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.
Image: A Chinese-made BYD Seagull electric car on display in Bangkok. Pic: Anusak Laowilas/NurPhoto/Shutterstock
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.
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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.
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Ford calls for incentives to buy EVs
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.
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Jaguar’s new electric concept
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.
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Govt to U-turn on electric car policy?
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.
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.
For more than a year, we have been tracking the flow of sanctioned items out of the UK and towards Russia.
Electronic equipment, radar parts, components used to make aircraft and drones. These are all items that have been banned from going to Russia. For good reason: while Britain is far from a global manufacturing powerhouse, it nonetheless still makes certain prized components used to make machinery.
In some hands, these components could be used for peaceful purposes, but they could also be used to wage war. All of which is why they are among the items sanctioned by G7 nations and banned from entry to Russia.
A glance at the trade figures might lull you into thinking those sanctions have been extraordinarily successful. Look at the flows of these so-called “dual use” goods from the UK to Russia and they drop to zero shortly after the invasion of Ukraine and the imposition of those export bans. But that’s not the whole story – because over precisely the same period, exports of those same items to countries neighbouring Russia have risen sharply.
At this point, the data trail goes cold. As far as the statistics tell us, those components stay in the Caucasus and Central Asia. But there are two powerful pieces of evidence that suggest otherwise. The first is that we have travelled out to the border of Russia and filmed European-sanctioned goods (in this case cars, the hardest of all goods to disguise) passing across the border.
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Zelenskyy: Sanctions needed as countries supplying missile components to Russia
The second is that Ukrainian forces have repeatedly found weaponry and equipment containing European and British components inside them on the battlefield in their country. British technology has been used to kill Ukrainians – in spite of sanctions. That was one of the messages President Volodymyr Zelenskyy relayed in his interview with my colleague Mark Austin.
So, in the wake of that interview, we revisited the databases to see if those flows of goods to Russian neighbours had slowed in recent months.
But, far from slowing, they’ve accelerated. In the past nine months, the flow of dual-use goods to Russian neighbours has risen by an average of 9%, compared with the monthly average between the Russian invasion of Ukraine in 2022 and last June. Those flows are 111% higher than they were before the invasion.
Nor are the flows of British goods to Russian neighbours the only trend suggesting these components are being trans-shipped via third countries. Look at exports of sanctioned items to the United Arab Emirates and Turkey and they are up by a similar proportion.
In short: the evasion of sanctions continues much as it has done since the beginning of the war. For all the talk about the toughest sanctions regime in history, the reality on the ground is somewhat different.
Global oil costs have fallen back sharply amid hopes that a ceasefire between Israel and Iran will end the threat of disruption to crucial energy flows for the world economy.
The cost of a barrel of Brent crude, the international benchmark, was as high as $81 late on Sunday night as financial markets opened in Asia.
It was the first reaction to news of the US bombing of Iran’s nuclear facilities over the weekend and built on gains seen widely since Israel first began its strikes 10 days previously.
But prices came down on Monday evening after it became clear that Iran’s retaliation, through missile attacks on a US base in Qatar, were a mere face-saving exercise due to the Americans being pre-warned by Tehran.
Drops of more than 7% in US trading were followed by a further 3% fall on Tuesday, with Brent currently standing just below $68.
It remains, however, $5 a barrel higher on where it started the month and reflects the continuing, possible, threat to shipping in the key Strait of Hormuz which handles 20% of global oil and 30% of natural gas supplies.
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The main concerns in the energy market were over potential disruption to liquefied natural gas (LNG) deliveries as it remains in high demand.
Europe is yet to fully restock following the harsh end to last winter which drained storage levels.
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Trump not happy with Israel
As such prices had already been driven up by steep competition from Asia for Gulf supplies.
UK day-ahead natural gas prices were more than 25% up in the month, as of Monday, and have not fallen as sharply as oil costs.
Financial services specialists have pointed to upwards shifts in the risk premiums facing cargo, especially tankers, due to the conflict.
Analysts had warned last week that a sustained Middle East war with disruption to energy shipping risked a fresh cost of living crisis similar to that seen after Russia’s invasion of Ukraine in 2022.
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Timeline of recent Israel-Iran conflict so far
Only a sustained ceasefire is likely to bring the additional costs seen in wholesale prices down.
Stock markets have also reacted positively to the ceasefire development, with the FTSE 100 in London up by 0.3%.
The gains in London have lagged those seen across much of Europe.
Commenting on the moves Russ Mould, AJ Bell’s investment director, said: “The markets will be watching closely to see if the cessation in hostilities is maintained and for Iran’s next move – amid noises from that side that no such ceasefire has been agreed.
“Defensive stocks, oil producers and precious metals miners were all under pressure in early trading.
“Gold slipped back as its safe-haven attributes were less in demand. This rather clipped the wings of the FTSE 100 given its relatively heavy weightings in these areas and saw the index underperform its European counterparts.
“On the flipside, travel stocks moved higher, both on the implications for fuel costs but also as the potential hit to foreign travel appetite that might have resulted from any further escalation of Middle East tensions seems to have been swerved.”
Amazon has said it will invest £40bn in the UK over the next three years as it creates thousands of jobs and opens four new warehouses.
The online shopping giant will build two huge fulfilment centres in the East Midlands, which it expects to open in 2027. The exact locations are still to be revealed.
Two others – in Hull and Northampton – were previously announced and are set to be finished this year and in 2026 respectively, with 2,000 jobs expected at each site.
Amazon is already one of the country’s biggest private employers – with around 75,000 staff.
Two new buildings will also go up at its corporate headquarters in east London, while other investment includes new delivery stations, upgrading its transport network and redeveloping Bray Film Studios in Berkshire – which it bought last year.
The £40bn figure also includes most of the £8bn announced in 2024 for building and maintaining UK data centres, as well as staff wages and benefits.
Prime Minister Sir Keir Starmersaid the investment into Amazon’s third-biggest market after the US and Germany was a “massive vote of confidence in the UK as the best place to do business”.
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“It means thousands of new jobs – real opportunities for people in every corner of the country to build careers, learn new skills, and support their families,” said Sir Keir.
The chancellor, Rachel Reeves, said it was a “powerful endorsement of Britain’s economic strengths”.
Amazon chief executive Andy Jassy stressed the investment would benefit communities across the UK.
“When Amazon invests, it’s not only in London and the South East,” he said.
“We’re bringing innovation and job creation to communities throughout England, Wales, Scotland and Northern Ireland, strengthening the UK’s economy and delivering better experiences for customers wherever they live.”
However, Amazon’s immense power and size continues to raise concerns among some regulators, unions and campaigners.
There have long been claims over potentially dangerous conditions at its warehouses – denied by the company, while last week Britain’s grocery regulator launched an investigation into whether it breached rules on supplier payments.