The European automotive industry, led by German and French manufacturers, is facing serious challenges. A decline in demand for electric vehicles, rising Chinese competition, and excess production capacity have resulted in warnings from key market players.
Manufacturers such as Volkswagen, Renault, and Stellantis, which manages 14 brands, are struggling with declining sales and rising inventories. Stellantis, whose SUVs and trucks have long generated high profits in the U.S. market, is now forced to cut production due to weaker demand and excess inventory. The company has warned of a decline in operating margin and expects a negative cash flow between five and ten billion euros, while Stellantis shares have lost nearly 40 percent of their value in 2023, making Stellantis the worst-ranked car manufacturer in Europe.
A similar situation has befallen other European giants. Volkswagen last week cut its profit forecast for 2024 for the second time in less than three months, facing declining sales in China and the United States. Additionally, French Renault, as well as British Aston Martin, reported demand issues in China, where European manufacturers are struggling against increasingly strong competition from domestic brands that are also cheaper.
Chinese Competition and Structural Changes
German and French car manufacturers are particularly affected by Chinese competition. Despite tariffs on Chinese electric cars imposed by the European Union, manufacturers such as Geely, BYD, and Chery plan to build their own factories in Europe to avoid high customs costs. Moreover, Chinese manufacturers are developing electric cars faster and at lower prices, putting European companies at a disadvantage.
German economist Hans-Werner Sinn pointed out that European companies have failed to respond in a timely manner to the rapid changes in market conditions caused by pro-EV policies in China and Europe. Policies such as the European Green Deal, the ban on internal combustion engines by 2035, and stricter CO2 emission standards have created immense pressure on European car manufacturers, forcing them to undergo rapid transformation. Sinn believes these policies are ‘well-intentioned’ but simultaneously warns that they will jeopardize European competitiveness and economic growth if the industry is not given enough time and resources to adapt.
Vicko Ljuban, a member of the Management Board of Porsche Croatia, agrees, stating that the transition to e-mobility faces many challenges, but the goal remains zero CO2.
– We need reliable and binding guidelines from politicians. The automotive industry has a long cycle; we cannot question our decisions every three or four years. The VW Group has extensively invested in this area and is working intensively to ensure that new vehicles in Europe are 100 percent electric by 2035. Decarbonization is one of the most important responsibilities of our generation for future generations. However, in addition to setting ambitious goals, it is necessary to create the framework conditions for their realization – says Ljuban.
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Declining Demand
Data from Bloomberg Intelligence reveals that one in three European production plants of major manufacturers such as BMW, Mercedes, Renault, and Volkswagen operates below capacity. For instance, in Stellantis’s Mirafiori plant in Italy, where the electric Fiat 500e is produced, production fell by more than 60 percent in the first half of 2024. Even Audi, known for its luxury models, is considering closing its plant in Belgium due to low demand for the Q8 e-tron model.
The situation is particularly difficult in Germany, where Volkswagen is considering closing its plant in Dresden due to weak sales of electric vehicles. Carsten Brzeski, chief economist at Dutch bank ING, believes that the European automotive industry is in the ‘midst of structural transformation.’ The global trend towards electric mobility is creating increasingly strong competition, and Europe, under significant pressure, is losing its long-standing competitive advantage. Brzeski emphasizes that the inconsistency of political decisions, such as the abolition of German subsidies for electric vehicles at the end of 2023, further complicates the industry’s adaptation. Questions about the future of internal combustion engines, timelines for their phase-out, and uncertainty regarding fiscal policies create uncertainty for car manufacturers and consumers.
However, despite the challenges, Volkswagen is still making significant profits. Its profit in 2023 amounted to 22.6 billion euros, and it is expected to reach 20 billion euros in 2024. Nevertheless, analysts believe that VW’s crisis management and the creation of a ‘doomsday scenario’ may be an attempt to pressure unions and secure new state subsidies for EV programs. On the other hand, Stellantis has announced a temporary halt to production of the Fiat 500e at its Italian plant, further illustrating the depth of the problems facing the European automotive industry.
What Next?
To preserve the industry and thousands of jobs, some experts propose the establishment of a ‘climate club,’ an idea first put forward by German Chancellor Olaf Scholz. The club would include the largest global CO2 emitters, including China, India, Brazil, the EU, and the USA, with the aim of reducing support for fossil fuels and creating a level playing field for all car manufacturers in the global market. While some economic experts agree that the transition to green mobility is necessary, they warn that too rapid changes could jeopardize Europe’s industrial base. Hans-Werner Sinn concludes that the problems currently facing Volkswagen are just the beginning and that other major challenges for European car manufacturers may arise in the future.
Incentives in Croatia
Regarding Croatia, Ljuban says that their expectations are primarily focused on national legislation and that they cannot be satisfied with the current incentive policy.
Namely, the entire automotive industry, through the professional association of motor vehicle trade organized under the Croatian Chamber of Commerce, has been warning for years that the existing system of electric vehicle incentives is flawed. – We have made constructive proposals, pointed out inconsistencies, but unfortunately, the system does not change. The results of this approach are visible in the modest share of electric vehicles in total motor vehicle sales, which is below three percent, placing Croatia at the very bottom in the EU – says Ljuban.
He adds that the existing incentive system in Croatia needs to be changed so that incentives are available to everyone throughout the year.
Furthermore, learning from the best examples from other EU countries, we have made proposals to motivate the purchase of electric vehicles. For instance, we suggest considering the possibility of reducing the VAT rate for e-vehicles, allowing legal entities a 100 percent VAT deduction and recognition of maintenance and charging costs for e-vehicles, completely abolishing or at least significantly reducing annual taxes on e-vehicles, and reducing or completely abolishing contributions for benefits in kind generated by using official e-vehicles for private purposes – he says.
However, in the end, he states that although the VW Group adheres to its electrification strategy, it is very important to have a flexible range of drive systems during the transformation phase, as regions around the world are developing at different speeds.
