A Davignon Plan for the European car industry

"European carmakers have been overtaken by Tesla and the Chinese in the electric transition; in 2023 they posted record profits and paid high dividends instead of investing in innovation." These and other criticisms are circulating in the corridors of European institutions in Brussels.

"The Green Deal is a bad deal: it failed to create demand for electric cars like in China, the 2035 deadline to stop selling petrol and diesel cars is ridiculous, and the penalties on manufacturers are   creating a sword of Damocles on the accounts of the European OEM’s and harming the industry." This is the tone of the growing criticisms of the Green Deal coming from European car manufacturers.

In recent weeks, the EU has launched a proposal for a new Green Deal, one that is long on ambitions but short on means to realize them . The 2035 "ban" on selling traditional cars is confirmed, albeit with some flexibility, along with the penalties. As for public investment in what is arguably the most crucial element to boost demand for electric vehicles—charging infrastructure—there appears to be a €20 billion shortfall needed to reach the target of 3–3.5 million charging points by 2030, up from the current one million (mostly funded by private sources). In contrast, China will already have 4 million public charging points by 2025, supported by massive infrastructure investments amounting to nearly €20 billion in 2024 alone.

For their part, European manufacturers are calling for a return to past policies: indefinite removal of the 2035 ban and the penalties, public subsidies (especially for battery gigafactories), and above all, tariffs on Chinese cars.

The truth is that the weak demand for electric vehicles in Europe is just the final straw in a much larger and older set of problems facing the European car industry. Overcapacity, which has been latent for years, has recently exploded as the market shrank from 18 million vehicles in 2007 to just 10 million in 2023. Added to this is the cost of maintaining two parallel product lines (electric and traditional), a burden that specialist EV makers like China's BYD and Tesla do not have. The biggest European player, Volkswagen, has essentially lost its biggest global market—China—where it has been completely overtaken by domestic manufacturers offering aggressively priced vehicles. And to top it off, European carmakers are lagging significantly in digital technologies.

And tariffs on Chinese cars? They're not the answer. Tariffs and voluntary export restraints worked in the 1980s against Japanese automakers because the Japanese advantage was managerial—innovative production techniques like “just-in-time”—not structural. Western manufacturers caught up within 15 years. But today’s gap with Chinese EV makers is structural: a domestic market larger than the US and EU combined (15 million EVs versus 4 million), and competitive advantages in battery material production, with far lower labor and energy costs.

Delaying the EV transition further in Europe will also hurt consumers, giving them less time to adapt (home charging installations, changes in car usage habits) and burdening them with higher prices due to tariffs. The European car industry will be left serving a shrinking market with uncompetitive products. It is unlikely to survive in the long run. The best managers already see the writing on the wall—some now work for Chinese automakers (e.g., Alfredo Altavilla), others have moved to more promising sectors (e.g., Luca De Meo at Kering).

This is why the European Green Deal must be completely rethought—not just to eliminate the ill-conceived bans and penalties. Brussels must revise its core objective: it can no longer be about restoring the former glory of an entire strategic sector of the European economy by forcing OEM’s to invest early in electric cars so that they can be the global leaders of the future. Instead, it should focus on ensuring the survival of at least a couple of manufacturers, creating opportunities for top-tier component suppliers ( tires and brakes are also needed in electric cars and leading innovative global players may  grow with Chinese OEM’s as customers) and advanced technologies where Europe can still compete, like software. It must also massively increase investment in charging infrastructure—not to rescue European manufacturers, but to help European consumers keep up with innovation:  young Europeans  declare that their next cars  will be electric.

The most important Green Deal initiative, however, should be to orchestrate the restructuring of the car industry—putting an end to the subsidy race between EU countries trying to keep plants open, and promoting consolidation among companies. All of this must be backed by a huge social transition plan to re-skill and redeploy a significant portion of the 12 million workers in the automotive sector and its supply chain.

Something similar has already been done. In the 1970s, Europe’s steel industry entered a deep structural crisis due to slowing demand and rising energy costs. Governments competed to subsidize their national champions, often state-owned. In 1976, the EU stepped in. Under the leadership of Etienne Davignon, then European Commissioner for Industry, it developed and implemented a plan to coordinate national policies, reduce capacity, and shut down inefficient plants. This was accompanied by a massive social plan that cut steel sector employment by 70%.

Today, the European car industry needs a Davignon Plan—not protectionism or a rehashed Green Deal.

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