[China’s offensive in Europe] - Auto Industry: Will Europeans Be Able to Play Their Cards Right?

This is the first part of a two-part paper. The second part will consider China’s offensive regarding LLMs and open source.

Amid a period of silence, if not a total freeze of political contacts between the EU and China, Chinese companies have continued to adapt their international strategy with increasingly significant implications for the European single market. Two domains are especially noteworthy: the automotive industry and the digital sector. The former, a legacy of the Second Industrial Revolution that entered the Third with automation, is nevertheless struggling to integrate the Fourth Industrial Revolution (big data information and communication technologies) due to the inertia of companies with human resources inherited from the past. Nevertheless, it remains the leading sector of employment in industry. As for the digital sector, now dominated by artificial intelligence and its applications, it is unfolding before our eyes at an unparalleled speed, including, of course, by profoundly transforming the industries that emerged from previous revolutions. This sector will dominate the foreseeable future.

Despite their inherent differences, some aspects of the strategies adopted are common to both. And they will gradually come closer as autonomous driving and electrification become fully adopted in Europe. The same strategies can be applied to other sectors, in what appears to be a standard playbook by China. This raises the pressing question of what constitutes an appropriate response, from the perspective of nations, and, at least as importantly, by the companies themselves. Standards and regulations can provide a framework for the production of cars or software, but they cannot replace the producers, and they will not save an industry by themselves. 

The following analysis, along with the one on open source and LLMs, while not an exhaustive account of these shifts, aims to offer preliminary perspectives and strategic orientation for European stakeholders, both private and public.
 

Official Rigidity, Corporate Flexibility

China’s automotive sector has already started a tsunami, one that is still underestimated. Parallel ambitions are surfacing within the digital realm, evidenced by official policy and recent advances in Chinese open source ecosystems. It is often difficult to decipher whether these trajectories are state-mandated top-down strategies or a bottom-up commercial evolution driven by companies.

While the latter scenario appears credible in the auto industry and is fueled by the fierce domestic competition within China, the impetus behind open source expansion is undeniably rooted in a strategic geopolitical and commercial calculus.

In both cases, Chinese companies are deeply embedding themselves within the European economic fabric, while making what can best be described as tactical concessions: forming partnerships with European firms. Such alliances are neither the standard practice nor an exception. Instead the flexibility functions as a negotiating tool. While its positive side is that the range of possibilities is vast, two negative drawbacks appear. China, a powerful and centralized state, has long avoided negotiations with European Union institutions, and it is far from proven that starting new meeting formats will change this. In any case, everything is reversible, especially since Chinese leaders are further expanding their arsenal of sanctions and retaliatory measures or, more generally, their ability to restrict foreign investment in their economy.

Flexibility can in fact work in the opposite direction, particularly once China’s positions are strengthened within agreements or joint ventures. We should therefore not misrepresent these developments as something that they are not. It is true that in June 2026, China and the EU announced new "roundtables" to address trade disputes, as well as a mechanism to monitor trade flows. For now, there have been no actual meetings or tangible results, although a European negotiator has been in Beijing in late August 2026. We have no indication that China is shifting its overall official positions in trade or investment negotiations, let alone its economic policy of self-sufficiency. The latter, in particular, had contributed to the collapse of imports from Europe.

China continues to oppose the restrictive measures adopted by others on grounds of security, quotas, or cybersecurity risks (export bans). And yet, at the same time, it continues to strengthen its own security arsenal and equips itself with the legal and practical means to impose restrictions, sanction, and punish its partners, or Chinese companies themselves.

Chinese companies are, for example, prohibited from responding to requests for information from European jurisdictions deemed by China to be extraterritorial in nature. This has recently concerned practices in China’s e-commerce sector. The grounds invoked are often so vague that they can be used to justify any form of coercion against one party or another.

Talking of flexibility therefore does not imply predicting a softening of China’s positions, as many governments and think tanks have hoped. This would take the form of concessions acknowledging the massive trade imbalances, a rebalancing of the Chinese economy. But rather, in a geopolitically useful and watered-down version, friendly favors granted to this or that party. The Chinese government has long been effectively using bilateral negotiations as a tool to drive a divide between its partners.

Unless it is a matter of a misjudgment or an uncontrolled action on the part of a company, decisions are made based on overall considerations and the pursuit of profitability. In this context, being "a friend of China" means, first and foremost, accepting favorable terms. There is no "free lunch".

This has already been demonstrated by the country’s stinginess when it comes to multilateral development aid, its non-mandatory contributions to the United Nations system, the rarity of debt relief, and its tough negotiations over energy purchases with the "friend without limits", which Russia is supposed to be. China certainly does not have the monopoly of selfishness on the international stage, but its behavior must still be recorded.

Regarding the electric battery sector, where Beijing commands 80 percent of the world’s output, China’s commercial reach in Europe is rapidly aligning with its global dominance. By 2025, the combined market share of CATL and BYD reached 55.6 percent within the European Union. This competitive edge is sharpened by a 35 percent price disparity compared to local production. The EU remains almost entirely reliant on Chinese supply chains for lithium iron phosphate (LFP) technology, whether sourced via direct imports or embedded in finished vehicles.

Such market dynamics are the result of decisions made over the past two decades. A watershed moment occurred in 2010 when Volvo was acquired by Geely for a very modest sum (€1.33 billion) in 2010, and the Volvo plant in Ghent (Belgium) alone accounts for nearly 2 percent of "European" production. Following this, from 2021 onwards, investments have focused on battery cells and materials: CATL in Germany and Hungary, AESC in France and the United Kingdom, EVE and Sunwoda in Hungary, CALB in Portugal, Gotion-InoBat in Slovakia, and CATL-Stellantis in Spain.

According to joint assessments by German think tank MERICS and the U.S. consulting firm Rhodium Group, the EV supply chain will account for 93 percent of all Chinese automotive FDI in 2025. But simultaneously, the total valuation of newly announced greenfield investments receded to €5.2 billion in 2025, continuing a downward trend from €5.7 billion in 2024 and €16.9 billion in 2023. Furthermore, out of the 228 initiatives Beijing introduced in Germany during 2025, 44 percent were dedicated primarily to marketing and distribution, whereas a mere 21 percent focused on R&D and production-a pattern consistent regardless of the investment sector.

From this perspective, we must also consider the broader automotive parts sector. Market penetration there is less visible but at least as significant. Overall, China’s share of revenue among the world’s top 100 automakers had already risen from 1 percent in 2012 to 9.1 percent in 2023. Furthermore, two studies highlight that between 2019 and 2023, Chinese entities finalized 40 acquisitions-either partial or total-of European equipment manufacturers. This momentum is set to continue, with 17 additional new sites scheduled for development across the continent through 2026. While battery production is a significant driver, these expansions go far beyond that.

During the first wave, decisions appear to have been driven by a strategy of rapid European approval and the acquisition of local expertise. Nowadays, regulatory constraints -particularly to avoid customs surcharges-coexist with a strategy of maintaining industrial proximity to assemblers and major equipment manufacturers. This operational shift leads vehicle bodies, engine blocks, subframes, interiors, aluminum parts, and thermal components to be produced locally. This has led to a combination of company-owned plants (CATL, Tuopu, Linglong, Sanhua, Xinquan) and acquisitions or joint ventures (Minth-Renault, KS Huayu-Rheinmetall, Chery-Ebro, CATL-Stellantis).

Distribution partnerships are indeed becoming increasingly common. They are often driven by a more tactical approach from the Chinese partner or buyer. BYD first used Hedin Mobility in Germany, then acquired the group’s German subsidiary and two pilot stores, while continuing to use it as a distributor elsewhere. To date, only Stellantis represents an exception by having managed a more ambitious arrangement involving a minority Chinese stake in a joint venture with Leapmotor. This collaborative vehicle has already rapidly scaled its European presence, leveraging Stellantis' network to establish over 850 sales and service locations across Europe.

Circumventing the EU and Next Steps

Chinese commentators sometimes portray these developments as the natural course of the market, unhindered by the "politicization" of negotiations with the European Commission, and criticize the Commission’s "industrial protectionism," rarely incriminating any particular Member State: after all, it is important to keep all bilateral options open… In reality, however, the Commission has taken a stand in favor of establishing Chinese joint ventures, preferably in Europe, and by setting localization quotas. It also granted the first tariff exemption for EVs (Volkswagen Anhui for the Cupra Tavascan model), provided that the company meets a minimum price requirement, a sales quota, and a local content requirement. With few exceptions, however, Chinese companies seek to retain a majority stake. The former Stellantis CEO himself commented on the Leapmotor exception deal, which he negotiated: "I’ve always wondered why the Chinese company Leapmotor agreed to the deal under which Stellantis would take a 21 percent stake in the company and a 51 percent stake in its business outside of China. I have only one answer: one day, if Stellantis runs poorly, Leapmotor will be in a position to buy it out." It should be noted that, at present, the major Chinese automakers are far from having exhausted their potential to lower prices in the European market, leaving this option to smaller domestic competitors that lack sales and service infrastructure in Europe.

Therefore, China’s positioning in the automotive industry is both multifaceted and adaptable. The visibility of its most prominent aspects, such as exports and equity investments in automakers that are increasingly little more than final assemblers, should not obscure this strategic depth. In particular, if the European Union imposes increasingly higher countervailing duties, it is likely that Chinese companies will shift their strategy toward setting up assembly lines in Europe. The same will be the case for equipment manufacturers, battery producers, and digital companies.

We have yet to see the impact that the adoption of autonomous driving will have-a development currently being resisted by a number of European countries, including France. Behind Tesla, which has an undeniable lead thanks to the experience it has gained as the first to experiment with the technology, China is catching up in the realm of "computers on wheels," which is what cars have become. It already dominates the global market for LiDAR (laser remote sensing), having drastically reduced its manufacturing costs. By pursuing a futile defensive battle-in the name of road safety, even though statistics actually show a decline in accidents involving autonomous vehicles-European countries risk falling even further behind, just as has already happened with electric vehicles.

What Are the European Responses?

In conclusion, with regard to the automotive industry, it is up to Europeans to take a tougher stance, either by implementing a near-total ban, as the United States has done, or, as a second option, by setting high mandatory localization thresholds for Chinese investments in the broader automotive sector. This must also include subcontractors and parts suppliers. Finally, a third option is to adopt the approach that Latin America long took toward foreign manufacturers: to give up on an independent manufacturing industry and become merely a final-assembly hub, with high purchase taxes and, generally speaking, a technological lag behind the rest of the world.

Clearly, the final scenario represents the worst option, as it would set the stage for a slide into underdevelopment and industrial dependence. The first solution of closing the market would by far be the best if recent experience had not shown that nearly all European manufacturers have taken advantage of barriers to preserve their short-term margins and, as is often the case, have passed on the cost of protectionism to consumers. However, the lack of a collective strategy among manufacturers, the economic diplomacy of member states encouraged by China, and the persistent disconnect between the auto industry and companies at the forefront of the digital revolution make a positive outcome highly uncertain.

Thus, for better or worse, the only option remaining is to negotiate "step by step" with the Chinese manufacturers and, behind the scenes, with the Chinese government. We have shown that China combines a rigid stance on principle, to maximize its negotiating leverage and options for countermeasures, with a certain degree of practical flexibility. At the current pace of Chinese production in this sector, it will not be able to do without the European market, financially speaking -not to mention in terms of employment, which is in any case destined to decline with automation. From this perspective, the European Industrial Accelerator Act (IAA), in which EVs play a central role, must be viewed as an asset to be strengthened, both in terms of its content and its effective and verifiable implementation, but with a view toward negotiation.

This European card must be understood for what it is: a losing hand to play, because it is clear that the European automotive sector will not emerge from this unaffected. Far from it. As in past cases, such as the Japanese auto industry in the United States starting in the 1980s, the industrial landscape will undergo significant changes, and this will obviously carry the risk of a breakdown in European unity. Yet without cohesion among member countries, and auto or supplier companies, we all lose together.