As if European carmakers needed more reminders of their dependency on China, new ones keep popping up.

The industry is bracing for production stops after chip supplier Nexperia warned that a spat between the Netherlands, where the firm is located, and the firm's Chinese owners could hit supply. 

They're also preparing for a squeeze on raw materials key for electric motors after new figures from China's customs office released last week showed China's rare-earth exports fell 31% in September from August.

On Wednesday, German car giant Volkswagen warned that the latest supply chain issues could lead to production stoppages. Production has not yet been impacted by chip shortages, the company said in an internal letter to its workers, according to a spokesperson quoted by Reuters. 

"In view of the dynamic situation, however, we cannot rule out an impact on production in the short term," the spokesperson said. 

Chip and raw material issues come in a year of plunging profits and job cuts and point to the larger conundrum facing the continent: Domestic suppliers built on the success of the combustion engine are struggling, while suppliers for critical components of electric cars, such as magnets, chips and batteries, are centered elsewhere. 

For Germany in particular, Europe's largest carmaker, the consequences of that disparity go beyond the production line and threaten its very prosperity.

"The combustion engine is not just part of a car, it's the ultimate competitive advantage of the automotive industry in Germany," said Andreas Herrmann of the St. Gallen University in Zurich. "Obviously this industry needs more time to develop new areas, new parts for competitive advantage," he told DW.

Rarer rare earths

Large automakers are already heavily reliant on China for sales, the largest single market for Germany's big three automakers, Volkswagen (VW), Mercedes and BMW. But it's foreign dominance in certain car components and supplies that threatens the industry's base at home.

This past spring marked the first slowdown in rare-earth magnet exports from China, as Beijing struck back at new US trade tariffs.

According to a study by the Mercator Institute for China Studies (Merics) in Berlin, China accounts for more than 90% of rare-earth exports into the EU.

Exports rebounded in the summer following a deal between the US and China. Now Beijing is returning to a harder line.

Earlier this month, it created a licensing regime for many rare-earth exports, a measure that experts say could further slow imports into Europe.

Chip shortages

Chip shortages were supposed to be a problem of the past. After a run on supply during the COVID-19 pandemic led to costly production stops in 2021, carmakers vowed to diversify their sourcing.

On a political level, coaxing production away from Taiwan, Korea, Japan and China has been a big part of automakers' plans, with Germany convincing chip giant TSMC set to open a fab in Dresden in 2027.

The chip landscape is complicated, however, with thousands of semiconductors now used in some modern automobiles. As the previously little-known Nexperia shows, even a single shortage can be damaging.

The head of the European Automobile Manufacturers' Association (ACEA), Sigrid de Vries, noted in a press release recently that automakers had "taken steps over the last years to diversify supply chains," but added that the risk "cannot be mitigated down to zero."

A battery strategy in progress

Unlike chips and rare earths, batteries represent a significant part of the electric vehicle value chain, close to 30%, according to the European Association of Automotive Suppliers (CLEPA).

European car companies want to manufacture batteries instead of sourcing them elsewhere. They currently rely on exports from Korea and China, who own most of the market share.

The largest European battery effort so far, Swedish battery maker Northvolt, ended in spectacular failure as the company declared bankruptcy in 2024. 

Other efforts now stand in Northvolt's place, including PowerCo from Volkswagen and Verkor, led by Renault. Whether they can reach the economies of scale necessary to match upfront costs remains a question, especially in a down market for electric vehicles.

Porsche recently announced it was giving up its goal of battery production, saying it was no longer profitable in the current market. 

Another question is the role of China, which has put new export restrictions on technology sharing and know-how on its most modern battery technology.

Prosperity driver combustion engine

The stakes for Europe's auto industry have only become clearer, meanwhile, with Germany in particular struggling.

The German Association of the Automobile Industry (VDA) estimates that roughly 773,000 people were employed in the sector in 2024. That number, declining in recent years, is now dropping quickly.

According to one new estimate, 51,500 auto industry jobs disappeared between summer 2024 and summer 2025. That's close to the 61,000 jobs that disappeared in the entire six years before.

The industry's problems are already hitting cities and households. Ingolstadt, home to Audi, is trying to patch a budget hole of up to €80 million ($92.9 million) after corporate taxes came far below expectations, a direct result of the Volkswagen-owned carmaker's troubles.

The Association of Automotive Suppliers predicted in September that as much as 23% of the EU value creation per car could move elsewhere by 2030 if nothing changes.

Reason for optimism?

Battery projects are moving ahead. Volkswagen is advancing its first gigafactory in Salzgitter, Germany, as is the Renault-led Verkor battery alliance, which is building a similar production hall in Dunkirk, France. 

New technology and more efficient recycling could reduce the amount of rare-earth magnet imports needed for electric vehicles. In Friedrichshafen, ZF has even developed an electric motor that requires no rare-earth metals, using electromagnetism instead of permanent magnets.

New lines of electric vehicles could kick-start sluggish purchases across markets. BMW and Mercedes received positive reviews for new electric SUV models. Volkswagen promises to finally bring its multi-brand scale to bear with the release four new models of small, urban electric cars in the 25,000-euro range in 2026.

The durability of Chinese competitors remains an open question, meanwhile. Chinese overinvestment has notoriously led to past bubbles. Beijing is already trying to discipline overheated competition among car manufacturers, which it fears could lead to more harm than good.

Still, Europe will have to develop more future technologies if it's going to successfully reduce dependencies, said Herrmann, and is "pretty optimistic" Europe's auto industry "will not go down."

"It has to go through a fundamental crisis, but at the end of the day I hope it will come out stronger," he said.

Edited by: Uwe Hessler

Editor's Note: This piece was updated on October 23, 2025, to reflect the developments at Volkswagen.