The on-going mobility revolution is the result of a combination of multiple factors. Technology is certainly a core driver, in particular electrification, ADAS and autonomous driving, as well as AI. However, this revolution is also heavily driven by external factors such as the need for clean mobility, more regionalized consumer preferences, fluctuating automotive markets across regions, and more recently, tariffs. In addition, regulatory environments, geo-politics, and global economic decoupling add another set of layers influencing the industry at large. This article complements Rethinking the Auto Industry: Tech, Tariffs, and China which I published in April 2025.

 

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Geo-Politics and the Chinese Powerhouse

Automotive markets have historically been rather well integrated across the globe. Carmakers and suppliers from Europe, the U.S., Japan, and Korea built global footprints over decades to serve local markets around the world. Over the past five years, the Chinese industry accelerated at a rate that surprised most industry experts. Local OEMs have pushed foreign players out of what used to be a very lucrative market for the latter, cutting off vital financial resources otherwise needed to advance technology. Today, Chinese carmakers control about 70% of the local market.

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What happened? In 2009, the Chinese central government began as a pilot called "Ten Cities, Thousand Vehicles"fostering the deployment of hybrid and electric vehicles. This has turned into a strategy aimed at boosting not only New Energy Vehicles (NEVs, i.e., plug-in vehicles) but also investment in domestic manufacturing capacity. Foreign players were caught off guard with no competitive NEVs when sales really picked up — today they represent about 50% of the market. Naturally, the NEV market is massively dominated by local players. However, they continue to play in the rest of the market where VW Group remains the leader.

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Capacity growth was another key lever of this Chinese strategy. Today, the country can produce 50 million vehicles, almost twice its local needs. This not only results in a domestic price war (which further squeezes foreign players’ profitability) but also exacerbates the need to export. In 2024, six million units were shipped abroad, double the 2022 volume. This puts additional pressure on global players as these vehicles make their way around the globe, except to the USA — for now — due to tariffs. Europe is a prime target despite tariffs on Chinese BEVs ranging from 17% to 45% depending on the OEM. Nevertheless, Chinese auto imports reached 8% of the European market in September 2025, matching the penetration of Korean players, thanks in part to a push for non-BEV versions (taxed at only 10%). In the UK, Chinese imports even exceeded 12% of the new car market that month.

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To keep things simple, the U.S. government implemented steep import tariffs earlier this year in an effort to decouple global economies and boost its own. As I write this article, cars imported from Europe and Japan are taxed at 15% and those from Korea at 25% whereas rates used to be 0 to 2.5%. A 102.5% tariff had also been applied on all Chinese vehicles by the previous administration. In addition, newly implemented tariffs on imported parts and raw materials will also make U.S.-made vehicles more expensive. This will cost the industry tens of billions of dollars per year, hindering its ability to address all the challenges it is facing. 

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To make matters even more complex, efforts by non-Chinese OEMs to electrify their vehicles are faced with China’s staggering domination of the battery supply chain. The country’s global market shares for the various components and minerals reach 70 to 90%. Developing sovereign supply chains in a world where economies tend to be decoupled is all the more difficult.

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Increasing Regionalization of Customer Expectations 

Typical vehicles in major car markets used to differ to a significant extent in the recent past. Essentially larger, heavier SUVs and pickup trucks in the U.S., smaller but more sophisticated vehicles in Europe and Japan, and cheaper cars in China. All were powered by gas or diesel fuel. 

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However, markets have been diverging significantly more in the last five years. Electrification is a key driver of this regionalization. Today, one in three vehicles sold in China is a battery EV (BEV), vs. one in six in Europe and one in 12 in the U.S. And this gap will widen as China continues to march ahead while the U.S. government is doing everything it can to stall BEV growth, likely with some success at least in the near term.

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Purchase intents show potential improvement according to a poll by McKinsey in April 2025 (before massive cuts in BEV incentives were announced). BEVs are the preferred next vehicles for 45% of Chinese buyers, vs. 23% in Europe, and 12% in the U.S. Conversely, 18% of Chinese buyers expected their next vehicle to be powered solely by an internal combustion engine, vs. 49% in Europe and 70% in the U.S. Furthermore, 32% of U.S. respondents even state they will never buy a plug-in vehicle. Nevertheless, this leaves increasing space for electrified powertrain options, from basic hybrids to plug-in hybrids and extended range EVs.

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Digital is another key domain where the gap between regional customer expectations is widening. In China, emerging NEV players such as Xpeng, NIO, Li Auto and more recently Xiaomi have leapfrogged established players and set a very high bar in the local market. In-house developed software combined with advanced electric / electronic architectures put them at the forefront of the software-defined vehicle (SDV) trend alongside Tesla and Rivian. Whereas Chinese customer expectations are now heavily influenced by these highly integrated digital cabins, this is not (yet) the case in the U.S. or Europe. Nevertheless, incumbent OEMs are racing to catch up, especially if they want to remain relevant in China.

 

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What Can Stakeholders Do?

The speed of change and the diversity of strategic inputs in the automotive industry have clearly accelerated in the last few years. This unprecedented environment makes it extremely difficult for management teams to operate effectively as the number of fronts on which stakeholders must frequently revisit their strategies has ballooned.

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In order to succeed, carmakers and suppliers must stay in the technology race (e.g., EV, software, SDV, ADAS) and boost their overall efficiency to catch up with Chinese players (e.g., product time-to-market). Given the speed of change, it is critical they manage with agility on all fronts. They must also develop more differentiated strategies and product portfolios across regions to adapt to local expectations, and lower regional breakeven points to cope with fluctuating volumes. 

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This will require relying more on regional expertise and supply chains. Partnerships across the ecosystem (e.g., develop an open-source operating system) as well as with tech leaders should also pursued — as VW Group has with Rivian and Xpeng on the software / SDV front. Furthermore, I believe the EU is right to consider requiring Chinese companies looking to invest in Europe to transfer technology (e.g., for batteries), just as China did in the past in so many domains. 

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All in all, these actions come at significant costs when the profitability of the stakeholders is badly hurt by tariffs, lost margins in China, weakened market positions, and write-offs from disappointing EV sales in Europe and the U.S. The challenge is significant.