EV sales in 2025: Where to now for European automakers?
The news just before Christmas that Honda and Nissan have formally agreed to hold talks on a possible merger—a move that would make them the world’s third-largest automaker—highlights the pressure car manufacturers are facing worldwide.
As the industry moves from ICE to electric vehicles, costs and challenges have risen while at the same time competition from Chinese automakers has grown. Indeed, reports indicate that 2025 will be a milestone year for China with sales of electric vehicles expected to outsell traditional combustion engine cars in the country for the first time ever.
It may only be early 2025, but already this year is shaping up to be another difficult one for the automotive industry. In the U.S., the new Inflation Reduction Act means the number of electric vehicles (EVs) and plug-in hybrids that qualify for U.S. tax credits has dropped from 22 to 18 models. Focused on greater domestic sourcing of EV battery parts and their raw materials, this new regulation has impacted VW’s ID.4 electric crossover as well as models from Nissan and Stellantis all of which have lost access to vital tax credits. And this is before Donald Trump takes office later this month. The incoming-President has been vocal about his plans to rescind pro-EV initiatives and place tariffs on foreign-made cars.
For European OEMs, it is a further blow at a time when EV sales in Europe are decreasing, and automakers are struggling to meet national and supranational mandates on the number of new electric vehicles sold.
So, how has the situation reached this point? The answer is a perfect storm of European Union (EU) regulation, scrapping of EV incentives in many countries, reduced consumer appetite and increased competition from Chinese OEMs.
CAFE regulation vs. EV incentives
The EU’s Clean Air for Europe (CAFE) regulation is a long-term, integrated strategy to tackle air pollution and protect against its effects on human health and the environment. It requires car manufacturers to comply with average CO2 emissions for all new vehicles sold in Europe.
Focused on an eventual ban on new combustion car registrations by 2035, the CAFE standard has gradually been reducing the threshold of allowed CO2 emissions per vehicle. As of this year, the limit—previously 107 g/km in 2023—will be lowered to 94g/km. Non-compliance could result in heavy fines, with a potential cost of €95 per excess gram of CO2 per vehicle sold. Depending on the number of automakers who struggle to make these targets, Europe’s automotive industry could face up to €15 billion in fines for excess carbon emissions
While these stricter CO2 emission targets are essential for combating pollution, they present a huge challenge for many players in the sector potentially impacting productivity, raising costs, and slowing the market.
Up until now, the CAFE standard has been largely adhered to, thanks to the rise in electric vehicle sales and improvements in combustion engine and hybrid vehicles.
In 2024, however, EV sales were consistently down across the continent with sales in Germany, Sweden, France, and Ireland not meeting expectations while the UK, despite a late surge in sales in 2024, also missed the 22% target.
There are many factors for this: the removal of purchase incentives, lack of affordable models, buyer concerns about EVs limited driving range, and insufficient charging infrastructure.
The upshot is that European automakers are now caught between a rock and a hard place: to meet the new CO2 limits, they must sell more zero emission cars but the appetite from consumers is flagging.
The issue has become so serious that automakers are pressing the EU to delay the implementation of these stricter rules. Speaking in December, Sigrid de Vries, Director General of the European Automobile Manufacturers’ Association (ACEA) stressed the impact it was having on the industry:
“The industry is running out of time on the 2025 compliance costs—this is no exaggeration. Manufacturers are deciding today whether to “freeze” funds for penalties, cut down production, or buy credits from foreign manufacturers to comply. These decisions are irreversible and must be made before the year’s end.”
China vs. Europe EV Uptake
Europe’s dwindling EV sales stands in contrast to that of China where sales have been continuing to rise. Between 2021 and 2022, sales there grew from 1.3m to 6.8m—amounting to over a third of global EV sales. OEMS in China continued to see growth in 2024 with BYD shipping a record 4.27 million EVs and plug-in hybrids, Li Auto delivering more than 500,000 cars, and Stellantis partner Leapmotor doubling their sales to more than 293,700. 2025 looks set to be the biggest year yet, with domestic EV sales (including BEVs and plug-in hybrids) expected to exceed 12 million vehicles.
Nonetheless, growing trade tensions with the EU are having an effect: Chinese OEMS are under pressure to deliver newer, more tech-led EVs, while the country’s top industry group has urged the government to extend concessions for trading in older vehicles in an effort to entice buyers.
Despite this, however, China remains more clear-sighted in their approach to EV adoption. The Chinese government has set a goal of peaking its emissions by 2030, a full five years sooner than Europe, with new electric vehicles set to make up 40% of cars on the road.
The difference in the two markets boils down to regulation, incentives, and infrastructure. On all points China has considerably more certainty than the European market.
China has invested heavily in EV infrastructure, offers extensive subsidies and tax breaks, and is championing its own EV OEMs. In addition, the latter are heavily focused on producing affordable EV models in contrast to many European automakers which have focused on top-end EV ranges, a factor which had led to an increased interest in Chinese EVs by European consumers.
In Europe, a manufacturing focus on larger, more expensive EVs has meant that the average price of a battery electric vehicle (BEV) has increased by 39% since 2015. This rise in cost combined with a fall in subsidies has resulted in a drop in consumer interest. In Germany, the withdrawal of its subsidy programme in 2023 led to a 37% drop in EV sales year-on-year.
There are also further challenges. Bloomberg Intelligence found ‘range’ and ‘locating a charging point’ the two biggest fears cited by potential buyers across Germany, France, Italy, Spain, and the UK. According to McKinsey 42% of urban EV owners rely on public infrastructure, where charging can be significantly more expensive than at home. Add to this the fact that electricity prices remain high due to the war in Ukraine and its clear why consumer interest in EVs has waned.
Despite these challenges, initiatives to improve charging access and expand renewable energy infrastructure are underway. But achieving these goals will require significant investment—estimated at €240 billion by 2030—to make EVs a practical and equitable option for more Europeans
Consumer retention of ICE vehicles
What we also saw in 2024, and which will be a key challenge for European automakers in 2025, is the consumer appetite to retain internal combustion engine (ICE) vehicles. Due to rapid advancements in battery technology as well as other technologies that impact driving range and charging times, it’s not hard to understand why. At present, EVs tend to depreciate faster than traditional ICE vehicles, however that will stabilise in time.
The increase in new EV sales in recent years has also meant there is now a growing supply of used EVs, especially from fleet companies, saturating the market and driving prices down. Meanwhile, the arrival of more affordable models from China has also impacted the resale values of used EVs.
HEVs (hybrid-electric vehicles) are proving to have much better value retention, highlighting the growing challenges that BEVs face in the second-hand market.
Is there a silver lining?
Taking all these elements together, it’s clear the issue of EV sales in Europe requires a multi-faceted approach if it is to be tackled in 2025.
Many of the issues facing European OEMs are macro-economic factors outside of their control and this has led to the public eschewing buying new EVs. On the other hand, the second-hand EV market is showing growth. The reduction in price means those who may not have been able to afford a new EV can now avail.
This indicates that consumers do still want EVs, albeit at a lower price. An important takeaway that only further highlights the competition that Chinese automakers pose.
But this increase in second-hand sales also indicates there is a market for ongoing revenue from software-defined EVs. European manufacturers historically have prioritised delivering advanced software-defined vehicles (SDVs) compared to that of Chinese OEMs who tend to adopt a more cautious approach. Maintaining this focus on innovation will stand European OEMs in good stead, enabling them to monetise the entire lifecycle of the car faster than their competition.
By incorporating subscription-models into vehicles, European automakers can capture and monetise the second-hand car market even when they are no longer deriving revenue from the sale of the hardware. This will be of critical value in the future, long after the challenge of EVs sales has been addressed.
