European Automotive Industry at Crossroads: Supply-Demand Imbalances and the Valuation Struggle of OEMs

The European automotive industry is navigating a period of profound transformation, marked by structural supply-demand imbalances and their cascading effects on original equipment manufacturer (OEM) valuations. As the sector transitions from internal combustion engines (ICE) to battery electric vehicles (BEVs), it faces a perfect storm of regulatory delays, geopolitical tensions, and financial pressures. These challenges are reshaping market dynamics, profitability, and investor confidence, with European OEMs caught between the urgency of electrification and the economic realities of a fragmented global supply chain.

Supply-Demand Imbalances in the Transition to BEVs

The shift to BEVs has exposed critical vulnerabilities in Europe's automotive ecosystem. According to a McKinsey report, only 50–60% of the value added from BEVs remains in Europe, compared to 85–90% for ICE vehiclesEuropean automotive industry: What it takes to regain competitiveness^[1]. This value leakage is exacerbated by the EU's delayed enforcement of 2025 emission targets, which has led to a 2 million BEV shortfall between 2025 and 2027EV progress report: Which EU carmakers are on track for 2025-27 targets?^[2]. While BEV sales grew by 34% in the first half of 2025, driven by policies and infrastructure investments, the market share is now projected to slow to 21% in 2025 from a previously anticipated 27%European Battery Electric Vehicle Market Surges 34% in First Half 2025^[3]. This revised outlook reflects the sector's struggle to balance regulatory compliance with profitability, particularly as automakers inflate BEV price premiums to offset production costsEV progress report: Which EU carmakers are on track for 2025-27 targets?^[2].

The ripple effects of these imbalances are evident in the broader supply chain. Rising raw material costs, labor shortages, and persistent supply chain disruptions—highlighted by 42 senior executives in a S&P Global Mobility survey—have further strained OEMs, especially smaller firms with limited access to financingEuropean automotive industry: What it takes to regain competitiveness^[1]. Meanwhile, the EU's 45% tariffs on Chinese EVs, while intended to protect domestic producers, have fragmented trade flows and increased production costs, forcing European automakers to navigate a complex web of geopolitical and economic pressuresEuropean Automotive Sector Faces Uncertain 2025: Trade Tariffs and Market Shifts in Focus^[4].

Financial Pressures and Profitability Decline

The financial toll on European OEMs is stark. Since 2017, European automakers have lost over 13 percentage points in market share, while supplier profitability has plummeted from 7.4% in 2017 to 5.1% in 2023European automotive industry: What it takes to regain competitiveness^[1]. A 2025 CLEPA-McKinsey survey found that 65% of suppliers expect low profitability to persist through 2025, with 60% anticipating revenue declinesGrim outlook for European automotive suppliers, as lower volumes suppress profitability^[5]. These trends are compounded by the EU's 45% tariffs on Chinese EVs, which have intensified competition and forced European automakers to absorb higher costs or risk margin erosionEuropean Automotive Sector Faces Uncertain 2025: Trade Tariffs and Market Shifts in Focus^[4].

The stock market has mirrored these challenges. Tesla's European sales fell by 40.2% year-on-year in 2025, while Chinese automakers like BYD more than tripled their market shareCar Sales in Europe: Which Brands Are Rising and Falling?^[6]. Volkswagen, the market leader in BEV sales, cut its 2024 profit outlook twice in under three months, and Stellantis saw its shares drop nearly 11% amid weak demand and restructuring costsEuropean carmakers warn on profits in the face of …^[7]. Fitch Ratings notes that European OEMs are likely to see further profitability declines in 2025 as trade tensions and EV price pressures persistEuropean Auto OEMs’ Profits to Fall Amid Tariff Turmoil^[8].

Strategic Responses and the Path Forward

To mitigate these challenges, European OEMs are adopting a mix of cost-cutting, vertical integration, and strategic partnerships. Volkswagen, for instance, is targeting a 40% cost reduction with its China Main Platform to achieve parity with local competitorsEuropean Automotive Industry Faces Big Changes^[9]. Stellantis is investing in battery gigafactories to control its EV cost structure, while Toyota is diversifying its electrification strategy with hybrids and solid-state battery developmentHow Automakers Are Navigating EV Disruption and Profit Pressures^[10]. These efforts underscore the sector's need to balance innovation with financial prudence.

However, the road ahead remains fraught. The EU's 2035 zero-emission car targets and the need for domestic battery production (900 GWh by 2030) require significant capital reallocationEurope’s automotive industry at a crossroads^[11]. At the same time, automakers must contend with the reality that EVs in mass-market segments yield lower profit margins than ICE vehicles, a challenge compounded by slowing adoption rates in EuropeHow Automakers Are Navigating EV Disruption and Profit Pressures^[10].

Conclusion

The European automotive industry stands at a crossroads, with supply-demand imbalances and geopolitical tensions reshaping its competitive landscape. While the transition to BEVs is inevitable, the path to profitability requires agility, strategic collaboration, and regulatory clarity. For investors, the key lies in identifying OEMs that can navigate these challenges through innovation, cost optimization, and resilient supply chains. As the sector grapples with its identity in an electrified future, the stakes for European automakers—and their valuations—have never been higher.