Are strict European standards undermining the region's auto industry?

After a tough year, experts expect European electric vehicle (EV) sales to recover this year. However, the European auto industry faces significant challenges, including stricter EU emission regulations. Are these stricter standards putting Europe’s own auto industry at risk? We spoke to Olivier van Hirtum, Head of Developed Market Equities Fundamental at APG, to find out.

Last week, Ola Källenius, CEO of Mercedes-Benz, suggested that the EU should ease emission standards because they threaten the European auto industry. Does he have a point?
“It’s not entirely surprising that the CEO of a major European carmaker and chair of the European Automobile Manufacturers Association (ACEA) would say something like that. The reality is that the energy transition is essential, and electric transport is a critical pillar of that transition. This means the auto industry must shift away from combustion engine models as quickly as practical. EU regulations are contributing positively by setting a clear goal: by 2035, gasoline and diesel cars should be a thing of the past.

At the same time, European carmakers have so far been less adept at producing EVs than they are at making combustion engine vehicles—a segment in which they have a century of experience. Chinese and American manufacturers are currently ahead in the EV race.”

The European auto industry is already struggling with growing competition from China and U.S. import tariffs. Do stricter EU emission standards come at an inopportune time?
“This question highlights another crucial aspect: a car cannot be seen as a standalone product. Behind every vehicle lies a vast supply chain spread across the globe. For instance, Europe depends on Canada and Australia for metals like lithium and nickel needed for batteries. Meanwhile, processing these raw materials into usable components largely takes place in China, where production is cheaper.

The country that can produce these components at the lowest cost gains the advantage. In this sense, Europe holds no edge in the EV value chain. There are initiatives—by Volkswagen, Stellantis, and various Chinese and South Korean firms—to open battery plants in Europe. The question is whether these efforts will progress quickly enough to defend Europe’s competitive position.

From this perspective, one could argue that stricter EU emission standards come at a bad time. However, it’s worth noting that European automakers are largely to blame for failing to adapt quickly and effectively to the necessary shift toward electric vehicles. Rolling back energy transition policies now won’t solve the competitiveness issues of European carmakers.”

Can European automakers still catch up with their international competitors at all?
“I’m confident they can close the gap. This is mainly because improvement curves eventually plateau. Battery technology is still in its relatively early stages, which means the improvement curve is currently quite steep. European automakers may be slightly behind their international competitors now, but they can certainly catch up.

The real question is how many European manufacturers will still be around when that happens. Smaller carmakers are particularly at risk because they lack the deep pockets needed to finance the transition. However, companies like Volkswagen—with its strong balance sheet and government backing for an industry employing 800,000 workers—are likely to survive.”

Electric models are still subsidized. How much longer will these subsidies be necessary?
“Subsidies for consumers buying EVs are gradually being phased out as the price gap between EVs and traditional cars narrows. That’s the way it should be. Governments can’t subsidize EVs indefinitely.

In Norway, for example, EVs already account for nearly 90% of all new car sales. Subsidies will eventually disappear because batteries are becoming the dominant technology. Once the higher upfront cost of an EV is offset by the lower cost of charging its battery, subsidies will no longer be necessary.”