Europe’s automotive sector, once a global leader, is facing what McKinsey describes as “the largest transformation in the industry’s history”.
Contributing 7% of the EU’s GDP and employing nearly 14 million people as well as generating €170 billion in exports, the industry’s future is closely tied to Europe’s economic stability. In the most disruptive scenario, up to €440 billion in GDP could be at risk by 2035.
The perfect storm:
The transition from internal combustion engines (ICEs) to electric vehicles (EVs) represents more than a change in technology. It signals a restructuring of the entire value chain. While ICE vehicles added 85-90% of value within Europe, this falls to 75% for locally produced EVs and just 15-20% for imports.
Since 2017, European manufacturers have lost one-fifth of their global market share, while new entrants, particularly from Asia, have doubled theirs. These companies bring vehicles to market at twice the speed and half the cost of established players, often using digital-first business models.
High energy costs and raw material dependencies add to the challenge. Europe’s energy costs are twice those of the US and China, and more than 95% of rare earth imports come from China. China also dominates 80% of the global battery value chain.
The ERA Framework:
McKinsey outlines an action plan under the acronym ERA:
Strategic priorities:
To remain competitive, European automakers must continue investing €150 billion annually in R&D and capital expenditure, while improving efficiency. Cost reductions of 20-50% and halving time-to-market are critical.
Embracing AI-driven design, new battery technologies and “design to value” approaches could help. AI adoption alone could unlock over €100 billion in annual value by 2030. However, regional market differences must be considered. In China, nearly half the buyers chose EVs in 2024, compared to just 21% in Europe.
Future-proofing the value chain:
Europe currently produces less than 10% of global battery cells. By 2030, demand could reach up to 800 gigawatt-hours, three to four times today’s capacity. Meeting this requires €200-300 billion in investment and coordinated EU strategy.
Europe must also secure leadership or resilience in seven critical technologies, including semiconductors, autonomous driving and circular materials.
Levelling the playing field:
Around €350 billion in charging infrastructure will be needed by 2035. Regulatory reform streamlined approvals, and innovation-friendly policies will be key. Consumer barriers remain, with only 20% of Europeans considering an EV for their next purchase, compared to over 40% preferring hybrids. Price gaps of 20-30% between EVs and ICE vehicles reinforce affordability concerns.
A narrow window:
McKinsey stresses that “the window for gradual change has closed”. Success depends on bold, coordinated action across industry, government and finance. Europe’s expertise, research base and sustainability focus provide a strong foundation, but rapid, decisive transformation is essential.
The industry’s trajectory will shape not only Europe’s automotive future but its broader industrial and technological competitiveness.
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