European Auto Industry Challenges

The European auto industry is navigating a "perfect storm" of challenges, including slowing battery electric vehicle (BEV) adoption, competitive pressures from Chinese automakers, and excess EV capacity, according to Bernstein analysts.

Volkswagen's struggle to adapt to the shift towards electrification mirrors past crises prompted by Japanese carmakers; however, the current threat originates from Tesla and nimble Chinese competitors.

> “What is different this time around is the technology shift to electrification, and here most legacy auto companies have been caught on the back foot by the volatility of demand,” the analyst noted.

Demand for BEVs heavily relies on state subsidies, and sales in Europe have weakened as early adopters decrease, leaving corporate fleets to bridge the gap.

On the supply side, emissions regulations will compel automakers to sell more EVs, especially as plug-in hybrid allowances tighten. Without regulatory easing, this may lead OEMs to sell undesirable EVs at fire sale prices, further escalating financial losses.

The industry faces a three-way tradeoff: if regulations are not postponed or significant subsidies are not reintroduced, OEMs must either incur substantial losses from discounted EVs to entice reluctant buyers or face fines.

While BMW anticipates avoiding fines in 2025, Mercedes may incur low triple-digit million euro fines due to its current dependence on hybrids. Volkswagen could face €1-2bn in fines, and Stellantis and Renault remain in unclear positions.

Bernstein has lowered its 2030 EV penetration forecast for Europe from 67% to 51%, reflecting subdued demand and changing market dynamics.

Automakers with greater adaptability, such as BMW and Renault, are better positioned to navigate these challenges, while Volkswagen, Porsche, and Mercedes are under increasing pressure to show significant advancements in their BEV strategies.