The specter of Detroit

Can Europe save its auto industry? Sander Tordoir, chief econmist at the Centre for European Reform on how Chinese competition, American tariffs, and self-inflicted injury have put Europe’s carmakers on the brink.

Sander Tordoir is the chief economist at the Centre for European Reform. Tordoir says European carmakers face two massive challenges: increasing competition from China, which has provided enormously generous subsidies to its own carmakers while rigging the exchange rate in their favor; and US tariffs on European cars. On top of that, German carmakers made a series of costly mistakes — confident in their technological lead in combustion engines, they neglected to invest in innovative battery technologies. Now they’re trying to catch up, but they’re way behind their Chinese competitors.

Fundamentally, Tordoir says, the car industry is being crushed between a Chinese hammer and an American anvil. Unless Europe supports its carmakers with enough funding for capital-heavy innovation while protecting them from Chinese market distortions, it’s hard to see how the industry can survive in its current form. The stakes are massive. Europe has lost some of its most innovative companies to the United States. It lags behind the US in productivity growth. Which European sector has seen exceptionally high productivity gains? Manufacturing. But now, with the car industry in crisis, even that’s under threat …

Sander Tordoir: Several shocks are hitting the car industry all at once.

First, the technological shock of the electric vehicle transition is only gathering steam. The International Energy Agency estimates that the electric vehicle market will grow fourfold by the end of the decade. The question for Europe — like the US — is: Do you want to be part of the electric vehicle revolution? Europe, unfortunately, clung to the past instead of investing in the future.

The European Union does have the potential to catch up with China. Germany alone is already the second-largest producer of electric vehicles in the world, even though it’s a much smaller country than the United States. But there is a real gap in technology, especially compared with China’s EV batteries, a market it dominates.

Then there’s a demand shock hitting the European car industry specifically — in three dimensions.

The first comes from China’s overcapacity. Aggregate demand is sluggish in China, but there’s an ocean of industrial funding and subsidies because the car industry is one of China’s priorities. That has created a situation where Western firms struggle to competein the Chinese market, because they’re bound by the logic of capitalism to churn out profits. By most estimates, China has the capacity to build over 50 million vehicles a year—roughly 60 per cent of global demand. Domestic Chinese demand is around 25 million vehicles a year, while exports exceed 7 million cars.

Chinese car factories have to find buyers somewhere. And Chinese cars have gotten good. The result is an export explosion that’s hurting European carmakers — first inChina, then in third markets, now at home.

The second dimension is American: US tariffs, coupled with the rollback of theInflation Reduction Act’s green subsidies, have hit European carmakers hard. As European carmakers gradually lost market share in China, the US market became an important offset — but tariffs have now choked off that market.

The third is homegrown: European car demand today is 20 per cent below 2019 levels.

In short, the technological shock and those three demand shocks have created an acute crisis in European car manufacturing.