The European car industry is set for a tough 2025, with several hurdles expected to impact profit margins, according to the Society of Motor Manufacturers and Traders (SMMT). Despite an anticipated increase in electric vehicle (EV) sales and the launch of new models, the industry is likely to face continued pressure from evolving emissions regulations and cost challenges.
Heavy discounting, which helped drive EV sales in 2024, may also undermine car manufacturers’ profits. While the shift from petrol and diesel cars to EVs gained momentum, it has already resulted in billions of pounds in losses for manufacturers in the UK alone. Mike Hawes, CEO of the SMMT, expressed concerns, saying, “The amount of money available to stimulate demand is going to be under severe pressure when manufacturers have very finite resources,” as reported by the Financial Times.
Sales of EVs in Western Europe fell in 2024, dropping to 1.9 million units, or 16.6% of the market, partly due to governments reducing subsidies. However, sales are expected to recover to 2.7 million units in 2025, or 22.2% of the market. The EU has set ambitious targets for the future, aiming for EVs to account for 80% of all car sales by 2030, and 100% by 2035. Achieving these targets, however, may prove difficult given current market trends.
Further complicating matters, the EU has introduced stricter emissions targets, reducing the acceptable level of carbon dioxide emissions for new passenger cars to 93.6 grams per kilometer in 2025, a 15% decrease from 2021 levels. By 2030, this target will drop further to 49.5 grams per kilometer, with car manufacturers facing hefty fines if they fail to comply.
The EU has also imposed higher tariffs on Chinese-made EVs to address concerns about heavy government subsidies for Chinese manufacturers. This has raised fears that China may retaliate by targeting major European brands such as BMW, Mercedes-Benz, and Audi, which rely on the Chinese market for significant revenue. Any such tariffs could have far-reaching consequences, especially since these manufacturers benefit from Chinese government incentives like cheaper land and tax breaks.
In addition, ongoing inflation and high interest rates are squeezing profit margins for car makers, leaving them with fewer resources for research and development, particularly in electrification. As a result, some manufacturers may struggle to offer the same variety of models and features that their Chinese competitors have been providing, potentially affecting their sales.
On top of these regulatory and economic challenges, major car companies like Stellantis and Volkswagen continue to face labor unrest, with strikes and potential layoffs adding to the uncertainty surrounding the industry in 2025.
