EV pullbacks hurt, but autonomy may shift the balance
European carmakers enter 2026 in a difficult position. New car sales rose for a third consecutive year in 2025, yet profits have fallen sharply from the post-pandemic highs as affordability, policy shifts, and intensifying global competition erodes margins. Last week’s Capital Compass explored how autonomous driving could reshape industry leadership, and that broader technological backdrop is essential to understanding today’s challenges.
New European car sales have recovered from their pandemic lows, but remain below their 2019 peak. Affordability remains a major constraint. For decades, carmakers kept list prices rising at roughly one percentage point below inflation, allowing real new car prices to fall. In practice, however, affordability deteriorated as manufacturers removed budget trims, and pushed higher-spec models.
The Ford Fiesta is illustrative: the entry model nearly doubled in price over a decade – from £9,995 to £19,350 – as lower-cost variants disappeared. Nissan’s Qashqai followed a similar pattern. Had these models simply tracked long-term pricing, they would be about 30% more expensive, not close to twice the price.
Source: European Automobile Manufacturers Association, Callanish Capital.
Financing has added further pressure. Higher interest rates, tighter EU creditworthiness requirements, and the UK’s ban on commission-based dealer finance have restricted credit availability. Unsurprisingly, new-car sales remain well below pre-pandemic levels.
Profitability surged between 2022 and 2024, as shortages meant manufacturers could sell fewer cars at elevated prices. With supply now normalised, that pricing power has faded. UK second-hand car prices, adjusted for inflation, are now roughly 30% below their 2022 peak, signalling further pressure on new-car profitability.
Source: Google.
The EV transition has been another drag. Manufacturers are simultaneously funding ICE (internal combustion engine), hybrid, and EV platforms – an expensive undertaking for an industry built on thin margins. A rise in R&D intensity from 7% to 8%, for example, can cut operating profit by nearly 17%, all else equal.
Approaches vary. Peugeot and BMW rely on multi-energy platforms, which reduce R&D costs but compromise efficiency, space, and profitability. Mercedes has opted for dedicated EV architectures – costlier upfront, but cleaner to build and more efficient on the road.
Geographically, Europe’s incumbents face pressure on several fronts. In China, where VW once commanded 40% market share (in a market of only c.100,000 vehicles), foreign OEMs (operating equipment manufacturers) are losing ground amid growing domestic competition. BMW, Mercedes, Volkswagen/Audi and Porsche all posted double-digit declines in Chinese sales in 2025 despite a modestly expanding market. Meanwhile, Chinese brands continue to gain footholds in Europe.
The US has been equally difficult. A weaker dollar and rising tariffs have materially squeezed profits. VW recently disclosed a €4.7bn write-off at Porsche and estimated that tariffs alone have created a €5bn negative volume effect across the group annually – equivalent to an operating profit hit of around €300m a year.
Late 2025 did show signs of recovery. Several Western OEMs, including VW/Audi, Stellantis brands and BMW, all saw stronger momentum as refreshed hybrid and EV models came to market. The new VW ID.7, for example, more than doubled sales relative to its predecessor and helped to lift VW’s European volumes by nearly 6%. Yet weakness in the US and China outweighed this progress, leaving full-year sales broadly flat.
Adding further strain, global carmakers have been forced to confront overoptimistic EV‑uptake assumptions. Stellantis announced a €22.2bn ($26.5bn) writedown as it scaled back EV ambitions amid weaker demand and shifting US incentives. Ford recorded a $19.5bn charge as it cancelled several EV programmes and pivoted back toward hybrids and ICE‑based extended‑range vehicles. GM disclosed a $6bn writedown tied to reduced EV production plans and the unwinding of supplier contracts. These mark a broader industry reset, acknowledging that EV adoption is proceeding more slowly and unevenly than earlier forecasts suggested.
There are bright spots, though. Input costs — especially energy and key battery materials — are stable to lower, and the EV writedowns have forced a more realistic alignment of product strategies with actual demand.
But, as we wrote last week, the most compelling opportunity now lies in autonomous driving. Unlike EVs, where China leads on cost and scale, autonomy depends on safety‑critical engineering, trusted software, regulatory alignment, and deep systems integration – areas where Western manufacturers retain a structural edge. As autonomous systems move from trials into mainstream vehicles, the basis of competition shifts towards reliability, auditability, and rigorous safety compliance, not low‑cost production. Indeed, geopolitical tensions with China could sow the kind of mistrust that pushes the Western consumer back to the brands they know the best. That dynamic favours European and US OEMs, whose engineering depth and long‑standing regulatory credibility create high barriers to entry.
If autonomy, rather than battery scale, defines the next cycle, the competitive pendulum could swing decisively back to Western brands, with the potential upside emerging precisely as the industry’s evolution realigns with their core strengths.
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