Chinese cars could reach 30% of European market by 2035 without tougher rules

Chinese carmakers could hold as much as 30% of the European automotive market by 2035 if Brussels leaves existing rules unchanged, roughly tripling their current share. That figure, from a Citi research note published on Wednesday, represents the base case. The low end of the forecast range, 15%, depends on the European Union adopting the most restrictive version of its proposed Industrial Accelerator Act, which would require cars sold in Europe to be assembled locally with local supply chains. The gap between those two outcomes, equivalent to millions of vehicles a year, is a measure of how much policy still has to decide.

Chinese brands currently account for roughly 10% of European car sales, up from a negligible share just five years ago. The speed of that advance, driven by BYD and SAIC's MG brand among others, has unsettled European manufacturers and prompted political intervention. The question now is not whether Chinese cars will keep gaining ground, but how far Brussels is willing to go to slow them.

Three scenarios, one decisive variable

Citi laid out three distinct paths. In the first, the base case, current EU rules remain in place. Countervailing duties on Chinese battery electric vehicles, imposed in 2024 after a lengthy anti-subsidy investigation, stay where they are. Plug-in hybrids are not covered. Under these conditions, Chinese carmakers reach 30% market share by 2035.

The second scenario extends those tariffs to plug-in hybrids. This would close a significant loophole. Several Chinese brands have shifted promotional emphasis toward plug-in hybrids precisely because they fall outside the existing tariff regime. Bringing them into scope would add cost to those imports and, Citi estimates, hold Chinese market share to 25% by 2035.

The third and most restrictive scenario involves the Industrial Accelerator Act, a proposed EU framework that would impose a comprehensive 'made in EU' requirement on vehicle sales. Under this model, Chinese carmakers would need to assemble vehicles in Europe and source components from European supply chains. Citi projects this would drive Chinese market share down to 5% within two years, recovering only to 15% by 2035 as local manufacturing gradually comes on stream.

What the Industrial Accelerator Act would actually do

The Industrial Accelerator Act has not yet been adopted. Its final form remains subject to negotiation between the European Commission, the European Parliament and member state governments. But its direction is clear enough. Brussels wants to ensure that vehicles sold in the EU are, to a meaningful degree, built in the EU. The logic is partly industrial: local production sustains European factories, jobs and supplier networks. It is partly strategic: dependence on Chinese manufacturing for a product as economically and politically significant as the automobile carries risks that several member states are no longer willing to accept.

A comprehensive 'made in EU' framework would force Chinese manufacturers to invest in European production capacity rather than simply exporting from their domestic plants. BYD has already begun this shift, announcing a factory in Szeged, Hungary, with production expected to start around 2026. Other Chinese brands are considering similar moves. The question is whether local assembly, with European labour costs and European suppliers, erodes the cost advantage that makes Chinese cars competitive in the first place.

Citi's analysts believe it would. Harald Hendrikse, who led the research, wrote that local manufacturing offsets China's cost advantages, which is precisely why the most restrictive policy scenario produces the lowest market share forecast for Chinese brands. The cost of compliance, in other words, is the cost of competitiveness.

The tariff question is not settled

The EU's existing tariffs on Chinese electric vehicles range up to 35.3% on top of the standard 10% import duty, depending on the manufacturer and the level of state subsidy found. These were agreed in late 2024 after a probe that exposed deep divisions within the European automotive industry. Some manufacturers, notably those with joint ventures in China, lobbied against the duties. Others, particularly those without Chinese manufacturing partnerships, argued they were essential to prevent market distortion.

The tariffs apply only to battery electric vehicles. Plug-in hybrids, which combine a combustion engine with a smaller battery and electric motor, are excluded. This distinction matters because several Chinese brands have used plug-in hybrids as a bridge product for European consumers who remain wary of fully electric range limitations. Extending the tariff regime to cover these vehicles would be a significant escalation, and one that Beijing would almost certainly challenge at the World Trade Organization.

Citi's 25% forecast for Chinese market share under extended tariffs assumes that the additional cost burden on plug-in hybrids would reduce their price competitiveness enough to slow, though not reverse, Chinese expansion. The effect would be incremental rather than structural: it raises the cost of doing business but does not require the fundamental reorganisation of supply chains that the Industrial Accelerator Act would demand.

Ten years of restructuring for European manufacturers

The Citi note carries a blunt warning for European carmakers. Even in the most restrictive policy scenario, the next decade will be defined by volume losses and restructuring. The reason is simple. Chinese brands are not waiting for permission. They are expanding distribution networks, establishing local service operations, building brand awareness and, in some cases, constructing European factories. Even if policy slows their advance, it does not reverse it.

European manufacturers face a structural problem that tariffs alone cannot fix. Their cost base is higher, their product cycles are slower, and their transition to electric vehicles has been uneven. Volkswagen, Stellantis and Renault have all announced significant cost reduction programmes in the past 18 months. Some of these involve job cuts. Others involve consolidating platforms or delaying model launches. The pressure is not hypothetical. It is already being felt on production lines across Germany, France and Italy.

The challenge is compounded by the fact that European manufacturers are simultaneously trying to defend their home market and compete in China, where domestic brands have taken an overwhelming share of electric vehicle sales. What was once a lucrative export market for German manufacturers in particular has become a theatre of losses.

Collateral damage for Japan and South Korea

The Citi forecast contains an implication that has received less attention. In the base case scenario, other Asian carmakers, principally those from Japan and South Korea, see their combined European market share decline from 20% in 2025 to below 16% by 2035. Toyota, Honda, Nissan, Hyundai and Kia are not the target of EU trade policy, but they stand to lose volume as Chinese brands expand and European manufacturers fight to hold their ground.

The mechanism is straightforward. If the overall market is not growing fast enough to accommodate new entrants, someone must lose share for someone else to gain it. Japanese and South Korean brands have historically occupied the mid-market segment where Chinese entrants are most aggressive on price. They lack the brand loyalty that protects premium European marques and the cost advantages that protect budget European models. Their position in the middle is becoming less tenable.

Why the policy choice matters beyond the car industry

BYD and MG have already changed the competitive landscape

The Chinese advance is not a projection. It is a fact on the road. BYD, which overtook Tesla as the world's largest electric vehicle maker by sales in 2024, has moved aggressively into Europe. Its product range now spans hatchbacks, saloons and SUVs at prices that undercut European equivalents by thousands of euros. SAIC's MG brand has taken a different route, competing on value and warranty terms in the volume segment. MG's MG4 electric hatchback became one of the best-selling EVs in several European markets within a year of its launch.

These brands have benefited from years of state support in China, including subsidised land, cheap credit and a domestic market that allowed them to achieve scale before exporting. The European Commission's anti-subsidy investigation documented these advantages in detail. Whether those advantages can be neutralised by tariffs or local content rules is the question that Citi's three scenarios attempt to answer.

The political economy of restriction

There is no consensus within the EU about how far to go. France and Italy have been among the most vocal advocates of stronger trade protection, reflecting the exposure of their domestic manufacturers to Chinese competition. Germany has been more cautious, partly because its premium brands still sell large numbers of vehicles in China and fear retaliation. The Council of the European Union will ultimately need to balance these interests when it decides on the Industrial Accelerator Act and any extension of tariffs to plug-in hybrids.

The debate is not purely economic. Automobile manufacturing employs directly and indirectly around 13 million people in the EU, according to the European Automobile Manufacturers' Association. It is the single largest export sector in several member states. Politicians who allow Chinese brands to capture a third of the market will face questions about lost jobs and closed factories. Politicians who restrict Chinese imports too aggressively risk provoking trade retaliation that damages other European export sectors, from pharmaceuticals to luxury goods.