Volkswagen’s €60 Billion Question: Can Europe’s Auto Giants Survive Chinese Competition?

Volkswagen will present details of a €60 billion cost-cutting programme on March 10, the latest attempt by Europe’s largest automaker to arrest margin compression that has left it fighting a war on two fronts: against Chinese electric vehicle makers who benefit from integrated supply chains and lower capital costs, and U.S. tariffs that have cost the company up to €5 billion annually.

The restructuring, which CEO Oliver Blume outlined to 120 executives in mid-January, targets a 20% reduction in costs across all brands by the end of 2028, according to Electrive. This comes on top of €15 billion in annual savings already expected from workforce reductions of 35,000 jobs by 2030. Despite these measures, Volkswagen Group reported an operating margin of just 2.3% for the first nine months of 2025, with the Volkswagen passenger car brand achieving only 2.3%, far below the company’s previous 6.5% target for 2026.

The arithmetic is unforgiving. Lower-margin electric vehicle sales are eroding profitability just as U.S. tariffs – which have fluctuated between 15% and 27.5% on European Automotive imports in 2025 – destroy pricing power in a market that accounts for 15% of European automotive output, according to Oxford Economics. Volkswagen’s China business, once a profit engine, has declined 2% in the first nine months of 2025 as domestic competitors capture share with vehicles priced at fractions of European equivalents.

The Cost Asymmetry

The challenge facing Volkswagen extends beyond cyclical headwinds. A Rhodium Group analysis published March 6 reveals that Chinese EV makers possess structural cost advantages that Western automakers cannot easily replicate. BYD spends roughly $2,302 per vehicle on combined administrative expenses and R&D, compared to Tesla’s $4,021 – a $1,719 per-vehicle overhead advantage driven by cheaper China-based engineering teams and tighter supplier collaboration.

Vertical integration amplifies these advantages. BYD and Leapmotor produce batteries in-house, eliminating the markup European automakers pay to specialized suppliers. CNBC reports that BYD’s Blade Battery technology provides a €10 per kWh cost advantage over nickel-cobalt batteries. Chinese manufacturers also extend payment terms to suppliers – BYD averages 155 days, Leapmotor 225 days – improving working capital flexibility in ways that European firms, bound by different financial norms, struggle to match.

China’s 20% manufacturing cost advantage over Western markets, cited by China Briefing, reflects more than labour arbitrage. The country processes over 60% of global lithium, controls three-quarters of lithium-ion battery production, and has accumulated expertise through sheer volume that competitors cannot quickly acquire. When CATL, which commands 37.9% of the global EV battery market, received government subsidies rising from $76.7 million in 2018 to $809.2 million in 2023, the scale of state support becomes apparent.

The Subsidy Debate

European officials have focused on Chinese subsidies as the source of competitive distortion. The Center for Strategic and International Studies estimates China invested over $230 billion in EVs and batteries between 2009 and 2023 through tax exemptions, buyer rebates, R&D programmes, and infrastructure funding. BYD alone received €1.6 billion in purchase subsidies in 2022 for approximately 1.4 million vehicles.

Yet subsidies tell an incomplete story. Direct purchase subsidies ended in China at the end of 2022, though purchase tax exemptions continue through 2027 with declining value – capped at ¥30,000 per vehicle in 2024-2025, halving in 2026-2027. More importantly, China’s advantage stems from Industrial Policy choices made over 15 years that created massive domestic demand, forcing rapid cost reduction through internal competition among dozens of manufacturers. This differs fundamentally from late-stage subsidies applied to mature industries.

The European Commission imposed countervailing duties ranging from 17.4% for BYD to 38.1% for SAIC on Chinese EV imports in October 2024. These tariffs have slowed but not stopped Chinese market penetration. Autovista24 reports BYD’s European EV sales surged 302.6% in the first nine months of 2025, capturing 4.4% market share. The BYD Seal U plug-in hybrid became the first Chinese-brand model to lead Europe’s cumulative PHEV standings in September 2025 with 45,837 units.

Protectionism’s Limits

Analysis by Rhodium Group suggests duties would need to reach 40-50% to make European markets unattractive for Chinese EV exporters – potentially higher for vertically integrated manufacturers like BYD. Current EU tariffs of 15-38% bridge only part of the price gap; BYD models show price differences of 80-100% between China and Europe, according to Coface, meaning Chinese manufacturers retain substantial margin even after absorbing tariff costs.

Chinese manufacturers are localising production to circumvent tariffs. BYD’s Hungary plant is expected to begin production before the end of 2026. The company registered 187,657 vehicles in Europe during 2025 and targets a 5% share of European EV sales by 2026. For the first time in February 2026, BYD’s overseas sales exceeded domestic sales, signalling a strategic pivot toward international markets as China’s domestic growth slows.

European Industrial Policy at the Crossroads

The predicament extends beyond Volkswagen. The automotive sector supports 13.6 million jobs across the European Union and contributes between 4-5% of GDP in Germany, Slovakia, Hungary, and the Czech Republic. IMF research suggests that if Chinese subsidies to the EV industry follow trajectories similar to solar PV, EU domestic EV production could decline by 70% with producers’ global market share falling 30%.

European policymakers face uncomfortable choices. The Centre for European Reform advocates for coordinated “buy-European” rules in national EV subsidy programmes. France’s eco-bonus, which scores vehicles on production location and carbon footprint, has cleared EU state-aid checks and could serve as a template. Germany, France, Spain, and Italy together accounted for 70% of EU passenger car registrations in 2024; coordinated local-content requirements across these markets could create meaningful competitive barriers.

Yet such measures risk trade retaliation and slow the decarbonisation timeline that depends on rapid EV adoption. Chinese manufacturers account for a quarter of EU EV sales, filling a gap European automakers cannot bridge at competitive price points. The average transaction price for new vehicles in Europe has risen 15-25% since 2020, pushing EVs beyond the reach of mass-market consumers. When more affordable models arrived in 2025, EU EV registrations rose 30% in the first eight months, demonstrating that demand exists at lower price points European manufacturers struggle to profitably serve.

What to Watch

Volkswagen’s March 10 annual results presentation will reveal whether the company can articulate a path to sustainable margins without relying solely on cost reduction. Analysts will scrutinise capex adjustments, brand accountability measures, and manufacturing consolidation plans. The company has already reduced its operating margin guidance for 2025 to 2-3%, down from an original 5.5-6.5% forecast.

Broader questions loom. Can European manufacturers develop competitive mass-market EVs priced between €20,000-€30,000, or will they cede this segment to Chinese rivals while defending premium territory? Will member states coordinate industrial policy, or will fragmented approaches – Hungary offering subsidies to BYD, Germany pursuing different strategies – undermine collective bargaining power? And can tariffs and local-content rules provide breathing room for European innovation, or do they merely delay an inevitable market realignment?

The stakes extend beyond quarterly earnings. If European automakers cannot match Chinese cost structures through manufacturing innovation, battery technology development, and supply chain optimisation, the continent faces a choice between protecting an uncompetitive industry through escalating protectionism or accepting structural dependence on Chinese manufacturers for critical green technology. Neither outcome aligns with Europe’s stated goals of industrial sovereignty and climate leadership. The gap between those goals and current capabilities is measured in the €60 billion Volkswagen believes it must cut just to remain viable.