European Car Factories Under Threat

A high-profile announcement about the potential closure of Volkswagen plants across Europe has sparked widespread concern globally. This highlights a worrying trend: the decline of the traditional automotive industry in the Old World. Following car manufacturers, the companies producing components—engines, brake systems, microelectronic devices, rubber products, glass elements, etc.—are likely to face a similar fate. The problem is exacerbated by two trends that European manufacturers are struggling to keep up with: increasing pressure from Chinese manufacturers in general, and the rising dominance of electric vehicle makers, many of which are Chinese companies. To make matters worse, Chinese manufacturers currently control key supply chains—not only for EV cars components but also for internal combustion engine vehicles and hybrids.

This situation resembles a perfect storm, where several harsh factors have converged at once, leaving little clarity on how to address them. Let’s start counting on our fingers because the reasons are many, and they’ve all collided here and now.

New car sales in the EU have significantly dropped. There are numerous reasons for this, but they amplify each other in the end. As a result, car manufacturers are now fighting over a shrinking market.

The introduction of stringent environmental regulations has simultaneously led to a decline in demand for diesel vehicles and a sharp rise in the prices of new cars, as newer models are equipped with increasingly complex emissions reduction systems.

The battle against inflation in 2022-2024 led to central banks raising key interest rates. Consequently, the interest rates on car loans rose as well, as did leasing rates. Naturally, this has reduced the number of people willing to purchase cars on credit.

China’s involvement in supplying goods for military and dual-use purposes to Russia, which is waging an aggressive war in Ukraine, creates high risks of sanctions on Chinese manufacturers. These risks threaten supply chains, even for entirely peaceful components for the European automotive industry. Chinese car manufacturers themselves also face the threat of sanctions.

Here, one can see an odd connection between suspiciously favourable car production conditions in autocratic regimes and those regimes’ involvement in international conflicts, including armed ones. The lessons of Russia’s war against Ukraine show that dealing with aggressive autocratic regimes is economically risky, no matter how beneficial such cooperation may appear at first.

The influx of imported cars from China, Turkey, and other countries outside the EU has led to a reduced demand for European-made cars. Higher tariffs, which the European Commission is implementing, are expected to tackle this issue. But it’s not just the EU—protective tariffs are also being introduced in the USA and Canada.

Protective Tariffs Aimed to Shield Industry

However, in the EU, the situation with protective tariffs is not straightforward. At present, preliminary protective tariffs on Chinese electric vehicles range from 9% to 38.1%, depending on the manufacturer. These were introduced following a decision on 4 July. It’s worth noting that a standard EU import tariff of 10% on electric vehicles is also in effect. Therefore, the combined tariffs range from 19% to 48.1%, depending on the car manufacturer. The ongoing investigation is set to conclude with a long-term solution, with a decision expected by November 2024, after which permanent tariffs will take effect.

The automotive industry accounts for over 7% of the European Union’s gross domestic product and employs more than 13 million people.

Despite the move to impose such protective measures on a permanent basis, there is opposition within the EU itself. This week, Spanish Prime Minister Pedro Sánchez concluded his four-day visit to China, where he held talks with President Xi Jinping and other senior officials. After these meetings, Sánchez announced that the policy of protective tariffs must be reconsidered: “I must be open and honest with you that we need to rethink—not just the member states, but the Commission as well—our position on this matter.”

This stance comes even though Spain has a relatively strong automotive industry. However, the idea of protecting the European car market still has strong advocates. On 10 September, Volkswagen announced the cancellation of several agreements that guaranteed employment for workers. These agreements had ensured jobs until 2029, but now the guarantees are limited to mid-2025.

Photo: The number of new car registrations in the EU by month. The chart clearly shows the decline in new car sales. Source: tradingeconomics.com

Final Outcome

The likely chain of events appears as follows: automotive companies will begin to shut down production that is no longer operating at a level that guarantees profitability. As a result, job cuts will be inevitable. Worker dissatisfaction, and by extension, voter dissatisfaction, will pressure politicians. Politicians will then be motivated to push for protective tariffs. The countries most interested in these protective measures are those that are net contributors to the EU. Sánchez will likely have to accept the introduction of tariffs on a permanent basis.

For Germany, the problems facing the automotive industry are critical, as an enormous number of workers are employed in this sector. For example, Volkswagen, the largest car manufacturer in the EU, operates 10 assembly plants and component factories in Germany, employing 120,000 workers. Worldwide, VW employs 684,000 people. Given the country's weak economic performance compared to other large EU nations, a blow to Germany's automotive industry could be devastating.

If we think the problems are limited to European manufacturers, that’s not the case. The Japanese corporation Nissan informed its dealers of production cuts for two key models, including its best-seller, the Rogue compact SUV. The second model affected by cuts is the Frontier pickup, equivalent to the Navarra model. In total, production will be reduced by 40,000 units in September and October. The reason given for the cuts is an effort to tackle oversupply by reducing inventories of already assembled vehicles. This information was shared in an email on 5 September, which was later reported by Automotive News and circulated through industry publications and news agencies.

Even aggressive Chinese manufacturers, supported by state subsidies, are facing the threat of production cuts. All of this together creates conditions for the implementation of more protective barriers against Chinese cars, as well as vehicles assembled in other developing countries. Naturally, this will lead to a certain rise in car prices in European retail markets. However, in the long run, it will help preserve jobs and boost production, which may reduce costs and potentially slow further increases in car prices.