Europe’s automotive sector, once a dominant force in global manufacturing, is confronting a convergence of pressures that threaten its long-term competitiveness. A recent McKinsey analysis underscores the scale of the challenge: more than 13 percentage points of global market share have been lost since 2017, while supplier profitability has dropped from 7.4 per cent to 5.1 per cent. The industry still accounts for 7 per cent of Europe’s GDP and supports 13.8 million jobs, but the report warns that €370 billion in gross value added could be at risk during the transition to electric vehicles.
Global trade tensions are reshaping supply chains. Nearly two-thirds of vehicles built in Europe are exported beyond the EU, and 43 per cent of the industry’s total value comes from these external sales. Tariff escalations—such as the US raising duties on Chinese EVs to 100 per cent and the EU imposing up to 45 per cent—may offer short-term relief but risk fragmenting supply networks. Chinese manufacturers are responding by exploring European production sites, a move that could alter competitive dynamics.
Powertrain economics are shifting unfavourably for Europe. “While 85 to 90% of the value in traditional ICE manufacturing remains within Europe, only 50 to 60% of the value of battery-electric vehicles does.” Batteries, representing over a third of a BEV’s value, are predominantly sourced outside the continent. Without substantial investment in local battery production, Europe risks losing its manufacturing centrality.
Consumer expectations are evolving rapidly. The McKinsey Mobility Consumer Survey found that 59 per cent of EV buyers and nearly half of ICE buyers expect greater in-car connectivity. More than half demand seamless smartphone integration. Premium customers increasingly prioritise intuitive, personalised digital experiences, making software integration as critical as mechanical performance. “In China, 53% of customers said they would switch brands for better ADAS features. This is a warning sign: in an industry where differentiation is increasingly defined by software, Europe risks falling behind.”
Chinese automakers have expanded their domestic market share by 18 percentage points between 2020 and 2023, while European OEMs have lost five points. Projections indicate China’s car-owning middle class will more than double by 2035, fuelling 2 per cent annual demand growth. Yet only 11 per cent of European suppliers see China as a priority growth market.
McKinsey outlines eight strategic imperatives for Europe’s automotive production. Enhancing manufacturing agility is key: 31 per cent of industry respondents in a 2024 ACEA and CLEPA survey cited adaptable production lines as vital. Flexible automation, transparent forecasting, and modular component design could reduce costs and improve responsiveness.
Consolidating ICE component production will be necessary as demand shrinks. €230 billion worth of ICE parts could become obsolete by 2035, with market share falling from 24 per cent to 8 per cent. Coordinated consolidation and long-term supply agreements can mitigate disruption.
Semiconductor resilience is another priority. Europe meets only 70 per cent of its demand locally, and “By 2028, only 8% of new global front-end semiconductor capacity will be added in Europe, compared to 52% in China and 10% in the United States.” Strategic investment in fabrication and start-up ecosystems is required to secure supply.
Standardising ADAS and autonomous software could help close the innovation gap. US investment in ADAS start-ups since 2010 has outpaced Europe by 3.5 times, while new OEMs outside Europe devote 43 per cent of R&D staff to software versus 16 per cent among European incumbents.
Vehicle architecture innovations, such as zonal E/E systems and gigacasting, promise cost reductions of up to 20 per cent and faster development cycles. Commonality in components and recycling processes can further enhance efficiency.
Adjacent markets—energy infrastructure, shared mobility, and digital services—offer substantial growth potential, with combined value pools exceeding €1.4 trillion by 2035. EV charging and hydrogen refuelling networks will require €150 billion in investment to meet projected demand.
Finally, talent development is critical. “Only 42% of European R&D employees meet required proficiency levels in digital and analytics, compared to 51% in North America.” Reskilling initiatives, such as those led by the European Battery Alliance, have already retrained over 100,000 workers, but broader efforts are needed to align skills with the demands of electrification and software-defined vehicles.
The report’s warning is stark: “Without urgent action, the continent risks becoming a secondary player in the global automotive market, with fewer high-value jobs, lower profitability, and diminishing influence.”