European Auto Industry: Balancing Growth and Green Goals

In January 2025, the European Commission unveiled the Competitiveness Compass, the Clean Industrial Deal, and launched the Strategic Dialogue on the Future of the European Automotive Industry. These initiatives were followed in March 2025 by an Action Plan aimed at supporting the struggling auto industry as it grapples with the dual challenge of accelerating decarbonization while boosting competitiveness – all within the context of a just transition based on deliberative and consultative processes with local communities.

A major risk facing the automotive industry is the dominance of China in the electric vehicle (EV) and battery sectors, including its control over manufacturing across all stages of the value chain. To better understand the implications of these developments, we approached several analysts from our CHOICE network to provide insights into what the Action Plan reveals about the EU’s current and future efforts to de-risk its major industry, assessing the plan’s opportunities and challenges at both the EU and (selected) member state levels.

Gregor Sebastian

Senior Analyst at Rhodium Group’s China Corporate Advisory Team, Germany

The EU’s Auto Action Plan underscores that the Commission no longer takes EU leadership in the automotive sector as a given. Chinese firms – and, in the case of autonomous vehicle technology, also US firms – are now explicitly recognized as competitive threats. 

To reclaim a leading position, the Commission advocates for a new level of industrial policy interventions, greater protection of domestic industries, and increased financial support. While the plan outlines a clear policy direction, its success (and effectiveness) will hinge on implementation details, which will require coordination with member states, Parliament, and key industry stakeholders.

The most concrete measures include proposed amendments to CO2 emission standards for cars and vans, which would allow manufacturers to offset underperformance in one or two years by overachieving in others during the 2025-2027 period. Additionally, the review of CO2 emission standards legislation will be brought forward from 2026 to the end of 2025 – a political victory for several European original equipment manufacturers (OEMs) facing penalty payments. This change, however, comes at the cost of continued uncertainty about the pace of Europe’s EV transition, which could dampen investor confidence and further weaken the outlook for European EV players.

Most notably, the plan signals a shift away from the EU’s historically open trade and investment policies toward a more defensive approach, proposing the introduction of non-price and resilience criteria for state aid, public procurement, and private-sector purchasing incentives. For instance, the EU may introduce legislation requiring corporate fleets not only to electrify but also to purchase vehicles meeting sustainability, cybersecurity, and resilience criteria –potentially modeled on France’s Ecobonus. While these measures primarily target Chinese competition, other trade partners may also be affected.

The EU’s assertive auto agenda, including the prospect of more ex-officio trade action, casts doubt on any substantive reset in EU-China relations or a pivot toward China, even as transatlantic ties grow strained over trade, Ukraine, and digital policy. At the same time, diverging EU and US policies on EVs – and the looming threat of US tariffs on EU-made cars – diminish prospects for deeper transatlantic cooperation in EV supply chains, including in the upstream battery and critical raw material sectors.

This raises the possibility that the EU may be left with little choice but to engage more closely with China, including through Chinese investment. However, the auto plan makes clear that the EU is approaching this with open eyes, seeking to impose its own conditions on Chinese investment – effectively offering Beijing a taste of its own medicine.

Dominika Remžová

China Analyst at the Association for International Affairs (AMO), Czech Republic

Similarly to the Competitiveness Compass, the Action Plan addresses key challenges facing the auto industry, including closing the innovation gap with the US and China, strengthening supply chain resilience (particularly in sectors with critical dependencies, such as batteries) and ensuring a level-playing field and energy security within the EU market; all while accelerating the transition to electromobility and supporting skills development.

In addition to the proposed changes to the calculation and compliance with emission targets and the accelerated review of the corresponding legislation – changes that have led to accusations of watering down the Green Deal on multiple fronts – the introduction of local content requirements, technology transfers, production subsidies, and regulatory simplification were based on proposals submitted by major OEMs, suppliers and industry associations as part of the Strategic Dialogue meetings and a public consultation process.

In general, the car lobby responded positively to the Action Plan, though several concerns remain. Chief among these is the insufficient support for the development of energy and charging infrastructure, as well as the lack of consumer incentives to accelerate the adoption of EVs. Indeed, inadequate infrastructure, declining EV sales and a shortage of skilled labor are some of the major challenges facing the industry today, including in Central and Eastern Europe (CEE). Another grievance from the region – echoed in the proposals from the Czech and Slovak automotive industry associations (AutoSAP and ZAP SR) as well as the statements by the center-right parties, including the Czech government led by Prime Minister Petr Fiala – concerns calls for an extension of the period for compliance with the emission targets from three to five years, where the Commission had opted for the former.

Overall, while the Action Plan signals the EU’s pragmatic turn and the Commission’s understanding of the necessary trade-offs between its green and industrial policies in the short-term, there are both institutional and structural limits to the bloc’s further protectionist shift, which would bring the EU on par with the US and China. This is reflected in the Commission’s emphasis on regulatory simplification over the more controversial issue of state aid. Moreover, the lack of viable European battery champions (as seen in the widely publicized struggles of Northvolt) and the absence of robust and independent supply chains – along with the continued focus on nickel-manganese-cobalt (NMC) over lithium-iron-phosphate (LFP) battery chemistries, the latter of which have both lower costs and carbon emissions – could further impede the EU’s ability to scale up this critical technology.

Ágnes Szunomár

CHOICE Fellow, Associate Professor at the Institute of Global Studies, Corvinus University of Budapest, Hungary

Chinese EV companies are gaining a foothold in European markets, both by selling EVs and supplying European manufacturers with locally produced EV batteries. Hungary hosts the majority of such Chinese battery projects in Europe, which has helped it become the fourth largest global producer of EV batteries. Chinese companies have selected Hungary to leverage their existing operations in Western Europe and expand their footprint across the broader European market, underscoring the export-oriented nature of the Chinese EV projects. 

Central and Eastern European countries play varying roles in EV production process. In addition to hosting foreign investments, countries like Czechia, Poland and Slovakia are strengthening their domestic R&D efforts and seeking to leverage the EV transition for industrial upgrading. In contrast, Hungary’s National Battery Industry Strategy (NBIS) relies almost exclusively on external – mainly South Korean and Chinese – investors and labor-intensive, low value-added activities.

Despite the uncertain future of the fast-evolving EV industry, adopting a diversified development strategy based on indigenous R&D could significantly improve the supply chain positions of the relatively small but vital CEE players in the European automotive sector. This is essential not only for the long-term interests of the CEE region but also for a genuinely European transition to electromobility. As the Action Plan suggests, European automotive supply chains must enhance their resilience and adaptability, especially in relation to batteries.

While European production is on the verge of scaling up, imported batteries remain cheaper than their European counterparts. As President von der Leyen emphasized in her press statement, neither increasing the cost of EVs nor creating new dependencies is a viable response to this challenge. As such, direct support for EU battery manufacturers will be considered, and European content requirements for battery cells and components will be gradually implemented.

This indicates a growing divergence between Hungary’s battery strategy and EU industrial policy. In the short and medium term, Chinese batteries will be needed to meet European climate goals. However, as European innovation progresses and local content policies become stricter, Chinese-owned or -invested factories in Europe may become a liability in the long run.