Europe car makers prefer lucrative defense contracts while China takes over Europe's idle car plants

Añadido: 2026-05-30

[00:00:00]Hello everybody. Let's talk today about the European defense industry which is not going anywhere. Combined with that the European car industry which is also in huge trouble and is being taken over by Chinese car manufacturers in fact and the very fact that we have actually two European industrial policies. one, forcing Chinese companies to invest in Europe, and two, rearming Europe and promoting its defense industry, which in theory should lead to more jobs and more industrialization. But now combined, actually these two policies have the perverse effect of actually accelerating the de-industrialization, strangely enough. So let's talk about that today.

[00:00:51]So let's start here with the European car industry. Now the European car industry is in deep structural trouble.

[00:01:01]In 2019, still 15 million cars were sold in Europe and that decreased to 13 million in 2025.

[00:01:09]Margins of course also dropped because increased competition. And at the same time of course the market is now shifting rapidly towards electrical vehicles and all kind of hybrids. And this of course is a sector where the Chinese companies are really really strong where the Europeans are really really weak as we our cars were always built on a legacy technology diesel and so forth in internal combustion engines.

[00:01:35]And of course the Chinese who have much more focused on EVs understand that a modern car is a computer on wheels are doing it much much better and especially the German companies have missed this shift enormously and where this problem became most visible was in China because in 2022 foreign car makers still held 60% of the Chinese market that has now dropped to something above 30%.

[00:02:02]Volkswagen for instance sold 30% of its cars in China in the past and made 50% of its profits here. So there was a huge premium on these cars. But now that has completely eroded. Moreover, all the Chinese of course start to export abroad even even more so that China has now actually become the biggest exporter of cars. And of course the Europeans to protect its own industry. Uh this is part of the China shock 2.0. Europe put tariffs on Chinese EV imports. Uh effectively ramping up the tariff rate to 30 to 35% trying to keep the Chinese out. Moreover, these tariffs were also meant to force or incentivize Chinese car companies to produce in Europe as it is 30% cheaper to make a car in China than in Europe. And of course by investing in Europe you create jobs, more employment, local activities and so forth. So this theoretically is a winwin. That indeed is the theory. In reality, indeed, the Chinese car makers are coming, but what they're doing now is not only building uh new factories, green uh field investments, but at the same time, they are now stepping in and acquiring or leasing underused, actually idle European production lines because European companies are obviously selling fewer cars and sitting on all this capacity. You have Leap Motor, who took over plants in Spain and in Poland from Stalantis. You have Cherry who took over a plant in Spain. You have Dongfung who is sharing a plant with Stalantis in France. Uh BYD built new plants in Hungary and Turkey and so forth. Now the idea was always that inviting these Chinese companies in Europe to invest.

[00:03:54]Of course, the idea was also that they then could bring their technologies and share their technology with European companies because indeed Europe has missed this whole transition into electrical vehicles and also the digital transition basically uh because many European companies or European car makers especially the Germans are very good in engineering but don't have the in-house R&D capabilities of software engineers. They don't have the EV platform and that means that actually they don't know how to catch up quickly despite massive investments in RMD and it's been reported that the European car makers are often two, three, five years behind Chinese competitors in critical technologies, not only batteries but also the software connectivity and all these kind of things because of course a car nowadays and especially Chinese cars are almost gadgets which are really really fun for the user and because The Europeans were not able to catch up.

[00:04:51]They then of course started cooperations and joint venture with Chinese EV companies. Volkswager for instance worked together with Xiaoong for their zonal electronic architecture as it's called and autonomous driving. Stalantis acquired 21% in Leap Motor and worked together there for their power trains and of course for the EV platform.

[00:05:12]Mercedes-Benz is cooperating with Gile and so forth. So one can see here that the European brands need to partner with these Chinese EV companies because they don't have this own technology inhouse anymore. Now the problem is that European companies now because the gap the technological gap is rather big and of course the margins are very small and they're operating in a declining market are not really that incentivized anymore to put a lot of money in R&D uh into their own uh innovation and technology.

[00:05:46]They actually rely now increasingly on Chinese companies despite all the efforts they're doing. But it's clear they're not catching up that quickly.

[00:05:54]And of course, the Chinese have a very long-term advantage. Not only is Chinese still leading in the car innovation race, not Europe anymore, the Chinese are launching much uh faster new cars.

[00:06:06]For instance, uh Chinese lounge between 110 or 130 new or heavily redesigned models every year. In Europe, only 25 to 40. That of course is quite interesting for the consumer. Secondly, as mentioned, a car is nowadays computer on wheels. It's a gadget a gadget and here the Chinese are much more much more developed understand this much better than Europeans who have of course this legacy technology and think in engineering terms and the Chinese much more think in terms of customer experience. At the same time, China of course is very good at making really good quality cars for very affordable prices, which of course fits very well for a European middle class, which purchasing power is not that high anymore as it used to be and where the European car manufacturers obviously were much more focusing on premium brands.

[00:06:57]So one can see that there's this massive effort needed from the European German car manufacturers even to catch up and that of course is not that attractive spending lots of money onto something without even knowing if you're able to catch up. And this then of course brings us to the second pillar and that is the defense industry. Nowadays in Europe there's of course a massive push massive investment into defense industry 800 billion euros 1 trillion uh euros uh being allocated apparently and there is this industrial pivot from the car makers to anything but otos basically anything but cars is now good uh to make money and of course don't forget from uh shareholders perspective they have almost a legal requirement of course to make money and of course chase the best profits wherever they are. And indeed, this defense sector looks very attractive. It has high margins. Uh there are long-term contracts. There's a lot of money slushing around, huge consulty contracts, whatever you want.

[00:08:05]And of course, there is protection. The defense sector of course is protected.

[00:08:10]You don't have foreign competitors there. You don't have the Chinese competitors there. And of course this means that this is a protective sector with huge money involved, huge press from the government. This of course is a long-term thing, political protection and so forth. So it makes sense to go to this relatively easy sector compared to the automotive sector where of course they have where the European companies are now losing out increasingly towards the Chinese companies. So you have now indeed European industrial groups allocating more and more of their talent, their capacity, their R&D, their investment away from actually the automotive and going into defense. Uh Volkswagen for instance is now retooling its Oenbrook plant for iron dome components and that is for Israel.

[00:09:00]Renault is stepping into the uh drone uh production. Mercedes-Benz is looking towards precision military hardware.

[00:09:08]Jaguar and Land Rover are looking to uh produce tactical fleet vehicles. Ryan Metal of course is also in the automotive but has retoled that much more now uh towards other military vehicles. Even VDL in the Netherlands who's doing now military drone logistics and so forth. You see they're all shifting basically towards that sector.

[00:09:31]And moreover, where in the automotive industry margins are compressed between two and a half and four and a half percent in the defense sector this is easy 10 15 or even much more. So basically this is much more interesting obviously. Now of course the problem with the defense sector is that Europe is quite late in the game already that we are not a uh historical big manufacturer of arms. Of course the United States is that. So we need to catch up here. We need to develop new technologies also. And the consensus here is for McKenzie for instance, but also the European Commission that it will take three to five years of aggressive factory construction and and building new technologies to catch up in this sector. Moreover, Europe is suffering from extreme market fragmentation. In the US, there is a centralized way of acquiring or or steering this military-industrial complex. In Europe that is not the case.

[00:10:30]France has its own companies, Belgium, Germany, Spain, whatever. There's of course jealousy and mistrust between different countries and this results in all kind of different size of ammunition, different tanks. Uh whatever there is completely not compatible and most likely the the uh the most famous example is development of the new fighter jet, the new Europe fighter between Germany and France, which didn't go anywhere. The main reason was that the French who have technology thought that the Germans just were there to get their hands on technology and the Germans thought that the French were there just so that the Germans could finance everything and that of course was the main reason why it didn't go anywhere. lots of mistrust and on top of that in Europe they're focusing on making the weapons from the last war uh tanks and all these kind of things which of course have the high profit margins and yes the drones are being produced but here of course China is the absolute master in drone production and and of course the moment you have anti- drone systems become better and better uh drones of course will lose much more of its value also and indeed we had Kayakalas only a few days ago saying that there is now uh some trouble in the defense industry. Despite all the investments, the output has not increased a lot. So, of course, it's not really paying off yet. So, to put it all together, we have now a story where in the automotive sector, the Chinese are moving in much much more. In fact, even invited by the European Commission, by the European Union because they wanted them in because they wanted to create all this employment or or or retain all this employment and everything. But of course the issue is now that the European car manufacturers are not upgrading tech their technology skills.

[00:12:16]They're moving towards the uh arms industry and that means that eventually the Chinese are taking over this sector gradually not next year not the year after but 5 10 20 years from now they increasingly become uh much more important and will take over technologically also this European sector. The profits of that of course will flow back to China. The innovation of course will be done in China not in Europe. The Chinese will set all kind of new standards in this sector, not the Europeans anymore. So of course that all increases the Chinese bargaining power even if they have plans in Europe. Uh it's the old game that a company says well we want this and this support you want this and this subsidy and if we don't and if you don't give us this oh then we relocate our plan to Spain or to Morocco or whatever there is. So the bargaining power and everything surrounding that will of course uh will be much more for China and that indeed makes us Europeans actually more dependent in China on the long run. And that then comes of course on top of the very fact that the Chinese market share in the European car market will increase year after year because they're building the better cars, the more competitive cars. So, of course, that also is something good for China and bad for the European companies, which then actually leads to a bigger job loss for the European car manufacturers. And for the defense industry, it's a bit of another story. There is now a lot of money there. That's true. But the end of the day, the European automotive sector still accounts for 6% of European GDP and 3 million jobs, direct jobs, uh, are from people in the production lines in the European car companies. Defense on the other hand has only 0.8 of European GDP and only employs directly 600,000 people. So even if the defense industry will boost will boom that will never be able to replace the automotive sector which of course is the core of one of the big core pillars of the European industrial system. defense industry cannot simply replace the car industry which we are now increasingly losing to uh to the Chinese and as mentioned before Europe is never going to be the best player in the defense industry we're very late in that game so this is not going to happen and the car industry where we used to be very good we're not catching up because we increasingly relying on Chinese technology probably not even trying that much anymore to catch up with them because of course it's easier to make all the now in the defense industry. So this all is going to be exactly the opposite of the stated goal of d-risking from China, reducing dependencies on China. we're going to be actually be more dependent on China and at the same time we're also going to lose more jobs in the car industry because obviously there we're not catching up anymore and it is a declining markets after all where the European car manufacturers slowly are being pushed out by the more advanced Chinese EVs. So this of course brings us now to the big irony where Europe of course is increasingly pushing for this industrial policy, state intervention and so forth copying the Chinese playbook. But in fact it will be very much the opposite result and all that money that goes in here will be completely lost.

[00:15:38]So we have the convergence of these two policies trying to get Chinese companies to invest in Europe. Check that worked.

[00:15:46]boosting the European defense industry starts to work a little bit, but combined there's the perverse effect of Europe de-industriizing even more. Thank you for watching and we see each other next time. Bye-bye.