The European automotive industry is bracing for a tumultuous 2025, shaped by regulatory pressures, global competition, and shifting market dynamics. Yet, despite the challenges, the sector also offers attractive opportunities for investors seeking long-term growth.
Challenges: A Complex Road Ahead
Stricter Emission Targets
The European Union’s carbon dioxide emission reduction targets for passenger vehicles are among the most stringent hurdles. By 2025, automakers must meet a target of 93.6 grams of carbon dioxide per kilometer, a 15% reduction from 2021 levels. Non-compliance could result in fines totaling €13 billion, with Volkswagen AG and Porsche AG identified as the most exposed, according to Pal Skirta, an analyst at B Metzler Seel Sohn & Co AG.
Future targets only heighten the pressure: by 2030, emissions must be reduced to 49.5 grams per kilometer. Automakers face not only financial penalties but also the challenge of overhauling production to align with these aggressive goals.
The Electric Vehicle Transition
Electric vehicle (EV) adoption remains central to achieving regulatory objectives. Western European EV sales fell to 1.9 million units in 2024, accounting for 16.6% of the market, according to Schmidt Automotive Research. While 2025 sales are projected to climb to 2.7 million units (22.2% of the market), meeting the EU’s target of 80% EV sales by 2030 will require a monumental shift.
Heavy discounting, the scaling back of government subsidies, and the high costs of electrification have weighed on profit margins. “The amount of money available to stimulate demand is going to be under severe pressure when manufacturers have very finite resources,” said Mike Hawes, CEO of the Society of Motor Manufacturers and Traders (SMMT).
Geopolitical and Economic Risks
The European Commission’s decision to impose tariffs on Chinese EV imports has heightened tensions, with potential retaliation looming from China, a key market for German automakers like BMW, Mercedes-Benz, and Audi. Any tariffs imposed by China could undermine the competitive advantage these manufacturers currently enjoy through tax breaks and low-cost operations in the region.
Inflation and high interest rates are further squeezing profit margins, leaving automakers with limited funds to invest in research, development, and innovative offerings to compete with Chinese EV models.
Opportunities: Bright Spots for Investors
Attractive Valuations
The sector’s current valuation offers significant upside potential. The Stoxx 600 Autos and Parts Index trades at a discount of more than 50% compared to the broader Stoxx 600 Index. For example, Volkswagen AG has a forward price-to-earnings ratio of less than four times its estimated 2025 earnings.
“The strong performance in December seems fueled by the hope that estimates are finally low enough, new tariffs are priced in, and on that basis, autos still look cheap,” noted Stifel Financial Corp. analyst Daniel Schwarz.
Turnaround Stories and Momentum
Several individual stocks show promise:
- Stellantis NV: Following a difficult year, the automaker received a boost from the ousting of its CEO, Carlos Tavares, signaling a potential turnaround in production volumes. Bank of America analysts are optimistic about its prospects.
- BMW AG: Despite challenges, including a recall and high energy costs, BMW received an upgrade from Jefferies for its strong positioning on emissions compliance and growth in China.
- Volkswagen AG: In the end of 2024 AIR Capital’s Pierre-Olivier Essig assigned a bullish price target of €180, emphasising the brand’s resilience. “Volkswagen is a fantastic story for next year,” he said. “The funny thing is everybody hates Volkswagen, but a lot of people like the cars. It’s exactly when you have to buy it.”
EV Market Expansion
The projected 40% growth in EV sales for 2025 presents a significant opportunity. Automakers that can manage compliance costs while offering compelling EV models may capture significant market share, especially as global demand accelerates.
Market Cycles
Investors familiar with the cyclical nature of the automotive industry see potential for recovery. “The industry is used to cycles,” said Fabio Hoelscher of MM Warburg & Co. “Probably beginning of 2025, I would expect some relief.”
Outlook for 2025
The European automotive industry faces a year of transformation. With tightening regulations, shifting market dynamics, and geopolitical tensions, automakers must navigate a complex landscape. Yet, for investors, the sector’s depressed valuations and signs of resilience present compelling opportunities.
As Morningstar analyst Rella Suskin noted, “It’s likely going to be a fight for market share with limited market growth.” However, the long-term potential for recovery and growth remains, making 2025 a pivotal year for the sector and its stakeholders.
These materials are for information purposes only. They do not post a buy or sell recommendation for any of the financial instruments herein analysed.
Deltastock AD assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon the information on this page.
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