The European automotive sector, long regarded as a cornerstone of industrial success, contributed €1 trillion to EU GDP in 2022, representing 7% of the region’s total output. It employed 13.8 million people—just over 6% of EU employment—and invested €60 billion annually in research and development, accounting for nearly a third of the EU’s total R&D spend. Yet, according to the latest McKinsey report, this legacy is under pressure from profound structural changes.
Two forces dominate the transformation: electrification and digitisation. The shift from internal combustion engines to electrified powertrains is accelerating, while vehicle differentiation increasingly comes from software capabilities rather than mechanical refinements. McKinsey notes that the decoupling of hardware and software development has opened the door to new entrants, both within Europe and globally, reshaping competitive dynamics.
China’s ascent illustrates the disruption. In 2022, it overtook Germany in light vehicle exports for the first time, shipping roughly 3 million units compared to Germany’s 2.6 million. Since 2019, European incumbents have lost six percentage points of market share in their home region and five in China. Meanwhile, Chinese OEMs have achieved a 45% domestic market share and increased their European presence eightfold between 2020 and 2022. In the EV segment, newcomers now control 51% of the global market.
The premium segment, traditionally dominated by European brands, still commands 71% of global sales. However, new players captured 18% of this market in 2022. Global EV sales have grown at an annual rate of 80% since 2020, with many mobility markets on track for near-total EV penetration by the mid-2030s.
Digitisation is a co-catalyst of change. EV buyers are more likely to switch brands for superior in-vehicle technology, including advanced driver assistance systems (ADAS) and connectivity services. The software content per vehicle has tripled since 2015. Modern cars may contain up to 150 control units, but the architecture is shifting toward centralised computing domains, such as powertrain and connectivity, and eventually to zonal systems.
McKinsey warns that new entrants are positioning themselves to supply critical technologies—batteries, semiconductors, software—placing traditional suppliers between high-tech commodity providers upstream and cost-pressured OEMs downstream. The battery value chain is largely controlled by Chinese companies, underscoring vulnerabilities in European supply resilience.
To address these challenges, McKinsey’s Center for Future Mobility outlines a seven-pillar roadmap:
1. **Revive strengths in customer understanding, product design and brand**: European manufacturers must adapt their design excellence and brand equity to software-defined EVs, leveraging consumer data to meet evolving purchase criteria.
2. **Focus relentlessly on cost and speed**: Closing the cost gap with Chinese OEMs requires structural product design changes, battery insourcing, scaled EV production, and productivity gains, alongside faster development cycles.
3. **Execute a winning strategy for the Chinese market**: Success demands tailored products, localised R&D, partnerships, and supply chain adaptations to meet China’s price-sensitive and innovation-driven consumer base.
4. **Create resilient, circular and sustainable supply chains**: Localising battery and semiconductor production can reduce dependencies and improve sustainability, while circular supply chains lessen reliance on external raw materials.
5. **Hyperscale competitive European battery and semiconductor players**: Building capacity in these areas requires regulatory support, specialised expertise, product innovation, and partnerships with emerging firms and research institutions.
6. **Design a way forward for ADAS with policy support**: Industry collaboration on standardising sensor protocols and pooling data for AI training is vital, with regulations enabling cross-sector alliances.
7. **Close the software skill gap**: Shared or interoperable platforms, early hiring, reskilling, and attracting foreign talent are essential. McKinsey stresses that “accelerating processes for foreign talent is essential to attract skilled software professionals.”
The report emphasises that executing this roadmap will require coordinated action from OEMs, suppliers, adjacent industries, and regulators. Clear targets, competitive regulations, infrastructure investment, and strategic partnerships will be decisive in securing Europe’s automotive competitiveness amid rapid technological and market shifts.