Volkswagen’s painful retreat exposes the continent’s deeper failure to compete in the age of Chinese industrial agility.
Jan. 12, 2026: Flags of the EU, China and Germany outside the Siemens Shanghai center. German industry and European competitiveness struggle to keep pace with Chinese innovation. © Getty Images
Europe’s customer became its competitor, challenging its industrial model
Without innovation, agility or entrepreneurship, EU lacks competitiveness
Europe must reform or face industrial weakness and strategic dependence
The mood was gloomy. On September 3, 2026, Volkswagen’s board made a decision: It approved a turnaround plan calling for about 50,000 more worldwide job cuts, on top of 50,000 already underway. This raised the question of what, if anything, would replace lost production at four German plants after manufacturing of their current model ends. Not long ago, the German powerhouse was growing, and China was its greatest driver. What happened?
The decision in Wolfsburg was the corporate expression of a deeper reversal – a trend facing an important part of the European manufacturing sector. It lays bare the pivotal question of Europe’s relationship with China, where European companies for two decades sold enormous amounts of products and basked in the surging profits.
Volkswagen now faces waning Chinese earnings while Chinese producers directly contest the market for electric vehicles (EVs) in Europe. The continent is not competitive enough in the industries on which its prosperity depends. It lacks the scale, agility, industrial invention and entrepreneurial dynamism needed to turn technical capability into fast-growing companies and resilient supply chains.
As a result, the European Union’s trade commissioner went to Beijing in early October to buy time for Europe to put its house in order: China will export fewer hybrid vehicles to the EU for the next four years. Yet this import slowdown will not resolve Europe’s lack of competitiveness.
China itself also lacks liberal entrepreneurship, as political control constrains autonomous risk-taking and capital allocation. Yet, Beijing compensates through speed of adaptation and applied invention. Production scale lowers costs, but the strategic advantage lies in using production, research, suppliers and finance to learn and improve faster. This is called agility.
The origin of European industrial stagnation
To understand what is likely just over the horizon, it is worth looking back and unpacking the whole story.
Volkswagen’s decision amounts to the largest turnaround effort in the company’s 89-year history. Behind the job reductions lays the failure of the business model that had previously made the company a symbol of European industrial confidence.
This is not simply a German labor dispute. Volkswagen was built on an international commercial model in which German engineering and Chinese demand mutually reinforced one another. China supplied volume, profit and a large base over which to spread development costs.
That model has broken down. In 2025, Volkswagen delivered 2.69 million passenger cars and light commercial vehicles in China, equal to 31 percent of its global deliveries in those categories. Yet its Chinese EV battery deliveries fell 44 percent. In the first half of 2026, its China deliveries fell a further 26 percent to 973,000 vehicles. Other European deliveries increased like sales by 3.5 percent.
Behind the job reductions lays the failure of the business model that had previously made the company a symbol of European industrial confidence.
Henrique Schneider
Volkswagen has been too slow in software and EV development. The strategic point remains: The German company now competes in China against domestic companies that revise models, software, features and prices faster than VW’s established operating model can react. China is fast increasing its export dominance of EVs globally.
The country produced more than 70 percent of the world’s electric cars in 2024. It supplied more than 400,000 of the approximately 680,000 electric cars imported into the EU in the year, and Chinese brands accounted for two-thirds of those China-origin imports.
Volkswagen is exposed on both sides, facing reduced earnings and market share in China, and more intense competition in its home region. The group’s local platforms, local software and planned launches of new EVs show that Wolfsburg is, in fact, adapting. But, the scale of the restructuring and layoffs shows how costly late adaptation can be.
The customer has become the competitor
For two decades, the biggest economies of Europe and Asia appeared complementary. Europe sold China cars, machine tools, chemicals and capital goods; China supplied consumer goods and increasingly complex components. That is over. China is now an equal competitor, rather than simply an export market and low-cost production base.
In 2025, the EU imported 560 billion euros worth of goods from China while exporting just 200 billion, generating a trade deficit of 360 billion euros. Imports rose by 6.4 percent from the preceding year, while exports fell by the same amount. Manufacturing accounts for nearly all Chinese sales to Europe. Machinery and vehicles alone represent 54 percent of that total, the same product mix that comprised half of Europe’s manufactured exports to China.
The shift has continued in 2026. The EU’s deficit with China reached 103 billion euros in the second quarter, its highest level since late 2022. In the first half of the year, European imports of Chinese electrical equipment, machinery, vehicles and parts all increased, while European exports of machinery and vehicles to China fell.
The essential change is not merely that Europe buys more goods from China. It is that China now sells into the industries that once underpinned Europe’s industrial export model and economic prosperity.
China’s advance partly reflects state support, preferential finance, procurement and local-content policies. The 15 sectors with the most recorded industrial-policy interventions accounted for 76 percent of the 2017-2024 rise in China’s aggregate trade surplus, a Federal Reserve study finds.
The International Monetary Fund also links Beijing’s reliance on exports to China’s weak domestic economy: low household consumption, high savings, the property downturn and excess supply. Chinese manufacturers need overseas markets because domestic demand cannot absorb the sheer volume of what they produce.
Europe lacks the wherewithal to succeed
Europe is still home to excellent scientists, engineers and specialist companies. But it cannot consistently create, fund, commercialize and improve products at the pace now required by global competition.
First, Europe lacks effective scale. Its market is large, but different rules, capital markets, energy systems, procurement practices and administrative procedures divide it. The Organisation for Economic Co-operation and Development finds that 60 percent of services-sector regulatory barriers existing in 2002 remained in 2022. Intra-EU services trade was only 16 percent of gross domestic product (GDP) in 2023, against more than 42 percent for goods.
Sep. 9, 2026: EU Commissioner for Industrial Strategy Stephane Sejourne in Brussels contrasts streamlined EU regulations (right hand) and existing ones (left hand). The bloc says it wants to reduce administrative burdens to strengthen Europe’s strategic autonomy. © Getty Images
This matters because the most valuable parts of modern industry are often services: software, data, design, finance, maintenance and digital platforms. A European company expanding across the continent faces a regulatory and commercial obstacle course. A Chinese company can test a product across one huge market and coordinate suppliers, logistics and finance around it.
Second, Europe lacks agility. It can engineer complex products, but decisions travel slowly through layers of regulation, corporate governance, consultation and subsidy rules. Caution has value, yet a system designed to minimize failure can become unable to act as technology, costs and consumer preferences evolve.
Third, Europe lacks enough industrial invention. It has ideas and world-class research, but no reliable system for converting science into repeatable, affordable products, platform technologies and global companies. A patent or laboratory breakthrough is not industrial invention; that is the continual production of better designs, lower costs, new production methods and rapidly improving products. Europe’s regulatory frenzy stops most inventions from becoming widely available commercial products.
China has caught up. Its research and development expenditure reached 2.8 percent of GDP in 2025, against the latest comparable EU figure of 2.2 percent in 2023. It had 25 of the world’s 100 leading innovation clusters in 2026; Shenzhen-Hong Kong-Guangzhou ranked first. Europe’s inventive activity is more dispersed and less consistently translated into continental production platforms.
Europe also lacks entrepreneurship at scale. Its start-up communities are capable, but the system favors incumbents, incremental growth and avoiding failure. A promising company is likely to simply remain a national champion, sell to a foreign group or relocate to a jurisdiction with deeper capital markets. The Scaleup Europe Fund and European Tech Champions Initiative acknowledge the problem; but they are not proof of a solution.
China’s advantage is agility, not free entrepreneurship
China and its rise should not be romanticized. It lacks the independent entrepreneurship associated with free capital markets, that secures property rights and unconstrained business exits. Chinese entrepreneurs operate within political limits. Policy priorities can change abruptly, private capital is conditional and corporate autonomy is constrained by the party-state.
But Beijing has found ways to compensate. It is agile where it matters in an industrial race. Once a sector becomes strategic or commercially attractive, companies, local authorities, suppliers, researchers and financiers can move quickly. They copy, adapt, redesign and drive down costs with extraordinary intensity. This is not open-ended entrepreneurship. It is state-enabled, market-disciplined adaptation, particularly effective where iterative design, supply-chain coordination and price competition matter.
Read more on EU-China trade and relations
China also has significant inventive capability. Its leading clusters combine scientific research, engineering, capital and manufacturing. The city of Ningde’s rise in the global innovation rankings, driven by battery producer CATL’s patent activity, shows invention embedded in a production system. The connection lets a company learn from production, incorporate feedback into design, and redeploy the result quickly.
Production scale is important, but it is not a permanent strategic advantage. Scale lowers unit costs, creates supplier networks and finances learning. However, it alone can become excess capacity. It can destroy margins, require external markets and trigger trade resistance, as China is now experiencing.
Europe, with a wealthy market of over 500 million people, is not limited by a lack of physical scale. The strategic contest is over whether a system can turn production into learning, learning into invention, and invention into market power. On that measure, China’s combination of agility and applied invention matters more than its sheer size.
Most likely: A managed but unequal rivalry
Chinese household demand remains weak, domestic price competition persists and firms seek growth through exports and foreign investment. Europe applies targeted trade defense but does not complete its market or solve its scale-up problem. Chinese companies localize final assembly in Europe where necessary while retaining important design, component and supplier advantages in China.
Europe preserves strong positions in high-end niches but loses more ground in mass-market electric vehicles, batteries, machinery, chemicals and industrial software. The trade imbalance remains large, further eroding Europe’s position.
Somewhat likely: No European renewal and worsening trade conditions
Europe may view the problem primarily through the lens of perceived unfair Chinese trade practices. Brussels expands tariffs, quotas and local-content rules without repairing its own deficiencies in agility, invention and entrepreneurial scale. China responds with countermeasures or local production. European firms face higher input costs and weaker access to China, while Chinese firms retain the advantages of rapid iteration and upstream supply chains.
Europe’s production base becomes thinner with more dependencies. Economic vulnerability becomes a security problem in a future disruption. Further plant closures, falling investment, higher China-origin market shares and new export controls would be early warning signs. In this scenario, Volkswagen’s decision is projected across other European boardrooms.
Least likely: Rebalancing through reform and reciprocity
The favorable scenario requires changes in both systems. China would strengthen household consumption, address property-sector weakness and increase imports. Europe would turn its single market, capital-market and scale-up initiatives into actual investment through lower cross-border barriers. Agreements on market access, technical standards and prices could limit tariff escalation.
The outcome would not restore the old Sino-European relationship. China would become a stronger market for selected European products and services, while Europe would become better at converting invention into scale. The goods deficit would narrow through higher European exports and more Chinese domestic absorption, not blanket decoupling.
Contact us today for tailored geopolitical insights and industry-specific advisory services.
Receive insights from our experts every week in your inbox.
Information about what personal data we collect about you and how we process it (including information about how we personalize our website for you and deliver content tailored to you) can be found in our privacy policy.
In a nutshell‹›
Scenarios‹›
Last reading position