Executive Summary
- 2024 was a reality check for the global automotive market and 2025 does not look much better. After recording almost +10% growth in 2023, the automative sector saw a modest +1.7% increase of new registrations in 2024, hit by lower demand; higher rates, which translated into higher loan costs coupled with tighter lending conditions, and a line-up from some carmakers that failed to match consumer expectations while legacy auto makers announced hundreds of new models over 2023-2024. We expect the overall car market to grow by about +2%, still driven by China (+4%) and the US (+2.5%), while Europe is likely to trail behind (+1.5%) as tariff tensions could be an additional major hurdle for the industry, especially in Germany. When it comes to the shift to electric vehicles (EV), while China leads the electrification drive, with EV sales up +40% and internal combustion engine (ICE) sales down -17%, Europe was the only major market to experience a contraction of EV sales in 2024. The US could follow suit in 2025 as the tide turns against EV adoption under the new administration. The hybrid segment was the only bright spot for the European auto market as sales grew by over +20% over 2024, though this benefited Asian automakers rather than European ones. Looking ahead, the EV segment should grow steadily in 2025 in Europe as CO2 regulations have been tightened and will force carmakers to reduce their carbon footprints.
- The European auto industry in particular is facing three structural roadblocks:
Auto makers need to make up for the missed innovation shift towards electrification. European automakers chose to stick with their vested interests in legacy assets rather than switching to electric technologies, notably onboard digital technology. Over the past decade, European carmakers spent two times less on capital expenditure (~6% of revenue on average in Germany) than the two biggest Chinese manufacturers (BYD & Geely) or Tesla. Consequently, European cars are too expensive and falling behind the competition in term of innovation. European sedans and SUVS are still 15-30% more expensive than Chinese ones, even with the fall 2024 tariffs.
Reliance on China is now a weak spot. China is strongly dominating the battery market, supplying around two-thirds of the global industry. Trying to catch up on the technology gap has not succeeded (e.g. the failure of the Northvolt) and Chinese brands are also increasing their market share in Europe (~7-8% in 2024) with EVs that are cheaper, reliable and fully equipped with top-notch tech. Moreover, Europe cannot afford to get into a trade war on auto with China as potential retaliatory measures would only intensify the decline of European brands’ market share in China, (German market share down to 18% in 2024 vs. 25% in 2019). would only intensify the decline of European brands’ market share in China, (German market share down to 18% in 2024 vs. 25% in 2019).
There is a disconnect between policy ambitions and policy making in Europe. Just as the EV market is slowing in Europe, the EU is about to impose stringent CO2 targets that could hurt the sector, with more than EUR10bn in fines looming. Meanwhile, the bloc also needs to solve its energy crisis: at EUR1.5 per liter of gasoline, charging an EV becomes uneconomical when electricity prices are above 37 cents per kWh. - Europe should follow a 10-step plan to restore its competitive edge. Blueprints for success include China’s ambitious three-spoke industrial stimulus policy that combined consumer incentive measures with fiscal easing action for manufacturers and R&D funding; Norway’s balanced demand support and rapid electric infrastructure development and Tesla’s small line up and focus on tech. China invested USD231bn between 2009 and 2023 to propel its EV industry, fostering champions across the full supply chain and promoting vertically integrated models. Meanwhile, Norway managed to become an almost fully electric car market in 2024 through a balanced carrot and stick policy and a comprehensive charging infrastructure plan. Finally, Tesla’s small line-up and focus on tech allowed it to become an above USD1trn company in the space of 20 years. To make auto great again in Europe, we outline five recommendations for industry leaders: (i) reducing the line-up to five to six models, of which half should be offered in both hybrid and electric versions, but also reducing the large range of options that inflates selling price and keeping a tight pipeline of new models; (ii) deepening vertical integration and investments into customized charging solutions; (iii) aiming for at least 10% capex in tech, R&D and customer services; (iv) exploring new markets such qs India, Vietnam, Indonesia and South America where car ownership is low (between 5% and 20%) and international competition still weak and (v) increasing intra- and extra-sector cooperation by favoring joint ventures and collective projects to make economies of scale while fostering a learning curve. Initiatives that policymakers should consider include: (i) implementing a 40-50% tariff on cars whose components and manufacturing costs (excluding battery) have a European sourcing ratio inferior to 75% – this could bring EUR2bn in receipts for the EU in 2025, (ii) axing the land tax rate and offering a 5% subsidy (out of total investment) to new JVs involving a non-European company with a project of building up new output capacities in Europe and allocating EUR20bn for this policy (~5% of available NGEU funds); (iii) allocating a 15% trade-in rebate on EV purchases of below EUR45,000 for consumers, conditional on a 75% European sourcing ratio – this could be financed partly with tariffs receipts and an incremental target for corporate fleet renewal (from 50% to 100% of new purchases allocated to EVs by 2035); (iv) investing between EUR200-300bn into charging infrastructure to support the rise of the EV fleet that is expected to reach 15-20% by 2030, and (v) devoting 5% of the EU Horizon program (~EUR5bn) to foster projects focused on batteries, autonomous driving technology, AI-driven software and recycling.