Amidst expansion challenges, why is the EU still such a priority for auto manufacturers?

However, the end of 2023 and beginning of 2024 brought curveballs for the industry that have rendered that confidence somewhat misplaced.

Indeed, this sense of buoyancy has been severely challenged by new customs duties implemented within the European Union (EU), alongside significant policy changes such as the elimination of the purchasing incentive for electric vehicles (EVs) in France and Germany. These rising costs have complicated manufacturers’ expansion plans into the EU market, as well as impacting demand for EVs amongst the customer base. All these factors together have severely undermined previous growth forecasts and given manufacturers less pricing power than they have had in the past.

However, despite these barriers, the EU market remains a top priority for auto manufacturers. In this article, we will explore why that is, and how automotive businesses can navigate these market-specific challenges to achieve growth and expansion.

Consumer expectations for digitisation and convenience

There are many reasons why manufacturers are so focussed on the EU market, but much of it has to do with technology.

First, the EU has far more infrastructure for EVs than most of the global market. So as the industry continues to focus more and more on EVs, the EU is the top market for those vehicles. Whilst demand has ebbed slightly, there is still a general push towards sustainable automotive decisions in the EU, including hybrid vehicles.

Second, the EU market is one of the few where consumer demands and buying power align, and these demands include technology. EU customers expect a certain level of connectivity and convenience when purchasing new vehicles, including innovative software solutions and even AI-based functionality; not to mention improved functional safety features. Of course, cost of living crises – not just in the EU, but globally – do impact buying power; but whilst in other markets consumer expectations may fluctuate according to buying power, in the EU, the purchase is likely to be postponed before feature expectations change.

Localisation of production

Another global trend in the industry is the increased localisation of production and supply chains following a ‘local for local’ trend. Whilst in the past many domestic operations were moved to nearshore and offshore suppliers, these moves are being largely reversed.

One reason for this is the emphasis on sustainability and carbon accounting in the EU market. ESG reporting requirements are much more stringent in the EU, leading manufacturers to localise supply chains as much as possible to within the EU to reduce carbon emissions.

With an increased demand for and focus on ESG reporting, manufacturers need a full view of their supply chains, all the way back to the mines. This visibility is much easier with more localised supply chains.

Dr. Christian Back Partner, Forvis Mazars Group

What this means is that not only are EU brands bringing their production back into the EU, but global brands, like those in the Chinese market, are opening factories and operations within the EU, too.

Another benefit of this localisation is that it can actually create cost savings. Whilst initial costs may be higher, reliability within the supply chain and production lines means less financial disruption. Additionally, international brands producing within the EU for the EU market will incur fewer levies and taxes on the sale of those goods.

The Chinese market influence

Adding another layer of complexity to the automotive landscape is the increasing interest from Chinese manufacturers in expanding their footprint in Europe. With their home market becoming oversaturated, many Chinese companies are looking towards the EU, which boasts a more robust buying capacity.

By setting up factories within Europe, these manufacturers aim to enhance ESG compliance, improve supply chain reliability, and mitigate customs duties that could hinder their

competitiveness. On the top of that, they could leverage the knowledge of EU-based experts to expand effectively and profitably without sacrificing alignment with consumer demands.

Prioritising profitability for 2025

This increased efficiency in the supply chain will help manufacturers cut costs, but cost saving measures should be undertaken intelligently. .

“The profitability per vehicle increases along with the value of the vehicles. If you sell a better car with better technology and features, profitability in both currency and percentage will be much higher compared to a lower cost vehicle.” – Dr Christian Back, Partner, Forvis Mazars Group

Simply put, EU drivers want luxury and convenience features. The technology and connectivity expectations they have are the main profit drivers for the vehicles, meaning features and quality should remain a top priority during design and production.

When costs are decreased through other means, but features remain attractive and high spec, this will help move purchasing decisions forward, which could help stimulate business growth headed into 2025.

As manufacturers look to close out 2024, likely a disappointing year in terms of growth, profitability is undoubtedly a top priority for 2025. By leaning on local experts within the EU for market insights and advice, it is possible to meet consumer demands and stimulate purchasing activity without sacrificing profitability in the coming year.