By Mark Heinrichs, Equity Analyst at DJE Kapital AG
2025 was an "annus horribilis", a terrible year for the European automotive industry. US tariff policy, the transformation to electromobility and strong competition from Chinese products, both in China and in the rest of the world, brewed up into a perfect storm. The sector's performance was correspondingly weak. Has the bottom now been reached and is a recovery in sight?
US customs policy has an impact on margins
Depending on the regional positioning of the manufacturers, the US tariffs at their current level of 15 percent are squeezing EBIT margins in the automotive segment by one to two percentage points. Measured against the current single-digit margins, this is a considerable proportion. In order to secure the tariff deal, the EU would have to keep its promise in the near future and completely abolish tariffs on car imports from the USA. This would not only benefit American companies, but also European manufacturers who build SUVs in the USA and import them to Europe.
However, the example of Korea shows that Donald Trump is keeping a critical eye on whether the tariff deal is implemented in line with his ideas, otherwise he may threaten to impose higher tariffs again. The US Supreme Court's decision last Friday on Donald Trump's tariffs does not affect the tariffs on cars, as these were issued on a different legal basis. However, it shows that there is a lot of uncertainty surrounding the issue and that US import tariffs on cars are likely to continue for the time being, at least in 2026.
Combustion engines for better margins?
The EU Commission's proposal to reform the "combustion engine phase-out" stipulates that emissions from new cars should no longer be completely avoided by 2035 compared to 2021, but should only be reduced by 90 percent. The remaining ten percent of emissions are to be offset in future by compensation measures such as low-CO2 steel from the EU or sustainable fuels (e-fuels/biofuels). Manufacturers will receive CO2 credits for this, which will be offset against the remaining emissions. Overall, the proposal will only slightly slow down the path to electromobility. However, a significant positive effect on the margins of European manufacturers is also not in sight. The situation is different in the USA, where Donald Trump is taking a much tougher line on CO2 regulation. There are therefore opportunities for all manufacturers with combustion engines on offer to improve their margin mix in the short term.
EU import duties and local content rules are a double-edged sword
The EU currently levies ten percent tariffs on vehicles from China. For purely electric vehicles (BEVs), there are additional company-dependent tariffs of up to 35%, depending on how the EU assesses the manufacturer's subsidies in China. Since the end of 2025, the additional tariffs for BEVs can be avoided if importers conclude a special agreement with the EU for minimum prices per model. So far, only one European manufacturer has concluded such an agreement with the EU for a BEV built in China. On the contrary, Chinese manufacturers are themselves in the process of opening plants in the EU and have greatly increased their exports of hybrid vehicles in particular, which are only subject to the basic customs duty. Volume manufacturers positioned in the lower price segments are particularly likely to suffer as a result.
So-called "local content" rules are therefore currently being discussed in order to promote not only the production location, but also the local value-added share overall. Not least the European supplier industry is interested in the highest possible local content requirements. For manufacturers, it is not clear whether such rules would help them. After all, even locally built vehicles often have a considerable proportion of components from all over the world. Local content rules could further increase input costs. They would probably only help manufacturers with a less global profile. In addition, the international components not only come from countries with unfair subsidies, but also from free trade partners who do not want to be offended. It is therefore clear that regulatory developments do not provide a clear catalyst for a recovery in margins across the sector.
European manufacturers are taking the right measures themselves
European car manufacturers seem to have understood that they have to achieve the turnaround themselves. At the heart of this are new, competitive products and falling costs. Numerous new models were presented at the IAA 2025 and will be launched on the market later this year. Significant cost savings have been achieved, particularly with new electric vehicles. This should reduce the negative effect of electric vehicles on the margin mix in the future. Manufacturers also want to achieve margin parity between BEVs and combustion engines by the end of the decade. However, the full effect of the current model offensives will not be visible until 2027, when the start-up phases have been completed and the products are available worldwide. At the same time, the necessary cost-cutting programs may lead to negative one-off effects, which already accumulated last year. This must also be expected in 2026. All of this therefore does not suggest a strong recovery in margins this year, but rather a gradual recovery over a longer horizon.
China remains the industry's problem child, but with a glimmer of hope
For manufacturers with a high proportion of sales and earnings in China, the stabilization of the market environment there is particularly important. According to UBS, domestic Chinese manufacturers have expanded their market share in recent years to 68% (as of January 2026) at the expense of the former international top dogs. The lost market share does not appear to be easy to regain in view of changing customer preferences. The task now is to achieve stable volumes and a sustainable price level at the lower level. Despite the contraction in business, it can be assumed that manufacturers in China will continue to make positive contributions to their global margin mix.
"At the end of 2025, the Chinese government regulated commissions that banks paid to car dealers for arranging vehicle financing. Some of these commissions were passed on to end customers as discounts, which further intensified price competition." This appears to be having an initial impact: According to UBS data, the market shares of Europeans remained stable at 14.5 percent in January 2026 compared to the same month last year, while Chinese brands lost 1.3 percent year-on-year. There are therefore initial glimmers of hope, although these would first have to be confirmed by stable volumes over the course of the year.
Autonomous driving as an opportunity and a risk
In the form of autonomous driving, the car is probably the most advanced implementation of so-called "physical AI", the integration of artificial intelligence into physical products. However, many traditional manufacturers would be overwhelmed by developing fully autonomous driving themselves, which is why the industry is rightly focusing on seeking partnerships with technology companies. In January, NVIDIA presented a new virtual platform called "Alpamayo" for the development of autonomous driving at the CES electronics trade fair and is expanding its offering for the coordination of high-performance computers, sensors and software in vehicles. On the one hand, this is good news for traditional OEMs, as they can keep their development costs in check by using these services. They will initially be able to achieve attractive additional margins with corresponding optional extras or subscriptions for assistance systems, even if the greater part of the added value remains with the originators of the technology.
In the medium term, autonomous capabilities will no longer be a differentiating feature if every manufacturer can purchase a corresponding solution. In the long term, however, autonomous driving will call into question the business model of selling vehicles, especially to private individuals. There is a risk that traditional OEMs will only become contract manufacturers for platform operators of autonomous vehicles. Those manufacturers that not only serve a mobility need but also offer a lifestyle product for which customers pay a price premium are probably best positioned to counter this risk of disruption.
Conclusion: 2026 could be a year of transition
After the "annus horribilis", the terrible year 2025, there are no visible short-term catalysts for 2026 that could lead to a dynamic margin recovery this year. However, manufacturers are setting the course in the right direction, so margins should recover in the medium term in line with the historical cyclical pattern. However, the question remains as to whether the margin highs of the last cycle can be reached under the new framework conditions. This question will separate the wheat from the chaff among manufacturers.
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