Europe's auto industry has fallen on hard times: fewer of their cars are being sold than expected, and their new electric-vehicle (EV) models are struggling to find favor with customers. It's not just the continent's biggest carmaker Volkswagen that is facing potential factory closures — French carmaker Renault and Italy's 14-brand car group Stellantis are also producing significantly more cars than they can sell.

According to business data and research company Bloomberg Intelligence, one in three European factories of carmaking behemoths like BMW, Mercedes, Stellantis, Renault, and Volkswagen is underutilized. In some of their plants, less than half of the vehicles that could theoretically be produced are actually being made.

The situation is particularly dire at the Stellantis factory in Mirafiori, Italy, where the fully electric Fiat 500e is built. Production there fell by more than 60% in the first half of 2024. Meanwhile, even the Belgium plant of premium automaker Audi, which produces the luxury Q8 e-tron model, is facing the risk of being shut down.

Sales problems are also dampening the mood at the Renault plant in Douai, northern France, and at VW in Dresden, Germany. The electric cars produced there are struggling to find buyers, and the manufacturers are incurring losses.

The chief economist at Dutch bank ING, Carsten Brzeski, sees the European car industry "in the middle of a structural transformation" which does not only affect VW but the entire automotive industry. "We're clearly seeing that the global trend towards more electric mobility is leading to more competition," Brzeski told DW.

Cut-throat competition in Europe

The pressure on European automakers is particularly strong from China. Despite EU tariffs on China-made EVs, manufacturers from the Asian powerhouse are determined to establish a foothold in the European market. In order to circumvent higher duties on their cars, manufacturers such as Geely, Chery, Great Wall Motor, and BYD even plan to produce electric cars in their own factories in Europe.

Carsten Brzeski says Europe's auto industry is currently struggling with many issues simultaneously, and that multiple problems are converging, such as intensified global competition and Europe's declining competitiveness.

Hans-Werner Sinn, the former president of the Munich-based Ifo Institute, dismisses widespread criticism that company managers have failed. "You can't say that anyone has slept through the market trend," he told DW.  The "failure" lies in not recognizing "how quickly and decisively [pro-EV] policies in China and Europe are being enforced."

As one of Germany's most renowned economists, Sinn argues that policies like Europe's Green Deal, an EU ban on combustion engines from 2035, and increasingly stringent fleet emissions standards have radically upset market conditions in a relatively short period of time. This has forced the industry onto a politically motivated transformation course that is leaving those companies on the sidelines that fail to adjust quickly enough. Moreover, VW's diesel-emissions scandal has put the entire industry on the defensive.

Sinn also said that China, and partly also France, have seen the ramp-up of EV production as an opportunity to break the dominance of German automakers in combustion-engine technology. Meanwhile, however, all carmakers in Europe would regard the Chinese as their primary competitors because they are currently benefiting the most from the transformation.

Brzeski blames the "back-and-forth" of political decision-making for the current problems as questions such as "What about the combustion engine? Is it staying or not? When is the phaseout happening? Will it be extended or not?" are causing uncertainty. A particularly "unfortunate decision," he added, was the German government's abrupt abolition of EV subsidy at the end of 2023.

What must be done?

For ING Chief Economist Brzeski, there is no doubt that the decline of the auto industry in Germany and Europe will threaten the region's prosperity. In Germany alone, the auto sector — including suppliers, vendors, and other companies depending on the sector — accounts for 7% to 8% of the country's annual economic output.

In order to preserve the industry in Europe and, most importantly, its thousands of well-paying jobs, Hans-Werner Sinn proposes a so-called climate club aimed at leveling the playing field for all carmakers operating in the global car market.

First floated by German Chancellor Olaf Scholz, the idea is to convince developed and developing countries — notably the biggest CO2 emitters such as the EU, China, India, Brazil and the US — to cut support for and the use of fossil fuels.

Anything else would be "the darkest form of central planning, which has no place in a market economy," Sinn told DW. Aligning European economies, including their carmakers, with sweeping climate goals may be "well-intentioned," but will "put the ax to our prosperity," he warned. Any attempts at "overriding market principles" will "ultimately ruin" Europe's economies.

"You can see the public outcry on these issues, and now it's intensifying with [the troubles at] VW. It's already showing in election results," said Sinn, referring to a far-right shift in recent elections in eastern Germany.

Frank Schwope, a car-industry expert at the University of Applied Sciences for Small and Medium Enterprises (FHM) in Hanover, Germany, is convinced though that VW will be able to ride out the current sales slump.

"The truth is, Volkswagen is making very substantial profits," he told German regional radio station NDR, and pointed to the carmaker's operating profit of €22.6 billion ($25.14 billion) in 2023, and an expected operating profit of €20 billion this year. In his opinion, VW's management has created a doomsday scenario aimed at suppressing current wage demands and pushing for new state subsidies for EVs.

Italian manufacturer Stellantis is indeed hitting the brakes due to its sales crisis. At its Mirafiori plant near Turin, production of the Fiat 500e will be halted for a month, the carmaker has announced.

Hans-Werner Sinn isn't so sure about the industry's ability to ride out the crisis. VW is only "an early victim," he told DW, adding that "there's more to come."

This article was originally written in German.