By Hadia Safeer Choudhry
The European automotive industry faces its most significant contraction in decades. Volkswagen’s announcement of up to 100,000 job cuts, mirrored by restructuring across BMW, Mercedes-Benz, and the broader supplier sector, has triggered urgent debate about the future of manufacturing on the continent. Policymakers, industry analysts, and commentators have rightly focused on external competitive pressures, particularly from Chinese automakers. Yet this focus, while understandable, risks obscuring a more uncomfortable diagnosis: Europe’s automotive crisis is fundamentally rooted in structural vulnerabilities that tariffs cannot remedy and that run far deeper than any single competitor.
Germany, the traditional heartland of European car making, faces potential job losses of 125,000 workers by 2035 unless competitiveness improves substantially. The supplier industry has already shed more than 100,000 positions across Europe in 2024 and 2025. Meanwhile, a survey by the German Association of the Automotive Industry found that 72 percent of automotive suppliers and manufacturers plan to postpone, relocate, or cancel investments originally planned for Germany, with 28 percent explicitly intending to shift operations abroad.
These figures reflect a deeper problem: Europe has constructed more automotive production capacity than its market can sustain. The Boston Consulting Group estimates that European auto plants operate at more than 20 percent excess capacity—equivalent to the output of roughly 35 assembly plants with no corresponding demand.
This overcapacity did not emerge from a single shock but from a convergence of structural pressures. The pandemic disrupted supply chains. Geopolitical tensions elevated energy and security costs. High inflation and interest rates weakened consumer purchasing power. The mandatory transition from internal combustion engines to electric vehicles fundamentally altered production economics. Simultaneously, European manufacturers have invested heavily in retooling factories and developing new technologies, creating a period of simultaneous high costs and uncertain demand.
Against this backdrop, external competitive pressures—however real—arrive upon weakened foundations. The question is not primarily whether Europe faces competitive threats but why Europe has become structurally less able to manage them.
The Cost Disadvantage: Where Tariffs Reach Their Limits
Europe, and Germany in particular, suffers from a persistent cost disadvantage relative to global competitors. The European Association of Automotive Suppliers estimates a 15 to 35 percent cost gap compared with the most competitive global locations. This gap is not primarily a function of labor efficiency but rather of accumulated structural costs.
Social contributions burden roughly one-third of employee compensation in Germany—a figure substantially higher than competitors in central and eastern Europe. Corporate taxation consumes more than one-third of profits in Germany, compared with below 10 percent in Hungary and other lower-cost jurisdictions. Meanwhile, critical infrastructure has deteriorated. Rail networks suffer frequent disruptions with on-time performance below 60 percent. The Rhine River, through which roughly 80 percent of Germany’s inland waterway freight passes, experienced water levels near seven-year lows this summer, reducing cargo capacity to one-third of normal levels. Road freight faces chronic truck driver shortages while facing elevated fuel costs driven by geopolitical tensions.
These cost pressures are compounded by the fundamental challenges of transitioning from internal combustion to electric vehicle production. The automotive industry of the future will be defined by batteries, software, and artificial intelligence—three domains where the supply chain architecture has shifted dramatically. Deloitte reports that 77 percent of battery cells used in European electric vehicles in 2025 were imported from Asia. Chinese technology companies have achieved prominence in intelligent-driving software and artificial intelligence applications that German automakers increasingly depend upon.
Tariffs can slow the arrival of finished vehicles from abroad. They cannot make an expensive, high-cost factory competitive. They cannot restore technological ground already lost in software and artificial intelligence. They cannot create demand in a market where consumers are constrained by high interest rates and weak purchasing power. In essence, tariffs address symptoms while the underlying disease remains untouched.
Adaptation, Cooperation, and the Future of European Manufacturing
Rather than concentrating capacity in Germany, both Chinese and European manufacturers are shifting investment toward southern and eastern Europe, where labor costs are substantially lower, energy is cheaper, and established supply chains and skilled workforces offer advantages. BYD is constructing a plant in Hungary with annual capacity of 300,000 vehicles. Leapmotor, Chery, and Geely are evaluating idle plants in Spain, where labor costs are roughly one-third of Germany’s.
This migration reflects a pragmatic adaptation to changed economics. It also points toward a broader strategic reality: the future competitiveness of European automotive manufacturing will depend not on preserving production in high-cost locations but on integrating global resources and fostering technological cooperation.
Volkswagen’s “In China, for China” strategy illustrates this adaptation. The company now develops and engineers models entirely within the Chinese market to respond more rapidly to demand and optimize costs. Stellantis is leveraging Leapmotor’s technology platform to produce electric vehicles in European factories. Mercedes-Benz and BMW are deepening partnerships with Chinese software and artificial intelligence companies as part of core competitive strategy.
This is recognition of complementary strengths. Chinese companies excel in software, digital technologies, and user-oriented product development. European manufacturers bring deep expertise in vehicle engineering, safety, reliability, and system integration. Combined effectively, these capabilities create competitive advantage that neither can achieve independently.
The uncomfortable reality is that German automotive industry must adapt simultaneously to three major market contexts. In the United States, rising tariffs are pushing manufacturers toward greater local production. In China, competitiveness increasingly requires technological cooperation and localized research and development. Within Europe, production will likely continue shifting toward lower-cost locations in southern and eastern Europe.
None of these adaptations represent failure. Rather, they reflect the normal process through which industries adjust to changed circumstances. Yet they do mean that the locus of automotive manufacturing in Europe will continue to shift away from traditional heartlands in Germany toward more cost-competitive regions. This creates genuine hardship for workers, communities, and regions dependent on automotive manufacturing.
The fundamental question facing European policymakers is whether the political and social reforms necessary to restore competitiveness in high-cost locations are feasible. Such reforms would require reducing social contribution burdens, lowering corporate tax rates, and investing substantially in infrastructure modernization. These changes would also require political and social acceptance at a time when voters across Europe are reluctant to accept reductions in existing welfare benefits
Moreover, higher defense spending—increasingly necessary given geopolitical tensions—will place additional pressure on public finances and make comprehensive fiscal reform more difficult. The European automotive industry faces not a single problem with a single solution but rather a complex set of interconnected challenges requiring sustained reform effort with uncertain political prospects.
Tariffs may provide temporary relief. They cannot address the underlying architecture. The path forward requires difficult choices: substantial structural reform to reduce costs and improve infrastructure, strategic repositioning of production toward more cost-competitive locations within Europe, and deeper technological cooperation with global partners, including companies from regions where European manufacturers have built competitive disadvantages.
About the Author
Hadia Safeer Choudhry is an International Relations graduate with a solid academic basis in Diplomatic Relations, International Law, and Intercultural Communication. Her writings focus on international relations, feminism, and current trends. She can be reached at hadiasafeer74@gmail.com
