Germany's three automotive giants—Volkswagen, BMW, and Mercedes-Benz—are facing an increasingly difficult balancing act. China remains its largest and most profitable market, yet the recent crisis involving Nexperia, the Dutch chipmaker owned by China's Wingtech Technology, has once again exposed the structural risks of its deep reliance on Chinese supply chains. The episode has forced all three companies to accelerate efforts to reduce their dependence on China.
After Beijing imposed export restrictions in response to the Nexperia supply disruption, shockwaves rippled through the global automotive sector. Honda reported profit erosion, Bosch was compelled to scale back production, and major German brands formed internal task forces to secure components. For Europe's auto industry, the incident marks more than a temporary supply shock—it underscores a fundamental fragility in the continent's manufacturing ecosystem.
According to the European Association of Automotive Suppliers (CLEPA) and senior industry executives, major automakers have instructed key suppliers to identify permanent alternatives to Chinese semiconductors and to evaluate potential sources of raw materials and components that do not rely on China.
Industry sources say the crisis has heightened concerns about the supply of semiconductors, rare earths, and lithium-battery inputs. Analysts broadly expect that replacing China's dominance in chips and rare earths will require at least three to seven years of investment and restructuring. Substituting China's lithium refining and battery-material capacity could take decades.
For European manufacturers, diversification is proving more difficult than for their American, Japanese, or Korean counterparts, largely because German automakers expanded so deeply into China over the past decade. According to data from the MERICS, two-thirds of Germany's investment in China from 2020 to 2024 came from carmakers. Investment surged 69% in 2023–2024 alone, reaching EUR4.2 billion (US$4.8 billion), as German companies sought to strengthen their positions during China's rapid rise in electric vehicles.
Yet the returns have not kept pace. Combined market share for German brands in China has fallen from roughly 25% in 2021 to about 10% in 2025. Analysts cite shifting consumer preferences toward smarter vehicles, increasing support for domestic EV brands, and overall weakening purchasing power—all factors that have disadvantaged German manufacturers, whose digital strategies evolved more slowly.
As China embraces rapid advances in electrical/electronic (E/E) architectures and software-defined vehicles (SDVs), the German giants have launched structural adjustments designed to merge "China speed" with "German quality." Their R&D operations in China are now second only to their home headquarters, and the companies have forged deep partnerships with Momenta, Alibaba, Huawei, and other Chinese firms. These collaborations leverage China's strengths in AI and software development to produce driver-assistance systems tailored to local road conditions and to counter the swift ascent of domestic competitors.
European policy constraints add another layer of difficulty. Driven by national-security concerns, the European Union is pressuring automakers to reduce their dependence on China while simultaneously upholding stringent emissions targets and considering additional fees linked to fleet emissions. The result is a costly EV transition at a time when consumer demand in Europe remains weaker than anticipated.
Chinese manufacturers, meanwhile, enjoy faster transition cycles and lower production costs, allowing them to expand aggressively in the European market. As a result, German automakers find themselves caught between two conflicting imperatives: reducing reliance on China for security and resilience, while continuing to depend on China's market size, technological velocity, and supply-chain capacity.
It is a dilemma with no easy resolution—and one that will shape the future of Europe's automotive industry.
Article edited by Jerry Chen
