Europe has created a policy framework to electrify its auto market and limit its dependence on imported energy, and in the first count, it is delivering. By 2025, a fifth of all cars sold in Europe were electric, and 2026 is forecast to drop to around a quarter. March gave a very clear signal as Battery Electric Vehicles (BEVs) outsold internal combustion engines (ICEs) in Germany for the first time, while in Italy, a tough market for ICEs, BEV sales grew by 66% in Q1 to reach an 18% market share. The picture across Europe’s five largest markets shows how widespread this change has been.
However, the change also brings another consequence at the same time: the OEMs best placed to meet this new demand are not the ones the framework was designed to protect. Under the EU’s fleet emissions system, manufacturers who miss their CO2 obligations must pay fines or meet with more compliant peers to borrow their higher compliance. BYD Auto is now the most compliant car company in Europe, emitting emissions well below EU targets, while in contrast, Volkswagen’s pool remains above target and has the largest gap of any major manufacturer. Nissan has already joined BYD in 2025, there are risk penalties. If these gaps persist, others are likely to follow, leaving European automakers paying Chinese rivals for the right to continue selling cars in Europe.
Part of this is systematic: BYD only builds Electric Vehicles (EVs) and Plug-in Hybrid Electric Vehicles (PHEVs), making compliance more automatic than it is for manufacturers that still rely on profitable ICE fleets. But that structural advantage is itself a product of a decade of Chinese industrial policy that Europe has chosen not to match, and there is little sign that it is waning: Chinese OEMs are growing faster than European OEMs can evolve. By February 2026, BYD had entered the top three EV companies in Europe, behind Volkswagen and BMW. In effect, the regulatory system designed to force Europe’s EV revolution is rewarding manufacturers who are better able to provide affordable EVs and which are increasingly Chinese.
The Iran war is sharpening this dynamic. Record BEV figures for March already partially reflect consumer response to higher fuel prices: Online EV search forums reported that interest is rising across Europe as electricity prices rise. However, registration pipelines are long. Vehicles registered in March were heavily ordered in the weeks or months prior, so the full demand side effect may be clearly visible in the Q2 and Q3 data. The real question now is not whether the oil shock will accelerate electrification, but rather who will absorb the growing demand. Based on current trends, a reasonable share will go to Chinese OEMs—either directly through imports, which have continued to rise despite EU tariffs, or through local Chinese production now coming online, including plants in Hungary. Meanwhile, Volkswagen has announced an estimated 50,000 job cuts by 2030, citing transition costs associated with a volatile situation in China and the US. European OEMs are forced to finance costly structural changes from a deteriorating financial base, competing with firms entering the European market on commercial terms rather than under the regulatory pressures that have created it. Scheduled to reach 2030, the effect of the redistribution of market share is remarkable.
This is the industrial gap that Mario Draghi faces in 2024: Europe is building a world-class regulatory framework for the energy transition without the industrial capacity to capture its benefits. Battery cells, raw material processing, and powertrain components remain the focus of Chinese supply chains. The EU’s anti-subsidy tariffs, intended to slow Chinese entry, instead accelerating Chinese localization, embedded Chinese industrial power within European chains rather than blocking it.
Proposed in March 2026, the Industrial Accelerator Act (IAA) is Europe’s attempt to close that gap. The idea is to limit EV subsidies and government fleet purchases to vehicles that meet “Made-in-EU” content restrictions, including the requirement that the battery component must be produced in Europe. Cars made in China, or cars assembled in Europe using Chinese batteries, will fall largely outside those limits. Because subsidies and public procurement together account for the majority of Passenger Vehicle (PV) sales in Europe, the IAA will actually increase the price of Chinese-made EVs in all segments where most vehicles are sold. The challenge depends on how aggressively member states are willing to raise costs on cars that most of their consumers already buy.
The backdrop is wide and uninspiring. Western European PV demand was flat in 2024 and increased in 2025, leaving the market below 2019 levels. Higher energy prices from the Iran war are likely to push the European Central Bank (ECB) toward a more accommodative stance, renewing pressure on big-ticket spending. GlobalData predicts a mild contraction in PV volumes in 2026 as the balance of risks has now tipped. Even if the market continues to struggle, the share of BEV continues to rise, but the European industrial base does not benefit from this.
The deeper story in March’s numbers is the choice Europe is making in response to the fuel price shock. Rapid electrification protects consumers and governments from continued oil shocks, but by 2026 most of the affordable, readily available EVs able to meet that demand are Chinese. Each month that Europe sees a surge in electrification, Chinese manufacturers capture a larger share of the market. The Middle East conflict has shown that energy security and industrial sovereignty are not the same goal. The IAA is intended to reconcile the two, but will not come into force before 2027 at the earliest. Canada dealt with a version of this trade in January, lowering its tariff on China’s estimated EVs from 100% to 6.1% in exchange for relief from agricultural exports to China. However, Canada does not have a large domestic market car industry to protect. Europe has a lot to lose and change is happening faster than Brussels can respond.
By Julian Ponirakis, Analyst, Research and analysis, GlobalData
“How the Iran war is driving Europe towards Chinese EVs” was originally created and published by Just Auto, a brand owned by GlobalData.
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