Today, we take a closer look at what we can freely call the backbone of EU industry, the automotive sector. An industry that employs 13.8 million people, contributes roughly 7% of the EU’s GDP, and represents around 10% of all manufacturing jobs across the bloc. In this piece, we present a picture of where this industry stands today, what brought it here, and what lies ahead.
Beyond its direct footprint, the sector remains one of the largest investors in research and development, while supporting a wide network of upstream industries such as steel and chemicals, and downstream segments including ICT and mobility services. In this piece, we present a picture of where the industry stands today, what brought it here, and what lies ahead.
We read a lot about factory closures, electrification mandates, new regulations, and weakening demand, not just in automotive, but across European industry as a whole. At the same time, structural pressures are building from multiple directions. Rising labour costs and persistent skills shortages continue to weigh on competitiveness, while energy prices remain structurally higher compared to other major regions. Add to that growing pressure from Chinese OEMs and their increasingly integrated supplier base, alongside persistent overcapacity across European production facilities, and a demand environment that still has not recovered to pre-pandemic levels. A quick question, how many new Asian cars have you seen on the streets of Zagreb lately? For some of them, you might be seeing their name for the first time in your life. Exactly.
These pressures are deeply interconnected, but they did not emerge in isolation. The accelerated push toward electrification, largely driven by regulatory ambition rather than market readiness, has front-loaded significant R&D and retooling costs onto an industry already facing demand constraints. At the same time, years of loose monetary policy inflated asset prices and labour costs, while the subsequent tightening cycle materially weakened consumer purchasing power and financing conditions for vehicle purchases. On top of that, the reduction in access to Russian gas introduced a structural energy cost shock to European manufacturing. The result is a simultaneous erosion of key cost advantages, labour, energy, and capital, at a time when the industry is expected to deliver the most capital-intensive transition in its history. The irony is hard to miss.
STOXX600 Auto Index vs STOXX600 Index (April 2016-April 2026)
Source: Bloomberg, InterCapital Research
From the very beginning of this transition, there were voices of scepticism among industry leaders. Many were confronted with a wave of regulatory targets and electrification timelines that proved difficult to align with market realities, timelines that have already been revised more than once. As time goes by, more executives are speaking openly about these challenges. To name a few, Carlos Tavares, former CEO of Stellantis, and Oliver Zipse, CEO of BMW. Are these names not big enough for policymakers? The policy response has, to some extent, adjusted. The EU has already shifted from a rigid 100% BEV pathway toward a more technology-neutral framework within a relatively short period. The OEM lobby won on principle; ICE is not entirely phased out post-2035, but the core issues remain. A roughly 30% cost gap versus China, infrastructure constraints, and still-fragile consumer demand are not resolved. The regulatory shift buys time, but it does not solve the structural problem.
So where are we now? ACEA’s latest market report helps frame the current position. Before turning to Europe, the global backdrop provides useful context, worldwide registrations increased 3.5% to 77.6 million units, supported primarily by China, where volumes rose 5.5% on the back of policy incentives and continued support for new energy vehicles. North America recorded modest growth of around 1%, reflecting a more uncertain macro environment, while Europe, after a weak start to the year, posted a limited increase of 1.4%.
Global Car Production (2023-2025)
Source: ACEA, InterCapital Research
Turning to EU production, Germany remains the central pillar of the industry and continues to dominate output. Is that a strength or a vulnerability? The answer is not entirely straightforward. The production base remains concentrated, with Germany accounting for 21% of cars sold in the EU, followed by Spain, Czechia, France, and Slovakia. In total, EU-based manufacturers supplied 73% of the market. At the same time, imports are becoming increasingly relevant. Cars produced in China now represent around 7% of EU sales. Only 7%, you might say? Not long ago, that number was effectively negligible.
Zooming out further, the global production picture reinforces the trend. Total output rose 4.2% to 78.7 million units, with Asia accounting for 62.1% of global production, while the EU contributed just 14.6%. European production has remained broadly stable, but continues to face pressure from elevated energy costs and tariff-related frictions. In contrast, China’s production expanded by 10.4%, supported by strong domestic policy and growing export capacity. Despite these challenges, EU-manufactured vehicles still retain solid external demand, with more than one-third of production exported outside the bloc, primarily to the United Kingdom, United States, and Türkiye. However, exports to China have been declining amid intensifying local competition.
Global New Car registrations (2023-2025)
Source: ACEA, InterCapital Research
Trade dynamics further illustrate the pressure. EU car imports declined 3.2%, while exports fell 6.2%, narrowing the trade surplus to EUR 76b. The imbalance with China is particularly notable, EU exports to China dropped 43%, while imports from China continued to rise, exceeding 1 million units for the first time.
And early signals from 2026 offer little reassurance. In February 2026 year to date, EU car registrations declined 1.2% YoY, improving slightly from January but still pointing to a market struggling to regain momentum. The recovery, if it can be called that, remains fragile.
One company navigating this environment from our region is AD Plastik Group, a Croatian-based Tier 1 supplier of interior and exterior plastic components for passenger cars. On paper, they are directly exposed to everything described above: Stellantis and Renault as key clients, European production footprint, and margin pressure from all sides. But their size, which is often seen as a disadvantage, also gives them agility that larger peers lack. The Group delivered a strong 2025, operating revenue grew 5.2% to EUR 160.4 million, EBITDA jumped 42.7% to EUR 19.1 million, and net profit reached EUR 14.2 million, up from just EUR 2.1 million a year earlier. A significant part of that result came from EAPS, their 50/50 joint venture with Faurecia in Romania, which continues to operate at near full capacity, supplying Dacia and delivering strong cash returns. Importantly, the company has been actively deleveraging; net financial debt dropped by EUR 13.9 million over the year, supported by lower capex needs following the completion of a heavy investment cycle and a successful restructuring of part of its debt portfolio. Looking ahead, new contract wins in Germany and initial steps toward client and sector diversification provide cautious optimism, though the broader sector headwinds we’ve outlined remain very much present. We expect a continuation of positive trends into 2026, with improving profitability and a more comfortable financial position, but as with the entire European auto supply chain, the trajectory will depend on forces largely outside any single company’s control.
The European automotive industry is not dying, but it is being fundamentally reshaped, and the question is no longer whether transformation will happen, but whether Europe will lead it or be led by it. The regulatory retreat from a full ICE ban to a 90% target is a pragmatic acknowledgment that the original timeline was disconnected from reality, but pragmatism alone doesn’t close a 30% cost gap with China. The SXAP index trading at 2016 levels while the rest of Europe hits all-time highs tells you everything about how the market views this sector’s structural position. For Tier 1 suppliers, the pressure is even more acute, squeezed between OEM pricing demands from above, rising costs from the side, and Chinese competitors entering European supply chains from below. Europe’s auto industry has reinvented itself before; whether it can do so again, and quickly enough, remains the open question of this decade.