The latest Economic and Market Report for full-year 2025 from ACEA, the European Automobile Manufacturers’ Association, paints a cautiously optimistic picture on the surface, but a deeper reading reveals a more unsettling reality for Europe’s automotive sector.

While the headline figures point to stabilizing macroeconomic conditions and modest market growth, the underlying data highlights structural weaknesses, shifting global power balances, and an electrification transition that is proving far more complex than anticipated.

At first glance, the economic backdrop appears supportive. EU GDP growth reached 1.5% in 2025 and is expected to remain steady through 2027, while inflation is converging towards the European Central Bank’s 2% target.

Modest 1.4% increase in registrations

The global car market expanded by 3.5% to 77.6 million units, with Europe posting a modest 1.4% increase in registrations after a subdued start to the year. Yet this recovery remains fragile and uneven, particularly when set against stronger developments elsewhere.

China continues to assert itself as the main growth engine of the global automotive industry. Registrations there rose by 5.5%, supported by incentives and strong policy backing for new energy vehicles, while production surged by more than 10%.

Asia now accounts for over 60% of global output, compared to just 14.6% for the EU. European production, meanwhile, has stagnated under the combined pressure of high energy costs and trade frictions, underscoring the region’s declining relative weight in global manufacturing.

The structure of Europe’s car production still reflects considerable industrial strength, but also mounting pressure. Germany alone accounts for 21% of cars sold in the EU, followed by Spain, Czechia, France, and Slovakia.

Other countries, such as Hungary, are steadily expanding their role as manufacturing hubs, while neighboring markets like Morocco are becoming increasingly important as cost-competitive extensions of Europe’s production base.

In total, European plants supply around 73% of the market, highlighting the depth of the region’s manufacturing base. However, this position is gradually being eroded. Cars produced in China now represent about 7% of EU sales, a share that has been rising steadily and signals a shift towards a more contested and globalized market.

Investing in local production capacity

At the same time, Chinese carmakers are no longer relying solely on exports to gain a foothold in Europe. Several are actively exploring or investing in local production capacity, aiming to bypass tariffs and move closer to European consumers.

This transition from export-driven growth to localized manufacturing mirrors the earlier expansion strategies of  (first) Japanese and (later) Korean brands, and could accelerate competitive pressure by embedding Chinese players directly within Europe’s industrial ecosystem.

Trade flows further illustrate the changing landscape. EU car exports declined by 6.2% in 2025, while imports fell by 3.2%, reducing the sector’s trade surplus to €76 billion.

Imbalance with China

The imbalance with China has become particularly pronounced: EU exports to China dropped by 43%, while imports from China exceeded one million units for the first time. At the same time, exports to the United States fell sharply following the introduction of tariffs, highlighting how geopolitical tensions are increasingly shaping market dynamics.

Against this backdrop, electrification remains central to the industry’s future, but its role is more nuanced than often assumed. Battery-electric vehicles reached roughly 17% of EU registrations in 2025, marking solid growth but falling well short of the roughly 25–27% share implicitly required to meet the EU’s CO₂ targets.

Instead, hybrids have emerged as the dominant technology, reflecting consumer caution, affordability constraints, and infrastructure limitations. Carmakers have rapidly expanded their electric offerings, but an initial focus on high-priced, high-margin EV models—effectively targeting early adopters rather than the mass market—combined with lingering doubts about usability, suggests the industry may have sent the wrong signal and has not yet fully convinced mainstream buyers

This dynamic has significant implications for automakers. Companies that pursued an aggressive, EV-only strategy are finding themselves ahead of demand, struggling to achieve scale and profitability. Tesla, long seen as the benchmark for electrification, experienced a notable decline in European sales during the year, highlighting the volatility of a market still in transition.

Flexible approach proves more resilient

By contrast, manufacturers with a more flexible approach are proving more resilient. BMW stands out as a relative winner among European players, having grown sales in 2025 while maintaining a balanced portfolio of electric, hybrid, and combustion models.

Its premium positioning enables it to absorb the higher costs of electrification more effectively than mass-market competitors, while its gradual transition strategy aligns more closely with actual consumer demand.

A similar logic applies to Hyundai Motor Group, which continues to perform strongly by combining competitive electric models with a robust hybrid offering, capturing both early adopters and more cautious buyers.

Not all manufacturers are as well-positioned. Volkswagen Group and Stellantis face mounting pressure as they juggle high investment requirements, intensifying competition from lower-cost imports, and a slower-than-expected EV transition. Their challenge is not only technological but structural, as they attempt to preserve margins while adapting to a rapidly changing market.

The pressure is equally visible in the commercial vehicle segment, where registrations declined sharply for vans and trucks in 2025. The downturn reflects both cyclical normalization and the high costs associated with transitioning to zero-emission technologies.

What stands out in the data, however, is the continued dominance of diesel. It still accounts for the vast majority of registrations—over 80% in vans and more than 90% in trucks—underscoring how deeply entrenched the technology remains.

This dependence is becoming increasingly problematic. The recent surge in fuel prices following escalating tensions in the Middle East has pushed diesel costs sharply higher across Europe, creating immediate operational pressure for fleets and reinforcing both the urgency—and the difficulty—of shifting to alternative powertrains at scale.”

Profound transformation

Taken together, the ACEA report suggests that Europe’s automotive industry is entering a period of profound transformation. Electrification remains essential, but it is not yet delivering clear competitive advantages for most manufacturers. Instead, it is exposing differences in cost structures, strategic flexibility, and regional positioning.

The biggest winners so far are not European incumbents, but increasingly Chinese manufacturers, which combine scale, cost efficiency, and strong policy support to expand both domestically and internationally. For Europe, the challenge is no longer just to lead the transition to zero-emission mobility, but to remain competitive while doing so.

ACEA’s latest assessment ultimately delivers a sobering message. The global automotive landscape is fragmenting, the center of gravity is shifting towards Asia, and Europe risks falling behind unless it can reconcile its climate ambitions with industrial realities. Electrification is part of the solution, but on its own, it will not be enough to secure the future of the European car industry.