The mood is somber in the European automotive industry. It’s been another year of steady decline, with the numbers painting a grim picture. Weak demand, rising energy costs, new tariffs, and the disruptive shift to EVs are all taking their toll. The European Automobile Manufacturers’ Association’s (ACEA) latest report states that Europe’s car production declined by 2.6% in the first half of 2025, while new car registrations were down by 2.4%.
Once leading the charts, Europe’s global market share is falling, with Chinese manufacturers whizzing past the Mount Rushmore of iconic car makers. Against this backdrop, Europe’s top auto supply chain leaders gathered in Munich at the Auto Supply Chain Leaders event to discuss the forces reshaping the industry and how supply chains can help manufacturers steer past the uncertainty that comes with technological, regulatory, and economic change.
Key drivers shaping the automotive industry
Nearshoring offers proximity and peace of mind:
Manufacturers continue to bear the brunt of global supply chain disruptions and are moving production lines and procurement closer to their main markets. According to a Capgemini survey, in 2024, 42% of auto executives said their organizations invested in either nearshoring or a combination of reshoring and nearshoring. In 2025, that number increased to 56%.
Nearshoring helps OEMs reduce lead times and bring down logistics costs. While de-risking and building a resilient supply chain is the primary objective, nearshoring delivers benefits like better collaboration with suppliers and lower emissions too. Swedish car manufacturer Polestar is building the Polestar 7 in Slovakia, while BMW will produce its iX3 electric model in Hungary. And to bypass European Union (EU) tariffs on Chinese cars, Volvo is manufacturing the electric EX30 at its Belgium plant.
EV transition drives a new sustainability mandate:
European consumers are slowly beginning to embrace electric vehicles, with battery-electric cars accounting for 15.6% of the EU market share — up from 12.5% in the first half of 2024. The EU’s plan to ban combustion engines by 2035 is also pushing OEMs to make the technology switch, even as the policy itself continues to have a fragmented mandate across the region. According to a McKinsey report, OEMs and major suppliers already spend nearly €150 billion annually to transition from internal combustion engine (ICE) vehicles to battery-electric vehicles (BEVs).
The industry is adopting circular economy solutions to reduce the negative impact of manufacturing on the environment. Automotive companies are focusing on using more recycled raw materials and refurbishing or repairing old parts. Nearly 6.5 million vehicles reach their end of life every year. The latest EU circularity rule states that new vehicles must be designed in a way that allows for easy removal of parts so they can be reused. Recently, Renault partnered with SUEZ—a company that provides waste management solutions—to recycle waste metal and recover end-of-life vehicles.
AI and digital transformation give carmakers a view they never had:
Millions of euros are being spent by the biggest names in the European automotive industry on digital transformation. Mercedes joined forces with NVIDIA to leverage data and build digital twins of its production facilities. At its Rastatt plant, it saved nearly 20% of energy costs by switching to AI-controlled vehicle chassis painting instead of traditional programmable logic controllers (PLCs).
Volkswagen is renewing its partnership with Amazon after realizing benefits from AI deployment across 43 of its factories. Stellantis’ European chief, Jean-Philippe Imparato, revealed that the Amsterdam-based car manufacturer plans to invest €6 billion in improving its supply chain operations. Renault uses AI to predict and optimize truck loads, transport routes, and forecast transport costs—helping cut its carbon footprint and become more responsive to disruptions.
Aftermarket and customer focus emerge as quiet growth engines:
Automakers are stepping up their game when it comes to aftermarket services, seeing them as a key differentiator in a tight market with new entrants. A BCG report states that the €64 billion European aftermarket auto parts business is profitable and growing and predicts that through 2026, the repair and maintenance sales networks exclusively linked to OEMs will enjoy a healthy growth rate of 3% per year. As part of its customer-focused aftersales strategy, Toyota Motor Europe focuses on delivering the right spare parts at the right time to its 3,000-strong dealer network across Europe.
Tariffs, energy costs, and volatility force a rethink on scale:
China and the Netherlands recently traded blows over Nexperia, a Chinese-owned Dutch company that manufactures chips widely used in cars. The crisis almost halted production lines across Europe. Even though the US reduced its tariff from 25% to 15%, European automakers’ books are in the red. Volkswagen forecasts losses of up to €5 billion due to tariffs, while Mercedes reported that through the first three quarters, tariffs had cut nearly 58% from its year-on-year profit. And if geopolitical tensions, tariffs, and curbs on rare earth materials weren’t enough, volatile demand is forcing the automotive industry to recalibrate its workforce. In September, Ford cut 1,000 jobs at its Cologne factory due to soft EV demand.
