The European Automotive Industry: Navigating Through Innovation and Transformation

Introduction: The Cornerstone of European Economic Growth

The European automotive industry has long been a pillar of economic stability and growth, contributing significantly to the continent's GDP and employment. Historically, the industry has accounted for nearly 7 percent of Europe's GDP and has been a direct or indirect source of employment for almost 14 million people. More than just economic contributors, European cars carry a hefty symbolic weight. Phrases like "Made in Germany," "Italian car design," "Euro NCAP for Safer Cars," and "British racing" are synonymous with European excellence in innovation and craftsmanship.

Despite its storied success, the European automotive industry faces a period of unprecedented transformation. The shift from internal combustion engines to electrified power trains and a renewed focus on software differentiation are reshaping the landscape. This shift is opening doors for new players, particularly from China, which has recently eclipsed Germany in light-vehicle exports for the first time, with about 3 million vehicles exported in 2022 compared to Germany's 2.6 million.

These transformative changes are taking place against a backdrop of rising energy costs, inflation, and geopolitical tensions, creating a challenging macroeconomic environment for the industry. The path to a prosperous future for the European automotive sector will depend on its ability to adapt swiftly and effectively, with concerted efforts from all industry stakeholders to create favorable conditions for growth and innovation.

A Legacy of Economic and Innovative Might

The European automotive industry has not only been a driver of economic prosperity but also a center of innovation. It has significantly shaped Europe's global image, with German engineering and Italian design being particularly noteworthy. The sector contributes about 10 percent of Europe's exports, supported by over 17,300 companies, including a vast network of OEMs and suppliers. These companies have been instrumental in developing cutting-edge technologies in powertrain systems, chassis, safety, and vehicle design. Remarkably, approximately 30 percent of global automotive patents originate from Europe, underscoring the region's role as a leader in automotive innovation.

Investment in research and development has been robust, enabling European automakers to pioneer new technologies that enhance fuel economy, reduce emissions, and improve overall vehicle safety and noise reduction. These advancements have not only contributed to sustainability but have also helped European brands maintain a competitive edge in the global market.

The Disruption and Transformation Landscape

Despite historic strengths and high profitability, European automakers are facing new challenges that could disrupt their market position. The rapid rise of electrification and software technology, combined with increasing competition from abroad, especially China, poses significant threats. For example, European manufacturers have seen a drastic reduction in their market share in industries like smartphones, where they lost more than 90 percent of their market dominance within six years.

The automotive sector is experiencing similar pressures. Since 2019, European automakers have lost significant market share in their home markets and in China, with Chinese OEMs rapidly gaining traction. In the burgeoning battery electric vehicle market, new EV-centric companies now hold over half of the global market share, demonstrating the intense competition and the shifting focus of the industry.

Strategic Roadmap for the Future 

To navigate these turbulent times, a detailed strategic plan covering key areas of innovation, market adaptation, and stakeholder collaboration is essential. The industry must prioritize rapid adaptation to electric mobility and increased investment in digital technologies to stay competitive. Additionally, fostering a supportive ecosystem involving the public sector and related industries will be crucial for leveling the playing field and ensuring the long-term success of the European automotive industry.

As the sector stands at this crossroads, the actions taken in the coming years will be critical in defining the future trajectory of the European automotive industry, ensuring it continues to be a beacon of innovation and economic power on the global stage.

The Shifting Dynamics of the European Automotive Industry: Focus on Premium Segments and Technological Transformation

The European automotive industry, particularly in the premium segment, has historically been a stronghold for European Original Equipment Manufacturers (OEMs). European brands still command a dominant 71 percent of the global premium market. However, this segment is increasingly contested as new entrants have captured 18 percent of the market as of 2022, illustrating the intensifying competition within this lucrative sector.

Accelerating Shift Towards Electrification

The industry is currently undergoing a significant transformation, primarily driven by the global shift from internal combustion engines (ICE) to electric vehicles (EVs). This transition is supported by a staggering growth in EV sales, which have increased by 80 percent annually since 2020. Projections by McKinsey suggest that most global mobility markets are expected to achieve near-complete EV penetration by the mid-2030s. In response, European OEMs are not sitting back; they have put forward ambitious goals to introduce over 150 new EV models by 2030. This proactive stance underscores their commitment to maintaining leadership in the evolving automotive landscape.

The Rising Importance of Software and Digital Technologies

With the shift towards EVs, the industry’s focus is also pivoting from traditional hardware to software and digital innovations. Modern EV consumers show a marked preference for vehicles equipped with advanced digital features, such as enhanced driver assistance systems (ADAS) and superior connectivity services. Our findings indicate that these consumers are more than twice as likely to switch brands for better in-vehicle technology. This trend has propelled automakers to invest heavily in software, leading to a tripling of software content per vehicle since 2015.

Semiconductors and Batteries: The New Battlegrounds

As vehicles become more software-centric and electrified, the significance of semiconductors and batteries has surged, with over a third of a BEV's value now derived from its battery. This shift demands a radical transformation of the European supplier network, necessitating new capabilities in both development and manufacturing sectors.

Decoupling of Software and Hardware

Recent trends indicate a growing decoupling between software development and hardware. European suppliers are increasingly proficient in integrating software with hardware, particularly in control units that manage specific car components like engines or transmissions. Modern vehicles may contain up to 150 such units, but there is a move towards more centralized software architectures that manage broader vehicle domains such as powertrain and connectivity.

This shift towards centralized computing could lead to the commoditization of certain vehicle parts, making scale and continuous improvement crucial competitive factors. Similar to the smartphone industry, where software differentiation alongside economies of scale and hardware quality stands paramount, the automotive industry is heading in a similar direction. We anticipate a rise in build-to-print suppliers, who manufacture according to precise engineering specifications, especially in components like power electronics.

Strategic Partnerships to Secure Future Technologies

The changing dynamics have prompted European automotive stakeholders to forge strategic partnerships to secure critical resources and manufacturing capacities, particularly in semiconductors and batteries. Given the current dominance of Chinese companies in the battery supply chain, European firms are increasingly collaborating with mining operators or directly investing in mining operations to safeguard their supply chains.

Despite these efforts, the current initiatives may not suffice to meet the projected regional demands by 2030, pointing to a need for an accelerated push in strategic resource acquisition and technology partnerships.

As the European automotive industry navigates these complex transitions, its ability to adapt and innovate will be crucial in maintaining its historical dominance and continuing to drive economic growth in the premium sector.

Prompt Response from European Auto Manufacturers and Broader Collaboration Essential

For the European automotive industry to thrive, rapid action from original equipment manufacturers (OEMs) and suppliers is crucial. However, success also depends on cooperation from other sectors including energy, research, and public services, fostering a supportive environment for future mobility advancements. This collaborative ecosystem approach that once bolstered Europe during the internal combustion engine (ICE) era must now evolve to meet the needs of the new era of software-defined, electrified vehicles.

Revitalizing Core Competencies in the EV Era

The European auto sector must leverage its longstanding expertise in innovative product design and strong branding to the burgeoning domain of software-defined electric vehicles (EVs). Despite most high-value global brands being European, the transition to EVs and software-centric models may shift traditional brand dynamics and consumer buying criteria.

To preserve and enhance brand value, European OEMs should delve deep into consumer needs, updating traditional segmentation to align with the nuanced profiles required in the EV and software-defined landscape. By owning and effectively analyzing consumer data, manufacturers can offer customized mobility solutions and maintain engagement throughout the customer lifecycle. This includes adapting product development processes to reflect customer experiences, ensuring closer alignment between operational roles and consumer expectations, and updating vehicle software remotely to continuously meet evolving consumer needs.

Emphasizing Cost Efficiency and Development Speed

Cost remains a paramount concern for consumers across various markets, with Chinese manufacturers gaining a competitive edge due to their lower production costs. European manufacturers could narrow this cost gap by adopting innovative design strategies, integrating battery production, scaling EV manufacturing, and enhancing overall productivity. Additionally, improving development speed is vital, as shorter product cycles can better address rapidly changing market demands. By implementing agile development practices and fostering closer collaboration across teams, European OEMs can enhance their responsiveness and innovation capabilities.

Strategizing for Success in the Chinese Market

China's automotive market dominance underscores the necessity for European firms to adapt their strategies to regain competitiveness. This involves tailoring products to meet the distinct preferences of younger Chinese consumers who value technology and convenience. A localized approach to R&D and production, along with forming strategic partnerships, will be critical in capturing and sustaining market share in this vital region.

Building Resilient and Sustainable Supply Chains

The industry must focus on creating robust, circular, and sustainable supply chains, particularly for batteries and semiconductors. Strategies like increasing local production capacity, implementing recycling initiatives, and ensuring supply chain transparency are essential to reduce dependencies and enhance sustainability.

Elevating European Competitiveness in Batteries and Semiconductors

To bridge the competitive gap in battery and semiconductor sectors, Europe should foster an ecosystem conducive to technology leadership. This includes regulatory harmonization, specialized innovation, and forming strategic alliances, akin to collaborations seen in the aerospace sector.

Advancing ADAS with Collaborative Efforts and Regulatory Support

As advanced driver assistance systems (ADAS) become a critical differentiator, European industry players should consider forming alliances to standardize technologies and harness collective data for enhanced development. Supportive regulatory changes are also necessary to facilitate this collaboration and innovation.

Addressing the Digital Skills Gap

Finally, to transition successfully to a software-centric automotive future, closing the skills gap is imperative. European firms should enhance software training, attract global talent, and foster partnerships with educational institutions to build a workforce capable of driving digital transformation in the automotive industry.

To foster accelerated progress, European automotive stakeholders are on the right track but should consider expanding and speeding up their efforts. To do this effectively, a broad coalition of regional stakeholders needs to create a conducive environment that propels forward movement and secures future successes for the automotive sector. This effort requires a clear road map, catalysts for action, and platforms for collaboration.

A well-defined road map, like the one we propose, is essential to hasten the advancement of the European automotive industry. This road map's seven pillars should be transformed into specific actions and measurable goals for all involved parties—including suppliers, OEMs, adjacent industry players, and regulatory agencies. Trade associations might play a key role in coordination.

Catalysts are crucial for executing the road map. One such catalyst is a competitive regulatory environment. It is vital to clearly define and communicate uniform standards and ensure interoperability across all aspects of the road map.

Another pivotal catalyst for the industry's transition is the development of EV infrastructure. Our analysis suggests that the industry will need approximately €300 billion in investments by 2030 for electricity generation, grid enhancements, EV charging stations, and hydrogen fueling infrastructure. European stakeholders are currently installing public chargers at a rate of 2,000 per week, but to satisfy growing demand, this number needs to increase to between 6,000 and 14,000 charging points weekly. Additionally, the renewable energy sources needed to meet this energy demand would require quadrupling the workforce by 2030.

Conclusion

Lastly, the industry requires robust platforms for collaboration. As industry boundaries shift, three types of partnerships will become increasingly crucial: horizontal partnerships among entities within the same segment of the value chain (e.g., among car manufacturers) for endeavors like software development or establishing a strong presence in markets like China; vertical partnerships between different segments of the value chain (e.g., between car manufacturers and tech companies) to secure access to crucial technology and talent; and cross-industry partnerships, such as collaborations between automotive firms and utility companies, to support overarching objectives like seamless integration of different energy sectors.