan into the development of electric batteries. While innovation and efficient production played significant roles, the downside was the Chinese adoption of mercantilist practices, including state-sanctioned intellectual property theft. Chinese manufacturers often stole design patents and other technologies from their competitors, disrupting the rules-based global trade system. This prompted counteractions from European and American governments, with Biden’s Administration increasing tariffs on Chinese imports from 25% to 100% in an effort to protect domestic manufacturers.
Fair or not, the European status quo is being challenged by predominantly Chinese brands, which are leading the way in innovative software-defined vehicles and electrified powertrains. These challenges are occurring alongside rising energy costs, inflation, and geopolitical tensions, making it increasingly difficult for European automakers to adapt. The future of the European automotive industry will depend on how quickly and effectively it can respond to these challenges. European brands should take lessons from once-dominant companies like Nokia and Kodak, which saw their demise as new technologies, like Apple’s innovations and the rise of digital cameras, gained traction. The threat to Europe’s automotive sector is real and urgent.
