China’s EV Dominance Reshapes Europe’s Auto Future

European automotive manufacturers helped China build its automotive industry by sharing technology, expertise, and production methods. Now the tables have turned, and Europe is trying to catch up with innovations from China.

As someone who has spent decades working with European automotive OEMs and suppliers, I’ve seen the region weather many storms. We’ve navigated global supply chain disruptions, shifting consumer preferences, emissions crises and the green transition. But the challenge posed by the rise of Chinese vehicle manufacturers is unlike anything we’ve faced before. It is strategic, structural, and long-term.

For those of us vested in automotive manufacturing, it’s tempting to focus on short-term manufacturing trends and market dynamics (and certainly the added chaos of U.S. tariff policy is not helping). But what we also face today goes deeper and is more structural.

The manufacture of electric vehicles, and China’s dominance in the sector, impacts many of the key economic issues of our time: the energy transition (mobility with lower emissions), the digital transition (an EV is a computer mounted on a battery) and European economic security in a volatile geopolitical environment.

Addressing this challenge requires a clear-eyed analysis and coordinated action across European industry and policy institutions.

EU – China FDI and Technology Transfer

It is worthwhile taking a quick look at EU to China foreign direct investment (FDI) to understand how it aided the ascendance of the Chinese EV industry.

The Chinese Open Door Policy initiated in the late 70s by Deng Xiaoping aimed to open China’s economy to the outside world, especially to foreign direct investment. The Open Door Policy was a pragmatic shift after the Cultural Revolution, as Deng Xiaoping famously said:

“It doesn’t matter whether a cat is black or white, as long as it catches mice.” 

This symbolized a practical rather than ideological approach to economics, prioritizing development and modernization over strict socialist doctrine. Critically, this policy also aimed to foster domestic Chinese industrial development by facilitating the transfer of technology and managerial expertise from foreign firms to Chinese partners.  Special Economic Zones (SEZs) were introduced in the early 80s offered tax breaks, simplified bureaucracy, flexible labour polices but also pushed joint venture structures focused on transferring skills and know-how into the local industry. Even though the skills transfer to local OEMs did not happen as quickly or effectively as Chinese government strategists hoped, a robust industry and supply base grew in China.

Meanwhile China was also becoming the largest global markets for automobiles. European auto brands saw this opportunity and made large direct investment into China. Germany has been the largest EU investor in China for the past decade. More than 40% of EU FDI into China takes place in the automotive sector.

The Importance of the European Automotive Industry.

Let’s remind ourselves that the automotive sector remains a central pillar of Europe’s economy. It employs 13.8 million people equating to around 7% of the Union’s employment. It also represents 7% of the region’s GDP. Arguably, it’s the backbone of our manufacturing economy. In Germany, automotive manufacturing accounts for 11% of all manufacturing jobs. Auto manufacturing also leads in research and development investments, accounting for 37% of the country’s total R&D expenditure.

EV AGILITY – Speed of cycle data EU vs China

Chinese EV makers are exceptionally strong at process innovation, and particularly at accelerating speed to market with their products. Chinese automakers are around 30% quicker in development than legacy manufacturers. Chinese EV makers offer models for sale for an average of 1.3 years before they are updated or refreshed, compared with 4.2 years for foreign brands. This rapid pace of innovation recalls then-Nokia CEO Stephen Elop’s “Burning Platform” memo, in which he famously observed that “Chinese mobile phone makers are bringing out new versions faster than it takes Nokia to polish off a power point presentation.”

How do they achieve this? It’s a combination of factors including: 

• Government Support and Market Dynamics: Strong governmental support, including subsidies and infrastructure development (see more below), combined with a highly competitive domestic market, incentivizes rapid innovation and deployment. Additionally, the Chinese government has avoided some of the regulatory burdens that make it challenging for manufacturing to thrive.
• Reverse Engineering of Development Process: Chinese automakers often delay finalizing supplier contracts, allowing them to incorporate the latest technologies just before production. This contrasts with Western practices, where early supplier engagement can lock in technologies years ahead of launch.
• Vertical Integration: Companies like BYD control significant portions of their supply chains, from battery production to vehicle assembly, reducing dependencies and accelerating timelines.
• Digital-First Design and Agile Structures: Chinese firms employ digital twins and simulation tools extensively, enabling rapid prototyping and testing. Their organizational structures are often more agile, facilitating quicker decision-making.

A deluge from the East: Chinese EV success in Europe

It’s worth remembering that Europe was a pioneer when it came to incentivising demand for sustainable cars. But arguably, Europe was not as pioneering when it came to EV production and instead backed hybrid models.  Regulations moved against hybrids, so a new investment was required to again transform the industry to meet the BEV and zero emissions mandate. 

China, by contrast, partnered with the leading western automakers and did not have a significant car industry to defend. Instead they embarked on a leapfrog strategy, intently focused on fully electric vehicles, both in terms of growing demand and production.

The result has been staggering.  In 2023 China produced over 8 million vehicles, exporting 1.2 million globally and surpassing Japan as the world’s largest car exporter. Today, the EU is China’s largest exporter of EVs, with 40 percent of Chinese EV exports intended for Europe.

In April this year, registration of EVs made by Chinese carmakers rose by 59% per cent year-on-year in Europe. This rapid market penetration is no accident. It is the outcome of a deliberate, state-directed industrial strategy.

The Beijing Playbook: Subsidies, Planning & Quality

State Subsidies

China’s EV technology success has been built off the back of generous state subsidies. The Kiel Institute for the World Economy has found that BYD received at least €3.4 billion in subsidies from 2018-2022. BYD is now the largest EV manufacturer globally. This is just one company in an ecosystem designed to dominate global markets.

And the state subsidies apply to essential EV components. Earlier this week we saw the largest IPO of 2025 so far – CATL. CATL is the world’s largest electric vehicle battery manufacturer. The cost of an EV is largely driven by the battery pack, which can make up to 30-40% of production costs.  If you drive a Tesla, an electric BMW, Ford, Mercedes, there’s a good chance the battery inside is made by CATL.  There was a lot of politics swirling around the CATL listing but worth noting are the Chinese subsidies CATL has enjoyed during its period of huge growth.

Strategic Planning

As important as subsidies, was the clear strategic focus from the state. Xi Jinping’s “Made in China 2025” strategy (announced in May 2015) outlined EVs as one of ten strategic industries in which China seeks global leadership by 2049. To do this, planned to achieve 70% domestic self-sufficiency in core components and key basic materials by 2025. By building a strong foundation, China was able to insulate itself against rising labour costs by becoming a one-stop-shop for scaled manufacturing. While Europeans debated climate targets, the Chinese were executing a comprehensive industrial policy to capture both the technology and markets of the future. The results are astonishing. In 2024, China produced 12.4 million of the 17.3 million electric cars made globally, over 70% of total output. Chinese OEMs made up 80% of domestic production, rising from about 66% in 2021. The rapid growth of domestic Chinese OEMs is a trend, that if it continues unabated, will eventually strike at the heart of European OEMs.

Labour Costs

Lower Chinese labour costs are deeply embedded in the broader economic advantages Chinese firms enjoy and allow Chinese manufacturers to produce EVs at significantly cheaper prices than their Western counterparts.

Quality & Innovation

And Chinese EVs aren’t just cheap, low-quality vehicles – they’re increasingly sophisticated and attractive to European consumers, offering features and range that match or exceed European models at lower prices. The manufacturing presence of innovative brands like Tesla in China inspired local manufacturers to step up their game and invest in upgrading their technology.

Europe’s Response: Too Slow and not enough

The EU’s tariffs on Chinese EVs, introduced in late 2024, were necessary but came too late and are too modest to stem the tide. The duties differ across car brands, ranging from 7.8% for Tesla to 35.3% for SAIC, reflecting the varying levels of subsidy calculated for each producer. The tariffs specifically target battery EVs, leaving hybrid models, car parts, and battery packs unaffected. Notably Chinese plug-in hybrids sales in Europe January to April this year have increased nearly eight-fold.

These measures are weak compared to those taken by the United States. The Biden administration imposed 100% duties on EVs, effectively closing the U.S. market to Chinese car makers. The Trump administration has shown no signs of relaxing this approach. In addition to protecting finished vehicles, the U.S. has local content requirements that support regional suppliers in its USMCA trade deal.

More concerning is Europe’s internal division on how to address this challenge. The tariff strategy does not enjoy unanimous support in Europe. The German Association of the Automotive Industry said the potential damage caused may be greater than the benefits. Major German car brands are still big players in the Chinese market and could potentially be at risk of retaliatory tariffs or other market access restrictions. China accounted for about a third of sales from BMW, Volkswagen, and Mercedes-Benz in the first quarter of 2024.

Caught between protecting Europe’s industrial base and maintaining access to the Chinese market, many European automakers have adopted a seemingly contradictory strategy: For the German big three, these partnerships have focused on investing heavily in research and development of batteries and digital solutions.

Another factor driving this dependency on joint-ventures in China is the dominance of Chinese EV battery producers like CATL. CATL controls nearly two-fifths of the EV battery market, has invested significant sums in creating battery factories in Hungary and Germany, and is a supplier to BMW, Volkswagen, Mercedes-Benz, Stellantis, Renault, and Volvo.

These incentives are driving a simultaneous approach of tariffs and joint ventures  unlikely to succeed at either objective. As Europe’s auto giants pour resources into China, their domestic operations face cutbacks.

Beyond Economics: The Security and Human Rights Dimension

The threat from Chinese EVs extends beyond economics. Under China’s Data Security Law (2021) and National Intelligence Law (2017), Chinese EV producers and companies in their supply chain (including Cellular Internet of Things Modules Manufacturers such as navigational systems) have a responsibility to “assist, support, and cooperate with national intelligence efforts.” At the same time, it is illegal to disclose the extent of that cooperation with a foreign government.

I attended a recent event at the Institute of International and European Affairs in Dublin about European Security and Defence. Professor Brigid Laffan, (European University Institute) stressed that the level of data security risk exposure posed via EVs is much greater than most realise.

Recognising China’s legal requirements for data collection and the broader data security risk, the Biden Administration issued an Executive Order on September 23, 2024, banning the import and use of Chinese-connected EVs in the U.S. Meanwhile, Europe continues to welcome these potential security threats onto its roads.

Modern EVs are constantly collecting and transmitting vast amounts of data. The planned integration of Chinese AI software, such as DeepSeek, into new Chinese EV models will only exacerbate data security concerns, given that DeepSeek has faced restrictions in several countries already on alleged grounds that it has shared user data with ByteDance and may have a backdoor within it.

Some of Britain’s most secure military sites are restricting access to electric cars over concerns that Chinese technology embedded within the vehicles could be used for spying. In April this year, The Financial Times reported that Staff at RAF Wyton — an air base in Cambridgeshire that houses intelligence operations — have been told to avoid parking EVs near the base in case sensors on the vehicles can be remotely monitored. In 2021, China itself banned Tesla cars, which are equipped with multiple cameras, from entering military complexes over concerns the sensors could be used to gather intelligence. As modern vehicles become increasingly software-defined and connected to national infrastructure (charging grinds, traffic systems etc) the potential for state interference grows. Cars are no longer just mechanical devices, they are rolling computers.

There’s also the disturbing human rights dimension. China’s EV supply chain has been linked to Uyghur forced labour in Xinjiang, child labour in mineral extraction in the Democratic Republic of Congo. An investigation by the U.S. Select Committee on the Chinese Communist Party has found that two Chinese EV Battery producers, CATL and Gotion High Tech, have alleged links to Chinese companies operating in Xinjiang who are linked to forced labour programs.

If these suppliers are added to the U.S. Uyghur Forced Labor Prevention Act entity list, as is being debated, European automakers using their batteries could face export bans to the U.S. This would complicate supply chains and further fragment transatlantic trade alignments.

The Economic Impact: A Vanishing Industry

The consequences of inaction are stark.  A forecast by European insurer Allianz Global has warned that European automakers could lose 24.2 billion euros by 2030 if Chinese EV producers achieve 75% market share in China and reach 13.5% market share in Europe. The economic impact would be the equivalent of a loss of 0.15% of the EU’s total GDP – and that is only the beginning.

The pattern is familiar. If these factors continue, Europe’s automotive industry may go the way of its solar industry a decade before. Germany used to be the world leader in solar power production. Today, Europe imports 90% of its solar panels from China.

Entangling investments from Chinese EV producers into EU Member States through planned Chinese EV plants in Hungary and Spain will not meet the job losses from the European automakers they undercut, instead they will likely be used to bypass tariffs, expand market share, and undermine European competitors, raising concerns about long-term economic independence.

Decisive Measures Needed Now

For European policymakers and automotive industry leaders, the time for half-measures and divided responses has passed. Here are some actions that should be urgently considered:

1. Strengthen and Broaden Trade Defences: The EU should commit to reviewing the countervailing tariffs on Chinese EVs. These tariffs should be strengthened and broadened to include EV parts and battery components to prevent circumvention. Regional content requirements can support supply chain continuity in the region.
2. Implement Stringent Data Security Requirements: Legally require foreign EV companies from a country where the EU does not have a data standards equivalency agreement to store data on European servers and to commit not to transfer the data overseas under any circumstances. EV companies from these countries operating in EU Member States should be legally required to share their source code with European regulators and allow regular inspections of their data storage operations.
3. Revise Investment Screening Rules: The EU Commission should review the EU’s current Foreign Direct Investment Regulation to focus on rules regarding joint ventures and look at local ownership requirements, data security requirements, and local content requirements.
4. Forge Strategic Partnerships with Democratic Allies: The EU Commission is using the ICTs security and competitiveness working group of the EU-US Technology and Trade Council to negotiate shared EU-US standards on Cellular Internet of Things Modules (CIMs) and develop mutual European and American standards for EVs and connected vehicles. Building off the EU-Japan Economic Partnership Agreement and the EU-Republic of Korea Free Trade Agreement, as well as the Minerals Security Partnership, the EU Commission should negotiate economic security partnership agreements with Japan and the Republic of Korea.
5. Address Human Rights Concerns in Supply Chains: The EU Commission should investigate forced labour in Xinjiang, add the geographic region of Xinjiang to its forced labour risk database, and introduce guidelines for European businesses regarding the prevalence of forced labour goods in the automotive supply chain.
6. Foster European Industrial Collaboration: European policymakers should introduce tax incentives and other measures to encourage European automotive companies to work together to share research, development, and production costs for EVs.
7. Create a Coordinated Industrial Strategy: Develop funds to support the development of the European EV sector, including encouraging matching private sector investment in the EV battery supply chain and EV charging infrastructure. This should serve as the frontrunner to an EU-wide Green Industrial Strategy that includes policy measures to stimulate the development of an EU EV sector which protects and promotes European automotive jobs.

The European automotive industry stands at a critical juncture. The decisions made in the next two years will determine whether Europe maintains its position as a global automotive powerhouse or cedes this vital industry to Chinese domination. The stakes couldn’t be higher – not just for the millions employed in the sector, but for Europe’s industrial sovereignty, economic security, and technological independence.

About Seraph

A global enterprise consulting firm that partners with business leaders to handle their most complex problems in areas such as supply chain, operations, and manufacturing challenges while delivering long-term operational and leadership improvements. Seraph has extensive on-site industry experience in the automotive, private equity, defense, medical device, electronics, energy infrastructure, and engineering sectors. The Seraph leadership team brings vast expertise across; crisis management, mergers, acquisitions, due diligence, restructuring, turn-around services, product launches, and logistics. Our four-phase process has been proven to provide quick payback and positive ROI, which is measured throughout customer engagement. Learn more at www.seraph.com and follow Seraph on LinkedIn.