Across Europe, car companies are cutting jobs and shutting factories – to the extent that some question their very existence. So it’s worth asking the question: what’s gone wrong with Europe (and for that matter America’s) car industry?

While some will reach for their own pet conclusions (Brexit! Electric vehicle deadlines! Government regulations!) in practice there’s something bigger, deeper and less parochial going on here. As the world shifts from petrol and diesel cars to their electric counterparts, a seismic shift is taking place in the global motor industry.

It is a shift which threatens to cause even more pain and disruption at carmakers in developed economies. And given most of these countries’ high-skilled and highly-paid manufacturing jobs are to be found in or around the car-making sector, this is no trivial matter.

Look at a chart of global car exports and you see a very striking sight indeed.

The lines for the traditional car-making countries – Japan, Germany, South Korea – are more or less flat, save for the period around the pandemic. But now look at the line for China. This country which, only a few years ago, was one of the minnows of the global car trade with barely 250,000 car exports each year, has suddenly launched into the stratosphere. In the space of barely two years, it has leapfrogged all the other major car-exporting nations to become the world’s biggest car exporter – in terms of the sheer number of cars.

This arresting chart might give you the impression that Chinese dominance is a very recent thing – a sudden and unexpected spurt. Except that that’s somewhat misleading, because this shift has been a long time coming. To see why, it helps (strange as this will sound) to ponder the innards of a typical car.

A conventional petrol or diesel car is an assembly of lots of different components. There’s the radiator, the exhaust pipe, the wheels and the brakes, but most of all, there is the engine. An internal combustion engine is – even in 2024 – an extraordinary piece of machinery. We take these things for granted (and, given their carbon emissions, some sneer at them). But the ability to take fuel and explode it in a controlled way that turns wheels remains a great mechanical achievement.

To be able to make these engines – contraptions of many different parts, each of which undergoes enormous stresses – at a low cost and in a way that ensures their long-term reliability is all the more impressing an achievement.

Indeed, making reliable engines was such an enormous industrial challenge that it defied China for most of the past century. Part of the reason Chinese car exports were so low for so long was because China struggled to make decent engines.

So it won’t surprise you to learn that the engine is comfortably the most expensive component in a typical car – accounting for more than a fifth of the total value of a car. Much of Britain and Europe’s car industry is focused on this 21% of the car value – because that’s where our expertise has been built up over decades.

Taking bits of steel and combining them into this complex contraption is part of the industrial story of Europe (and America). Millions of people are employed across Europe working either at carmakers or their suppliers making these engines. This is where some of the best-paid, highest-skilled manufacturing jobs are to be found, even today in 2024.

But here’s the critical thing. In an electric car there is no engine. Instead, the vast majority of the value lies in something else: the battery.

Making a battery is very, very different to making an engine. It’s chemical engineering – not mechanical engineering. The skills built up by European carmakers over decades are simply not directly transferrable. Even if Europe was the only continent in the world making cars, it would still be an almighty challenge to shift from one industrial model to a very different one, without having a rollercoaster ride along the way.

But Europe’s problem (and America’s and South Korea and Japan’s too) is that it’s not alone in making cars. China, which struggled to compete on those car engines decades ago, has been investing in electric carmaking for some time.

In doing so, it has been helped by subsidies far more generous than those their Western competitors tend to receive (nearly all carmakers get subsidies – one way or another). Beijing has long been determined both to dominate this next phase of car production and reduce its reliance on Middle Eastern oil imports – both of which point towards mass electrification of road transport.

And those subsidies – alongside cheap energy costs helped by China’s relaxed attitude towards coal-fired power – are one part of the explanation for why China has been able to produce cars with far cheaper costs than their Western competitors. Analysts from Swiss bank UBS recently tried to break down the costs of a German-produced VW ID3 compared with the component costs of a Chinese car, the BYD Seal.

They found that the BYD was cheaper to produce – not just overall, but for every single component part. And since it was far cheaper to produce, that meant it could be sold at far cheaper rates.

Some of that is explained by state aid but, even more so, it’s a consequence of something else. China’s interest in batteries is not a recent trend. It has been investing in their production for many, many years. It has been attempting to dominate not just the production of cells but also of the cathodes and anodes that go inside them – not to mention the chemicals used to make those electrodes. It has been firming up the entire supply chain – all the way down to the mines. And while you can find only so much lithium and cobalt in China, Chinese firms have been buying up mines in Africa and elsewhere for years.

The upshot is that China is the dominant country not just in the production of EVs and the cells inside them but in nearly every component that goes inside those cells. If you want to make a battery today you will be hard pressed not to use at least some Chinese technology or products. It’s that dominant.

The late business writer Clay Christensen coined the term “disruptive innovation” to describe moments like this. When a new technology comes along that completely changes the industrial structure in a sector, it’s incredibly difficult for the incumbent businesses to respond and adapt. They simply aren’t set up for it. Think about how digital photography displaced traditional film, or how smartphones have displaced traditional computers.

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What makes this moment so tricky for European carmakers is that they are trying to compete with a disruptive innovation which has been supercharged by Chinese industrial strategy. The upshot is that China is so far ahead on battery production – particularly of low-cost batteries – that it’s hard to see how Europe and America – and, to some extent, South Korea and Japan, can catch up.

All of which is why so many countries are reaching for the most drastic of all economic remedies: large, expensive tariffs on imports of Chinese EVs. The US and Canada have imposed 100% tariffs, India is following suit with similar rates. Europe has introduced a sliding range of extra tariffs. Japan has yet to do so, but is protected to some extent by the fact that their consumers habitually typically buy Japanese.

The main outlier here is the UK. This country has not yet imposed any extra tariffs on Chinese imports. The upshot is that this is one of the most attractive places in the world for Chinese producers to market their cars right now – and one of the cheapest places to buy a Chinese car. But that has profound consequences for domestic car producers.

With energy costs having risen so much, it is getting harder, rather than easier, to compete with Chinese production domestically. It raises profound questions about the ability of this country’s car industry to survive or compete.

The logic of these transitions is that they often move in slow motion but become quite self-fulfilling. Britain and Europe had opportunities to invest in batteries in years gone by; they have been spectacularly slow-moving in setting up new supply chains. But the cards were always stacked against them. The coming years will probably get tougher, as the 2035 EV deadline approaches, pushing consumers towards a market which is becoming ever more dominated by one country.

To listen to UK car manufacturers in recent weeks has been to hear a counsel of despair over the electric vehicle market.

Struggling to hit targets imposed amid mixed messages from the last government, they have lobbied the new one to relax the rules.

Yet November’s figures show an industry not just hitting the 22% zero emission mandate (ZEV) but exceeding it, with EVs accounting for a quarter of all new sales.

In the week Ford joined Vauxhall and Nissan in calling for state incentives to boost sales, what are we to conclude?

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The industry says November is a blip, only the second month this year when EVs topped 22%, with the total for the year likely to fall just short of 19%, and only thanks to £4bn of discounting.

With the target rising to 28% next year, and fines of £15,000 for every vehicle by which they fall short, they say consumers need help, in the form of grants or tax breaks, to swallow their reservations about plugging in.

But the picture is not quite as simple as that.

Benefits beyond the headline target

While 22% is the headline target, manufacturers can benefit from flexibilities, including buying credits from competitors who exceed the target, to offset their shortfalls. (These carbon credits have long been a crucial revenue line for Tesla, raising almost $1.8bn (£1.41bn) last year.)

Proponents of EVs say once these are taken into account the “real” target is 19%, and with some manufacturers far exceeding targets, any shortfall can be met from competitors, with not a penny in fines going to the government.

New Automotive, which campaigns to increase the pace of the energy transition, tracks global EV sales and its latest figures show BMW-Mini, Jaguar and Vauxhall all recorded EV sales above 30%, with Peugeot, Renault, MG and Skoda exceeding 22% in November.

Biggest critics are furthest behind

According to New Automotive’s tracking of “real” targets for manufacturers, Ford, Stellantis, Nissan and VW are furthest behind.

Coincidentally or not, the first three of those have been the most vocal in calling for reform of the ZEV regime.

Consumer reservations about electric vehicles are real. Price, range and concerns over the charging network – all of which are improving – still give people pause. But the UK’s progress is remarkable.

Since 2017 new electric car registrations have grown from close to zero to 25% of the market, with petrol and diesel declining from around 95% to less than 40%, helped by the rise of hybrids. It is a fundamental change that mirrors the energy market, with the rise of wind power and the phase-out of coal.

And as with energy, the final steps to decarbonisation will be the hardest and, one way or another, the most expensive.

Which is why manufacturers are asking the state to give us a helping hand on the road.

Battery electric vehicles (BEVs) accounted for 25% of new car registrations in November, an almost 60% increase year-on-year and well above a government target manufacturers have called on ministers to relax.

BEVs were the only sector of the car market to see increased sales in November, which saw new registrations down almost 2%, the second consecutive month of contraction and a third in four months the industry blames on the race to meet EV targets.

Petrol registrations fell by almost 18% and account for 53% of new registrations in 2024, with diesel sales falling by more than 10% in November, and declining to 6.4% market share in the year to date. Hybrid sales, both mild and plug-in, also fell.

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The figures come as manufacturers have stepped up lobbying of ministers to provide support for the industry to meet a target that 22% of all car sales, and 10% of vans, must be zero-emission in 2022.

The industry says EV sales are rising only because of unsustainable discounting totalling £4bn this year, and this week Ford’s UK managing director told Sky News the government should consider direct cash incentives or tax cuts to support private EV sales.

Last week the business secretary Jonathan Reynolds announced a review of the zero emission mandate, which increases to 28% next year and every year towards the eventual phase out of new internal combustion vehicles in 2030.

His move followed the closure of Vauxhall’s diesel van plant at Luton, a decision owners Stellantis have been considering for some time but blamed on the UK’s environmental targets.

Figures for November also show a decline in fleet car sales, which do benefit from tax breaks for EVs and have driven much of the expansion in recent years. Private sales, which make up the bulk of the UK car market, accounted for just 40% of new registrations.

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The Society of Motor Manufacturers and Traders (SMMT) says EV market could reach 19% for the year, short of the 22% target, and that demand for electric cars is weaker than when the target regime was introduced by the Conservative government last year.

Mike Hawes, chief executive of the SMMT, said: “Manufacturers are investing at unprecedented levels to bring new zero emission models to market and spending billions on compelling offers. Such incentives are unsustainable – industry cannot deliver the UK’s world-leading ambitions alone.

“It is right, therefore, that government urgently reviews the market regulation and the support necessary to drive it, given EV registrations need to rise by over a half next year.”

The UK remains the second-largest market for EVs in Europe, with every major UK-based manufacturer (with the exception of Toyota) having committed to new electric models, powertrain or battery production in recent years.

Supporters of rapid decarbonisation of transport argue the figures show that manufacturers are meeting market demand, and that the government would be wrong to relax the headline target because some manufacturers are missing their market share.

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Ben Nelmes, CEO of New Automotive, said: “Thanks to the investments and efforts made by carmakers, UK motorists now have more electric options at more competitive prices than ever before.

“This impressive progress is the result of the combination of ambitious and flexible EV targets, and significant tax breaks for electric cars. This combination of targets and incentives is putting the UK in the fast lane to greater energy independence and cheaper, cleaner motoring.

“As global electric car sales wax and wane, the UK’s car market is heading in one direction – and fast. Ministers must not pull the rug under this progress as they revisit UK policy on EVs.”