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As we approach 2026, the European automotive industry continues to face unprecedented challenges. The industry that gave the world iconic vehicles like the Beetle, Mini, and E-Type must now reinvent itself at warp speed to survive in a rapidly changing global market, writes Paul Bennett, Managing Partner of Madox Square.
The end of European exceptionalism
Today, a Chinese EV maker can out-engineer a German car on technology, match the Italians on design and give the French a run for their money on innovation and quirkiness. Chinese manufacturers build high-quality; software designed vehicles and undercut the Europeans on price. From the majority of consumers’ perspectives – what’s not to like?
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If BYD, XPENG, MG, Polestar or any one of the Chinese nameplates offers everything and more compared to a European OEM product, at a more affordable, accessible price point, it begs the question: what exactly are European brands selling? Heritage? Emotion? The intangible feeling of driving something ‘special’? While such abstract qualities are extremely valuable, it’s uncertain if they’re enough to sustain the industry in the long term.
The regulatory straitjacket
Europe’s automotive industry must navigate the world’s most aggressive emissions regulations while competing against manufacturers with greater flexibility. The 2035 ban on new petrol and diesel car sales is just nine years away, forcing a wholesale transformation of an industry that typically plans in decade-long cycles.
European manufacturers must meet tightening fleet emissions targets, pay non-compliance penalties and invest billions in electrification. Meanwhile, Chinese competitors benefit from massive state and or regional subsidies, lower labour and energy costs, and complete control over battery manufacture, R&D and raw material supply chains.
While the climate imperative is urgent, European manufacturers are fighting with one hand tied behind their backs. Some will survive this transition, but many won’t.
The British paradox
Britain’s automotive industry collapsed in the 1970s and 80s, then revived under foreign ownership. Brexit exposed the fragility of this model, disrupting supply chains and complicating investment decisions. Britain now produces fewer cars than it has done in decades.
However, Britain’s automotive aftermarket, classic car industry, motorsport engineering, and luxury bespoke manufacturers remain world leading. Companies like McLaren, Aston Martin, Morgan and Longbow prove that small-scale, high-value automotive excellence is possible. Britain’s future may lie in becoming the ‘Savile Row’ of automotive, focusing on bespoke excellence rather than mass-market volume.
The German dilemma
Germany’s challenge is maintaining supremacy across the volume and premium sectors while the very definition of automotive excellence changes. For decades, German manufacturers set the standard. A Mercedes S-Class was a rolling demonstration of engineering excellence. BMW’s ‘Ultimate Driving Machine’ was philosophy, not hyperbole.
But in a world where software matters as much as suspension geometry, where Chinese manufacturers can iterate new models in 18 months rather than 5 years, the traditional German approach looks increasingly vulnerable.
Volkswagen Group’s struggles clearly illustrate this issue. Despite massive electrification investment, the ID range has failed to capture the same imagination as, say, the Golf did for generations. Chinese competitors are out-innovating them in their own market. Mercedes face massive challenges. Thus far, while technologically impressive, their electric offerings have been commercially very disappointing. On the other hand, the recent launch of the ‘Neue Klasse’ platform has put their arch-rival BMW in pole position. However, both brands are caught between defending their traditional combustion business (still highly profitable) and investing in an electric future (currently loss-making).
Engineering-led, quality obsessed, premium-positioned, the German model worked brilliantly for a century. Whether it can adapt quickly to the stiff challenges of today enough remains genuinely uncertain.
The French exception
France’s focus on clever pragmatism and democratic mobility is likely to be an advantage for them in the electric transition. Renault‘s approach of affordable, stylish EVs, battery partnerships and experimental business models appears more sustainable than the German obsession with premium electric saloons and SUVs.
Stellantis represents quite a different model, following its recent joint venture with China’s Leapmotor and diverse European and American brand portfolio sharing platforms, while maintaining distinct identities. This approach prioritises efficiency through federation rather than consolidation, but Stellantis remains no less vulnerable, perhaps more so when compared to other OEM groups.
The Italian conundrum
Italian automotive manufacturers like Ferrari, Lamborghini and Maserati continue to produce vehicles that defy rational analysis: they persist because emotion and artistry matter in the automotive world. However, mass-market Italian production has largely disappeared, with brands like Alfa Romeo and Lancia struggling to survive.
The supercar sector remains a profitable niche where Italian craftsmanship and clever marketing commands premium pricing – but it’s an increasingly narrow slice of the market.
The Nordic whisper
Sweden’s story is particularly poignant. Volvo and Saab represented a distinctly Scandinavian approach: safe, practical, understated with a deep human connection: cars that prioritised substance over style. Saab is gone. Meanwhile, Volvo survives under the Chinese ownership of Geely, bought from Ford’s Premier Automotive Group (PAG) in 2010 for $1.8B, and has been transformed from a relatively small independent into a premium brand with global ambitions. Its electric offerings are among the most credible, its safety innovations continue to lead the industry.
But in the transition, something has been lost. The quirkiness, the willingness to do things differently for good reasons. Modern Volvos are excellent cars, but excellent in increasingly conventional ways. Perhaps that’s necessary for survival. Or perhaps it’s a cautionary tale about the homogenising force of global markets
The European electric transition is not going to plan
Despite massive investment, aggressive regulation and genuine manufacturer commitment, European consumers remain hesitant. Range/charging-anxiety persists. Infrastructure is far from complete and in part, remains patchy. Prices stay stubbornly high and one mustn’t forget, Europe is not one market but rather, is made up of 27 distinct markets that can broadly be split into three geographies: west, south and east. Clearly these markets are at varying states of maturity and development for electric vehicle mass adoption.
More fundamentally, Europeans have developed deep emotional connections to the internal combustion engine beyond rational transportation needs. The sound of a petrol engine, the feeling of changing gears – these aren’t just functional attributes, they’re cultural touchstones. European manufacturers face an impossible challenge: selling electric vehicles to large groups of customers who don’t particularly want them, at prices they can’t really afford, with infrastructure that isn’t quite ready, while maintaining profitability to fund the transition. The answer, increasingly, is accepting lower margins, subsidising sales through combustion profits, lobbying the EU and national governments for incentives and hoping customer attitudes shift before balance sheets break. It’s a super high-stakes gamble with genuine uncertainty about whether it will pay off.
The Chinese question
Until recent times, China was Europe’s biggest opportunity but today is its biggest problem. China is the world’s largest car market and producer. Chinese manufacturers built c.30 million cars in 2024 with a 50:50 split between pure EV, PHEV, RXEV and ICE. Around 15 million were sold domestically and 15 million exported globally. More recently, they have become increasingly hostile to European brands, with domestic manufacturers controlling consumption to the tune of 59% market share.
The big losers in all this are the European and US brands, with many closing their operations in China and others seeing their market share plummet. European car brands have significantly lost market share in China from 2020 to late 2025, especially in the booming New Energy Vehicle (NEV) segment, with foreign brands dropping from over 60% of the total market in 2020 to their current position of circa mid to upper 20% range. This has caused devastating consequences for German OEMs.
European manufacturers poured billions € into China, betting on premium positioning and that engineering excellence would protect them. That bet worked beautifully for more than 25 years with some OEMs making 50% of their global profits from the Chinese market. Today, the scenario looks very different with Chinese consumers opting for home-grown vehicles bristling with the latest technology, features and offering tremendous value for money.
Over the past handful of years Chinese manufacturers have been exporting ever increasing volumes of EV, PHEV and ICE cars to Europe. The larger brands have established European National sales Companies (NSCs) and smaller entrants accessing the European market via importer distributor arrangements. They have swiftly ensured wide distribution by appointing networks of franchised dealers within well-established dealer groups, winning design awards and securing impressive sales volumes. Currently, Chinese brands combined enjoy circa 11% market share in UK and 5.5% across the EU. Source Jato & ACEA
Protective tariffs put in place by the EU clearly represent an admission that competition on merit alone may not be sufficient. Ironically many European manufacturers (BMW Group, for example) produce some of their electric vehicles at their Chinese factories. This means that their imports into the EU face additional EV tariffs over and above the standard 10% import duty.
Never have European manufacturers faced competitors with deeper pockets, faster development cycles, stronger government support and vertically integrated supply chains giving structural cost advantages. The question isn’t whether Chinese manufacturers will capture European market share (they have already secured that) and will, in my opinion, only continue to rise significantly with more brands arriving in Europe and UK literally monthly. The question is whether European brands can maintain sufficient volume and profitability to fund their continued existence.
Five predictions for the next 5 years (2031)
1. At least one major European volume manufacturer will merge, be acquired or exit the market. The industry has too many players chasing too few profitable customers.
2. The 2035 combustion ban will be delayed or modified. The political, economic and practical realities are increasingly untenable. Expect hybrid exemptions, synthetic fuel carve-outs or outright postponement.
3. European manufacturers will increasingly bifurcate into mass-market producers competing on cost (increasingly indistinguishable from Asian competitors) and luxury brands competing on heritage and emotion. I believe the middle ground will become indefensible.
4. The centre of European automotive innovation will shift from powertrain engineering to software, user experience and services. OEMs will increasingly accept that they must pivot to become technology companies that manufacture cars, as opposed to the classic engineering companies they have been for the last century.
5. We’ll see a genuine European battery supply chain emerge, driven by government subsidies, industrial policy and recognition that energy security requires domestic production. It will be late to market; expensive and initially inefficient but strategic necessity will override economic logic.
The path forward
The European automotive industry faces existential challenges: regulatory pressure, technological disruption, changing consumer preferences and unprecedented competitive threats. But its assets are substantial: world-class engineering talent, powerful brands, centuries of accumulated knowledge and meaningful customer loyalty.
But what’s unclear is whether these assets can overcome those challenges. The honest answer is that for some manufacturers, they won’t. The European automotive landscape in 2035 will look fundamentally different, with fewer players, different ownership structures and a redefined relationship between manufacturers and mobility itself.
But crisis creates opportunity. The manufacturers that survive won’t be those clinging most desperately to the past but those who most successfully balancing heritage with innovation, emotion with practicality, European identity with global competitiveness.
The metal may be changing, from combustion to electric or maybe to other ‘new energy’ variants. But the fundamental promise of European automotive remains: vehicles that move not just bodies but souls, that represent not just transportation but aspiration, that embody not just function but passion. Whether that promise is sufficient in an age of algorithmic efficiency and cost-optimised global manufacturing, remains the defining question of our time.
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