Made in Europe 2025: Can Local Content Requirements Save Europe’s Auto Industry?

Europe’s auto industry faces mounting pressure as falling Chinese demand, intensifying competition at home and in third markets, and US tariffs strain profitability and employment. The use of traditional trade defense measures to shield industry has proven slow, politically divisive, and only partly effective. As a result, the European Commission is turning to other tools to restrict market access, safeguard jobs, and buy time for domestic producers, with local content requirements emerging as the preferred policy lever. Their effectiveness will hinge, however, on the scope of such rules, how local content thresholds are defined, and on the effectiveness of compliance. In this note, we explore the policy options under discussion and what they could mean for automakers and suppliers ahead of a proposal from the Commission, which is due later this year.

Local content requirements: The EU’s silver bullet for the auto sector?

Once the pride of Europe’s industrial economy, the auto sector is now in clear distress. Demand for European cars in China is weakening as local competition intensifies. That competition is spilling into third markets and Europe, reducing European exports and eroding production. On top come punitive US tariffs, surging energy costs, and an expensive transition to electric vehicles.

These realities are starting to show in production, trade, company, and jobs data. European auto suppliers announced 54,000 job cuts in 2024 and another 22,000 in the first half of 2025, while auto production and sales fell 1.9% and 2.8% year-on-year, respectively. Germany alone accounted for 45,400 job losses across OEMs and suppliers. Europe’s auto trade balance is deteriorating, with exports losing ground and imports of Chinese cars and auto parts continuing to climb (Figure 1). Meanwhile, OEMs and suppliers are revising profit expectations downward, with several turning loss-making over the past year—including Stellantis, which recorded a net loss in the first half of 2025, and BMW, which cut its profit guidance twice.

This has increased the pressure on Brussels to step up support. But concern is growing that the use of traditional trade tools is not having the desired effect. The Commission’s countervailing duty case against Chinese-made EVs took a full year to finalize, exposed divisions among member states, and has done little to stem the tide of Chinese exports (Figure 2). Chinese auto investment in Europe is slowing, as producers find exports a more attractive strategy than investing in high-cost European production—especially at a time when Chinese greenfield investments are coming under growing scrutiny for failing to create jobs and the sharing of know-how. Some Chinese firms are instead turning to the EU’s neighborhood as an alternative base (Figure 3). As a result, the Commission is exploring new options, including the use of non-price criteria—measures that condition market access based on how and where products are made, for example, according to their carbon footprint, labor standards, or the extent of local content. By tying access to these criteria rather than price, Brussels aims to shelter EU-based auto firms while aligning trade policy with broader industrial and climate goals.

Non-price criteria come in many forms. One can restrict Chinese market access based on cybersecurity rules, as the US has done (see our note Car Trouble: ICTS Rule Rewires Global Auto Supply Chains). The EU is expected to publish an ICT toolbox in the coming weeks that is likely to cover a broad range of connected products, including cars. But as the bloc’s 5G toolbox in 2020 showed, imposing standards on an EU-wide basis is challenging given that member states retain power over national security-related policies. Even if a select group of member states agreed on the need for strict cybersecurity standards, the free movement of cars within the EU would make enforcement extremely difficult. The upcoming review of the EU Cybersecurity Act could offer a chance to make toolbox findings binding, but the absence, so far, of pressure from the Trump administration to follow Washington’s lead in banning Chinese connected cars has reduced the likelihood of a strict European approach.

Against this backdrop, other non-price criteria—focused on environmental, resilience, and local content considerations—are gaining support. The Commission has tied EU battery funding to resilience, defined largely as diversification away from China. France and the UK have linked their national EV subsidies to environmental criteria that, in practice, exclude non-European producers. However, these measures remain piecemeal and have not presented significant obstacles for Chinese firms.

Under pressure from Europe’s struggling supplier base, the Commission has begun to focus on local content requirements (LCRs) as the next big tool in its arsenal. The push reflects both the political appeal of LCRs as a direct lever to protect jobs and industrial activity, and a growing view that a “buy-European” approach invites less retaliation than an explicit ban on Chinese cars and technologies. It also responds to the fact that other major economies are introducing their own buy-local frameworks that risk further disadvantaging European firms. Support for tighter local content rules is growing among Europe’s suppliers (Figure 4).

References to content thresholds in the Industrial Decarbonization Accelerator Act consultation and recent statements from France and Italy signal rising political momentum—but not yet a consensus. Carmakers warn that stricter sourcing rules could raise costs, weaken competitiveness, and invite retaliation.

CLEPA notes that local content remains high for internal combustion engine (ICE) vehicles—around 76% of components by value are sourced within Europe—but much lower for EVs,¹ where OEMs rely heavily on batteries and parts from China and Korea. The association warns that localization rates are set to decline further as automakers increasingly turn to Chinese suppliers to cut costs and tap faster innovation. Mercedes’ new CLA will source its engines from China, while Renault’s new E-Twingo will be assembled in Slovenia with powertrains and body parts supplied from China.

How to assess the EU’s local content measures

We see several pathways for how the EU could implement LCRs in the auto sector.

A light-touch local content model

The “light-touch” approach would apply local content requirements mainly to public procurement and to foreign investors receiving public funding—avoiding broader obligations for private market activity. Its appeal lies in political feasibility, legal defensibility, and minimal disruption to supply chains—reasons why OEM groups such as ACEA favor it.

LCRs would likely be attached to the Clean Vehicles Directive, which obliges member states to promote low-emission vehicle purchases. The European Commission has signaled plans to add a “Buy European” preference criterion to public procurement—a lever that could easily be adapted to include local content thresholds. Such measures would target government fleets—police, emergency services, and public administrations—where European OEMs have strong sales. Maintaining eligibility for these contracts could push firms to sustain or raise EU sourcing, with spillover effects on broader production planning to preserve economies of scale.

The limitation of this approach is its narrow scope. Public procurement accounts for well below 1% of EU passenger car sales—around 20,000 units in Germany in 2021—though the share is higher for commercial vehicles.

The approach would also offer only limited protection for Europe’s auto industry. Export-oriented or non-European producers—such as Chinese, Japanese, and Korean OEMs—would likely refocus on the 98% of the market not covered by such rules, strengthening their position in corporate and consumer segments. Firms more reliant on public sector contracts would face “Buy European” obligations to retain access, potentially eroding competitiveness elsewhere.

A related measure would extend local content conditions to public funding. Grants under programs such as Spain’s PERTE VEC or national incentive schemes like Hungary’s battery aid and France’s support for Envision AESC could be tied to content targets. However, major Chinese investors such as BYD or CATL may proceed without subsidies, limiting leverage, while smaller firms would simply invest elsewhere or continue exporting.

Without complementary tariff measures or added incentives, the light-touch model would do little to drive new EU-based production. Its narrow scope risks raising local content only at the margins. To reinforce its effectiveness, the Commission could pair it with trade defense tools—such as extending countervailing duties to low-value assembly operations by Chinese automakers seeking to circumvent tariffs through limited local production, including planned GAC and Xpeng facilities in Austria.

Industry compromise: Super credits for local content

A middle ground between suppliers’ calls for stronger “Buy European” measures and OEMs’ resistance to rigid sourcing rules could center on super credits. The idea would be to reward “Made in Europe” vehicles—most likely EVs—by granting them extra credit toward fleet emission targets. This would, in turn, allow manufacturers to sell more internal combustion engine (ICE) vehicles without breaching CO₂ limits. The mechanism appeals to both sides: Suppliers view it as a way to incentivize local production and preserve segments where European firms remain competitive in ICE components, while OEMs see it as a tool to maintain regulatory flexibility and sustain higher-margin ICE sales.

While a super credit–local content linkage could support European industry, the impact on Chinese automakers would likely be limited. Chinese firms are expanding in ICE segments that are not subject to countervailing duties and continue to benefit from pooling arrangements with Western OEMs—earning additional revenue by selling them emission credits. These benefits may decline as European manufacturers rely less on such credits under a super credit system. Yet, because Chinese OEMs are primarily focused on EVs, they are largely unaffected by the EU’s fleet emission standards that penalize ICE-heavy producers. As a result, they would face little pressure to localize high value-added manufacturing in Europe to qualify for potential super credit incentives.

From Beijing’s perspective, such a policy shift could even reinforce perceptions of Europe’s waning competitiveness in the global EV market. By easing compliance requirements for ICE vehicles, the EU risks weakening investment incentives for advanced electrification at a time when EV adoption is accelerating across emerging markets. And while Europe’s political climate around green policy has cooled, strong support for the bloc’s climate targets—including from European Commission President Ursula von der Leyen—means that any move perceived as diluting fleet emission standards would likely face significant political resistance.

Non-price criteria for private procurement

This approach would build on the limited public-procurement model by extending local content requirements to private procurement, primarily through corporate fleets, which account for roughly 60% of new car sales in the EU—a far greater lever than public procurement.

The EU could either mandate that corporate fleets purchase cleaner, locally made vehicles or incentivize member states to link fleet tax benefits and depreciation schemes to EU-made zero-emission cars—both steps would strongly encourage localization.

A key question is whether the rules would cover only zero-emission vehicles—boosting EU content in EVs—or all fleet purchases, which would also protect ICE models. Given the EU’s focus on greening fleets, the former is more likely, though it would limit the measure’s impact over the next five years while ICE sales remain significant. It would still offer some protection against Chinese competitors, whose European lineups are mostly electric, even as China’s ICE exports to Europe—now accounting for about 31% of total car shipments—continue to rise.

Regulating corporate fleets could be highly effective in promoting local content, because this would capture a large and critical market segment for OEMs producing in Europe. It would also help alleviate European concerns about Chinese OEMs because they are highly dependent on fleet sales. Nearly 90% of BYD’s sales in Germany in the first nine months of 2025 were to corporates. Under tightened corporate fleet rules, those sales would be curtailed. BYD would have to produce locally, and even then, its Hungary operations may run afoul of tighter European content rules. Similarly, European OEMs looking to source more from China would have to think twice, and it would create major pull effect for European battery production.

However, this option faces strong resistance. OEMs and several member states already oppose binding zero-emission vehicle targets for corporate fleets, making additional local content rules even harder to accept. The pushback reflects a broader reality: Europe’s auto industry still relies heavily on ICE profits, while the EV market is increasingly dominated by new entrants disrupting established players.

Wild card: Member states step up

Several large member states with major auto industries could also move ahead independently. France has amended its EV subsidy scheme—which provides up to €4,000 for zero-emission vehicles with an environmental score above 60, a threshold that effectively excludes most East Asian producers—to add an additional €1,000 bonus for vehicles whose assembly and battery production take place in Europe.

The German government, under pressure from the Social Democrats (SPD), is also considering reintroducing its EV grant and restricting eligibility to EU-made vehicles. Both the French plan and the mooted German program are targeted at lower-income households and mass-market segments, meaning they would primarily affect high-volume, lower-cost models rather than premium vehicles, which are often bought by corporate fleets.

Given that France and Germany together account for around 40% of new car sales in the EU, these national policies could be a powerful lever. To be truly effective, however, they may need to be complemented by EU-level measures. If introduced alongside corporate fleet requirements, they could close the remaining gap in the non-corporate fleet market, encouraging private households to choose European-made vehicles that become price-competitive with Chinese models once grants are applied. If, however, corporate fleet rules are not implemented, substantial space would remain for Chinese automakers to compete through exports.

Unresolved questions

Apart from the instrument that the Commission plans to use to introduce local content requirements, there are other important factors that will determine their effectiveness. These include the following:

How to define “EU content”?

An open question is how local content will be defined. The upcoming Industrial Accelerator Act—expected in December—could settle this question. Local content is most likely to be defined at the vehicle level, but some industry groups are lobbying for a group-level approach that would allow manufacturers to offset low-content models with higher-content ones. This could allow European OEMs such as Renault or Stellantis—whose fleets generally have high European content—to market heavily China-supplied models like the E-Twingo or Leapmotor as “made in Europe.”

CLEPA, reflecting supplier interests, advocates a vehicle-level definition that measures the share of “Made in EU” components in the total value of all parts used in production. A component would qualify as EU-made if its last substantial transformation occurred within the bloc and it meets minimum thresholds for locally sourced materials—particularly in critical technologies such as batteries, semiconductors, and power electronics. CLEPA also proposes setting the EU value threshold for “Made in Europe” status at 70–75%, aligning with the USMCA’s regional value content rules for passenger cars and light trucks, which apply specific sub-thresholds to key parts like engines, transmissions, and batteries.

The Commission may favor a more flexible, phased approach. For batteries—which account for roughly 30% of an EV’s total value—imposing high local content requirements immediately would be unrealistic given the EU’s still-nascent supply base. A gradual ramp-up, similar to the US Inflation Reduction Act’s schedule for critical minerals and battery components, would likely be required.

Ultimately, the definition of “EU content” will determine whether localization rules operate as genuine industrial policy or mere additional compliance. Without meaningful thresholds, high-value manufacturing risks migrating abroad while only low-margin assembly remains in Europe.

What counts as a European product?

Another key question for any local content regime is what qualifies as “Made in Europe.” Where the borders are drawn could vary widely:

• The narrowest interpretation would limit it to products manufactured within the EU-27.
• A broader definition could include tightly integrated partners such as EFTA members (Norway, Switzerland, Iceland, Liechtenstein) and the UK.
• An even wider interpretation might extend recognition to FTA partners such as Japan, Korea, and Morocco or the EU’s Customs Union with Turkey, where production networks are already deeply intertwined with the European auto market.
• The widest interpretation would also encompass looser arrangements such as the EU-US framework agreement—driven not just by supply chain logic but also political concerns to preserve transatlantic stability

This question has already sparked concern among key EU trading partners and industry participants. Turkey’s automotive manufacturers’ association (TOFAŞ) has urged the Commission to recognize Turkish-origin vehicles and components as European, given the deep integration of Turkish suppliers into European value chains. Korea’s Business Association Europe and the Korea International Trade Association (KITA) have warned that excluding Korean-made vehicles and batteries from “Made in Europe” rules would contradict the EU–Korea FTA and could “inadvertently strengthen the position of Chinese producers.” Their argument is that limiting Korean participation would primarily erode competition for Chinese OEMs and battery suppliers, not strengthen Europe’s.

The issue is far from trivial for countries like Turkey, Morocco, Japan, and Korea. South Korean carmaker Hyundai assembles vehicles not only in the EU but also in Turkey and South Korea for the European market. In light of US tariffs, maintaining that access has become increasingly critical. The same applies to Japanese automakers—including Honda and Mitsubishi—which now serve the EU market almost entirely through exports and are facing simultaneous pressures from US trade barriers and intensifying Chinese competition.

The Commission’s central concern is China. Extending “Made in Europe” status to FTA partners would align with a broader effort to build an ex-China trade bloc. Excluding them, however, could provoke retaliation—particularly from the United States—and complicate the EU’s pursuit of new trade agreements. The value of an FTA is limited if products from partner economies still face barriers to entry. Yet a definition that is too expansive risks weakening the objective of anchoring manufacturing and high-value activity within the EU. Chinese firms could also exploit FTA partners as production hubs, a trend already visible in growing investment in Algeria, Egypt, and Morocco. To manage these competing pressures, the EU may layer additional criteria—such as GPA or OECD membership—onto FTA-based treatment to selectively filter eligible geographies.

What about other non-price criteria?

While local content requirements may be the tool of the moment, they are far from the only non-price criterion under consideration. Several related approaches—some already in use—continue to shape the policy debate and could overshadow LCRs if they prove less divisive, more effective, or more compatible with WTO rules.

The most prominent alternative is the use of environmental criteria, already embedded in the French and UK EV grant systems, which effectively shield domestic producers from Chinese and broader Asian competition. Similarly, the EU Battery Regulation could, once fully implemented, restrict the sale of EVs that are deemed too polluting within the Single Market. The appeal of this approach lies in its compatibility with WTO rules and its effectiveness in excluding Chinese producers. However, it is less targeted and has caught FTA partners such as Japan and Korea in its net alongside China.

A second category involves resilience or diversification criteria, which the EU has already employed to limit funding for battery projects overly dependent on China. Over time, such criteria could evolve into a gatekeeping mechanism, restricting market access based on the degree of supply chain diversification away from Chinese critical minerals.

Finally, national security and cybersecurity standards offer a third pathway. The US has used these to exclude Chinese automakers and suppliers from its market. The EU has taken a more cautious, incremental approach. Still, there is potential for cybersecurity-related restrictions to be incorporated into EU-level procurement frameworks over time, potentially excluding Chinese producers and component suppliers from sensitive or connected-vehicle segments.