Green competitiveness: Why Europe should rethink targets to outpace China

Europe’s carmakers are facing a daunting list of challenges. Since the COVID-19 pandemic, they have endured semiconductor shortages, soaring energy and metal costs and now Chinese export restrictions on rare earths, permanent magnets and semiconductors, alongside punitive US tariffs. This is before counting the surge of affordable, state-subsidised Chinese electric vehicles (EVs) that European consumers increasingly believe are on a par with Western rivals.

Brussels has responded with a raft of measures: fresh funding for batteries, investment in charging networks and proposals for local content rules, all guided by former European Central Bank president Mario Draghi’s call to place competitiveness at the centre of the EU’s strategy. For the industry, however, this is not enough. Car executives are blaming the EU’s target to ban the sales of internal combustion engines from 2035 for their financial troubles, dismissing them as “no longer realistic” and insisting the targets “must be recalibrated”. Manfred Weber, leader of the largest political group at the European parliament, the European People’s Party, considers the goal a “serious mistake”.

An industry in trouble

The car industry points to Europe’s stagnating EV sales as proof that the 2035 target is unrealistic. Sales did dip in 2024, particularly in Germany and France, as subsidies were phased out. Yet this stagnation is largely self-inflicted. To protect profit margins, carmakers pursued “value over volume” strategies, focusing on premium models. This pushed average EV prices in Europe higher between 2021 and 2024. When more affordable models finally arrived in 2025, which the car makers developed to meet the EU emissions target for 2025, sales rebounded. EV registrations rose 30% across the EU in the first eight months of 2025. Demand clearly exists when prices fall.

If sales are not collapsing in Europe, then what is dragging down profits? Trump’s tariffs on European car imports have hit margins, but the real problem is competition from China, both at home and in the Chinese market. It is increasingly clear that carmakers’ problem stems from a “China shock”, not an “electric (vehicle) shock”

Sales of Chinese battery electric vehicles have continued to grow even though the EU imposed a tariff on them in October 2024. They now capture 9.6% of the market, up from 5% just five years ago. The sales of Chinese plug-in hybrid vehicles—which can run on both batteries and a combustion engine and are not covered by the tariff—jumped in the European market. Chinese car brands now sell more cars in Europe than Audi or Renault. The sales of MG cars, a British brand owned by China’s SAIC, outstrip those of Tesla and Fiat in Europe.

For German carmakers, the declining sales in China are one of the main financial headwinds. Volkswagen, Mercedes and BMW all sell more cars in China than in America. Meanwhile, Chinese consumers are shifting decisively to domestic car brands, lured by lower prices and better features. State and provincial subsidies have made EVs more affordable, but they have also created an oversupply. This has fuelled brutal price wars that Beijing itself now describes as “involution”.

Fierce competition in China is cited as one of the main reasons for Volkswagen’s credit rating downgrade earlier this year. Mercedes and BMW are reporting flagging sales in China as a key pressure on their 2025 annual profit forecasts. By contrast, Renault, whose executives have openly described its low exposure to China as a “competitive advantage”, posted record earnings in 2024.

European carmakers are rapidly losing market share in China: their collective share fell to 15% in 2024, down from 24% in 2020. The outlook is not promising. Despite Beijing’s repeated pledges to “level the playing field” for foreign firms, European manufacturers continue to face barriers, such as restrictive cross-border data rules that undermine customer support and R&D, and exclusion from pilot schemes for autonomous driving. Dismantling these obstacles would run counter to Beijing’s priorities of boosting domestic consumption, advancing self-reliance, and safeguarding provincial governments’ revenues and jobs tied to homegrown EV champions.

Climate standards and competitiveness

Calls to loosen European climate rules to reduce compliance costs and help the industry will have three clear effects. First, loosening climate rules will likely slow the rollout of affordable EVs. The EU’s decision in March to water down the 2025 emissions standard, granting carmakers the flexibility to meet fleet CO2 emissions standards over a three-year period, is projected to result in two million fewer EVs on Europe’s roads over the next two years, inevitably delaying mass-market adoption. Slower uptake would then become a self-fulfilling prophecy: the lack of affordable EVs would reduce sales and deter mass market adoption, reinforcing the argument for weaker standards due to low EV demands.

Second, weakening climate regulations will divert scarce investment to other technologies, such as low-emission fuels to extend the shelf life of internal combustion engines, rather than focusing directly on battery electric vehicles. This will leave European companies underprepared for a global market moving rapidly toward battery electrics. In Britain, China, Norway, Thailand and Vietnam, battery electric vehicles already account for a greater share of new car sales than in the EU.

Third, leaning on technologies other than electric vehicles would not shield Europe from Chinese competition either: Chinese firms hold a formidable position in hybrids and plug-in hybrids (PHEV). Their exports are rising fast. Chinese PHEV imports into Europe increased fourteen-fold in August 2025 compared to August 2024, pushing the market share of all Chinese-made cars in Europe to 5.5%.

Protecting profit margins today cannot come at the cost of Europe’s industrial strength tomorrow

Carmakers are right to argue that regulation should not be rigid: there must be room for flexibility that reflects realities on the ground. But protecting profit margins today cannot come at the cost of Europe’s industrial strength tomorrow. While European politicians fight over whether climate targets undermine competitiveness, China has long treated the EV transition as an industrial strategy. Its targets for the sector came well before Beijing’s 2060 carbon-neutrality pledge or even the 2015 Paris Agreement. The 2015 Made in China 2025 strategy targeted 80% domestic supply of renewable equipment and EVs. In 2017, China’s car sector roadmap set goals to create two to three global battery champions and to propel Chinese EV brands into the global top ten by 2025. These were never about ideology; they were about industrial power.

The newly announced small affordable “E-car” initiative by the European Commission is a step in the right direction, incentivising the development of competitive European product offers to the global EV race. But the EU should not backtrack on commitments, allowing quarter-by-quarter financial pressures to dictate its long-term competitiveness. European carmakers will not win by changing the rules on home turf in a global race. They will win only by building the affordable, competitive EVs that Europeans, and the world, clearly want.