With China’s rapid Electric Vehicle (EV) expansion squeezing global markets and Donald Trump’s tariff threats looming, Western automakers face mounting challenges. To survive, the industry must balance geopolitical tensions, rethink supply chains, and adopt a more pragmatic approach to the EV transition.

The most recent quarterly earnings reports show that major automaker brands have underperformed, dramatically reducing their profits from the previous financial year. Analysts point to the slow EV transition and reduced sales in Chinese markets due to fierce domestic competition in China. In the wake of Donald Trump’s return to the White House and his proposal to increase tariffs, the global auto sector will likely face continued hardships. So, what would a possible scenario look like going forward?

In recent months, headlines have been flooded with automakers laying off thousands of workers due to factory shutdowns. Clearly, this is not a regional issue either, as major brands across the world are struggling. Volkswagen has just narrowly averted the closure of three factories within Germany. The Japanese automaker Nissan has already laid off 9,000 workers and reduced global factory capacity by 20 percent. There is no doubt that the rapid development of Chinese auto brands and the associated loss of market share in China are devastating for traditional automakers. In addition, a slower-than-expected transition from gasoline-powered to electric cars has resulted in saturated inventories, unproductive resource allocations, and inefficient investments. The auto industry will likely face an uphill battle in the future as, with Trump’s protectionist tendencies and anti-China rhetoric, carmakers worldwide navigate a tricky curve of maintaining good relations with both the US and China—two of the biggest car markets in the world.

China’s global rise in the auto industry, particularly in EV production, has taken over the domestic Chinese market once led by Western and Japanese automakers and, thanks to increasing exports, is now disrupting markets worldwide. The numbers speak for themselves: collectively, 30 million vehicles were produced in China in 2023. In the same year, it surpassed Japan as the largest car exporter in the world, with 4.9 million units reaching foreign markets, causing sales to slump for automakers elsewhere. The world’s largest car market since 2009, China’s market is now as big as the American and European markets combined. Thanks to decades of government subsidies to mature their auto industry, China has finally caught up and is beating the world in the production of low-cost EVs. The Chinese government deems the EV sector an especially important industry, as discussed in our previous joint op-ed on Chinese subsidies and their effects on the global economy. Losing market share in China is a huge loss for established automakers that once dominated the country’s market. Moreover, due to the economic slowdown in China and a slump in domestic consumer demand, Chinese manufacturers are aggressively exporting vehicles abroad–a move many nations have labelled as a dumping scheme. Additionally, China has increased its market share in developing countries, Southeast Asia, as well as sanctioned markets like Russia. Low prices, the latest technologies, and attractive designs have won over the hearts and minds of consumers. Australia, too, has become one of the leading destinations for Chinese EVs—with no duties on Chinese EV imports, making it particularly attractive to Chinese brands. China became the third largest exporter of cars to Australia in 2024, and the latest data shows that from 2022 to 2023, the sales of Chinese-made vehicles jumped by 57.5 percent. Around 80 percent of electric cars sold in Australia are assembled in China, including those from non-Chinese brands.

On top of all this, automakers in the West are playing catch-up, or “reverse” catch-up, to adapt to the slower-than-anticipated transition from internal combustion to EVs. Car development usually takes three to five years from initial design to manufacturing. A lot is hanging on the line, as building new factories or coordinating with suppliers for components must also be considered. With the EU’s announcement to completely phase out the sale of new combustion engine cars and vans by 2035, many companies were already making changes to their infrastructure to accommodate the likely increase in demand for EVs. However, this has not happened for multiple reasons. First, although prices have come down significantly, EVs are still expensive compared to their gasoline-powered counterparts. Second, many countries have ended their subsidies and tax breaks for EVs, causing consumers to return to cheaper alternatives. And third, a lack of charging spots and inadequate infrastructure further hinders buyers who live in rural areas or are concerned about EV ranges. In the case of the United States, the companies that had fully attempted to transition to EVs have seen slumping sales figures. With their more conservative approach to long-term product planning, Toyota and Honda saw growth as hybrid sales increased dramatically. Automakers such as General Motors had an ambitious target of building 400,000 EVs from 2022 to mid-2024 to eventually move to an all-EV portfolio, but have since revised the number by about half. Ford has also cut its annual EV capital expenditures from 40 percent to 30 percent and has since cancelled several plans for upcoming EV models.

And then there’s the elephant in the room: President Donald Trump and his love for imposing “tariffs.” Tariffs will increase costs and disrupt existing supply chains, hurting the auto industry going forward, and automakers must navigate a delicate balance between trade relations with the US and China. Trump has hinted at imposing a 25 percent duty on imports from Canada and Mexico and an additional 10 percent tariff on China and the EU. Tariffs on Mexican imports will be particularly damaging to US car manufacturers, with their factories spread across Mexico. According to the US Department of Commerce, 90 percent of vehicles produced in Mexico are exported, three-quarters of which are directed to the US market. As the fourth largest producer of automotive parts in the world, Mexico also manufactures most of the components—anything from small components such as harnesses and fasteners to engines and transmissions—that go into US-manufactured cars. There is already a rush among auto manufacturers with factories in Mexico to get as much inventory into the US as possible before the 1 February deadline. The tariffs will ultimately hurt American consumers with higher prices and will certainly trigger retaliatory actions from Mexico and Canada, who have threatened to follow suit if Trump’s tariffs go into action, disrupting the already fragile American automotive sector.

As a result of geopolitical tensions and market disruptions, automakers are now facing headwinds. To tackle this immense challenge, governments and car manufacturers must cooperate for efficient resource allocation, including subsidy use, as well as creating a unified future vision to compete with Chinese rivals. This does not mean throwing money at factories and infrastructure for EVs, but rather taking a more realistic, gradual approach to the EV transition while taking advantage of each carmaker’s strength to push for continued innovation. By improving on such strengths, they will be able to better cope with the ever-changing market dynamics and demand. Corporations must also increase the resilience of their supply chains by domesticating some production processes to better deal with the increasing likelihood of trade disruptions by the Trump administration. Even US-allied nations with strong economic relations with China may face tariffs under Trump, including Australia. Although we do not have a large automotive sector, we must manage our economic policies and trade relations carefully while maintaining positive relations with both trading partners, the US and China.

Daiki Sato is a former intern with the Australian Institute of Interntional Affairs. Currently, he is an undergraduate student at the School of Asia and the Pacific at the Australian National University.