In this space we regularly note the significant impact of government policy on the automotive industry. Laws and regulations are, after all, government policy. As technology and political contexts change, one expects the laws and regulations will also change either directly or through altered emphasis in interpretation. The dynamic between governments, consumers, and companies is always challenging for the automotive industry because it operates at a global scale, is economically and socially prominent, and the industry is extremely competitive and operates with tight profit margins. In recent years, the shift toward EVs and software-defined vehicles – what we termed a ‘once-in-a-century' change in technology – has been our core orientation. We outlined the role of government policy in that transition and explored the impact of geopolitical issues primarily through the impact on that change in technology.
We noted the automotive industry ‘has always been highly regulated, but geopolitical factors are now increasingly important in government policy, impacting the industry's core operating parameters. In other words, massive technological shifts are challenging when only market principles are in play, but those challenges are exponentially more difficult when government policy is forcing the nature and pace of the changes, and policies within nations and among major markets are not aligned in critical aspects.'
This year, the focus must be reversed. We cannot start with technology and markets. Geopolitical issues are the dominant concern in the automotive industry. Those factors are not just changing tariffs and supply chains and thus product planning and consumer prices. Geopolitics are also changing the outlook on EVs and software-defined vehicles.
To understand what is happening in the automotive industry, we must initially zoom out and explore broad economic, political and geostrategic issues. Then we can return to the automotive industry.
Geopolitics, volatility and President Trump
Geopolitical concerns are not new. Tensions have been rising for several years between China and the ‘Global West' as anchored by the United States. Any route to untangling those tensions and explaining them will have its weaknesses but the best angle is likely the evolution of what is referred to as the ‘China shock' – the term often used to describe the rapid increase of goods entering world markets after China joined the World Trade Organization in 2001.
When China entered the global economic system, its massive, rapidly evolving, and inexpensive manufacturing capacity delivered an economic ‘shock' to the rest of the world. This had positive aspects and challenges for the rest of the world. Jobs were lost and industries altered, but new possibilities and lower prices came forward, too. The US and China seemed to thrive together to the point that some called the symbiotic commercial system ‘Chimerica'. One deeply simplified view of that commercial system is that the US tended to innovate products, China manufactured them, and Europe sought to regulate them.
Tensions began to emerge about 10 years ago and have grown consistently since then. On a bipartisan basis, in the US concerns arose that the US was losing control of critical supply chains, that jobs lost were not recovered, and that China's manufacturing success was not market driven only but to a significant degree built through non-market factors such as subsidies from the Chinese government and extensive limits on inbound trade and technology. China, in turn, felt the US and the Global West resented its success and did not recognise it as still a developing economy and a country with a different political structure and means of economic organisation.
China's national strategic plan ‘Made in China 2025' succeeded very well. The complexity of Chinese production increased to higher valued output. Current analysis by a UN body indicates China accounts for 27 per cent of global industrial production. What is truly amazing is that China's share or global industrial output is projected to be 45 per cent by 2030. This expected growth is fuelled by continued investment in manufacturing capacity and a growing overcapacity, while domestic Chinese consumption is low. Many feel this productive capacity is not market based. The US and the EU, for example, have both made determinations of non-market subsides in 2024 when they imposed tariffs on EVs produced in China.
In US President Trump's first term, he imposed tariffs on China. President Biden kept those tariffs and added an extensive industrial policy of government-led investments in renewable energy, EVs, and semi-conductor manufacturing. President Trump won the election in 2024 with his Make America Great Again platform. A core element of that domestic policy is to grow the economy by reducing government regulation and green energy subsidies (including for EVs) and bring manufacturing back to the US. His foreign policy is built around using tariffs as a route to advance US manufacturing capacity and protect it from what he sees as unfair actions. He announced various waves of tariffs aimed at several targets, not just China. He frequently takes a maximalist approach and then cuts back as needed. And he believes this approach encourages deal-making and advances his agenda faster than normal diplomatic and trade negotiations.
At this writing, despite recent tariff deals with the US, the tariff structure going forward is unknowable. No one knows whether a further trade war will take place and, if it does, who the players will be and the parameters of the economic battles. Nor can anyone know whether a broad array of deals will be struck or when that might happen and on what terms. What seems certain, however, is trade tensions will continue to expand.
Increased trade tensions mean tariffs will be higher on goods crossing certain borders. Non-tariff barriers such as limits on software, data exchanges and the sale of certain types of goods will almost certainly expand. De-risking supply chains, economic uncertainty, and new forms of competition will define the global economic landscape for the foreseeable future.
These tensions will continue to evolve. The US wants to manufacture more goods, not just innovate them. China wants to innovate more goods, not just manufacture them. With its Competitiveness Compass, Europe seems to be starting to evaluate whether it has leaned too heavily on regulation in a way that inhibited the business climate and reduced economic growth, productivity and competitiveness.
The global automotive industry amid geopolitical competition
The automotive industry is significantly impacted by this geopolitical dynamic. Its supply chains are global and many of them originate in China. OEMs and major suppliers operate at a global scale, and production can cross national borders several times before a completed vehicle is brought to market. Tariffs, especially uncertainty regarding tariffs, challenge the operational planning and the fundamental economics of the industry. While non-tariff barriers – such as limits on types of technology or software or even data transfers – have gotten less attention recently in the press, these issues also impose significant operational and economic challenges on a global industry.
The recent wave of trade issues did not start just recently, it has evolved over years. Auto companies came to rely increasingly on Chinese suppliers while also expanding sales operations in China – at the cost of the surrendering majority control and intellectual property and with limits on data use. As China grew economically, it became the world's largest auto market by volume and an important source of new revenue for foreign companies. As China's economy grew, it also leaned into motor vehicle production. Initially, its products were relatively unsophisticated, but its capacity advanced rapidly.
In recent years, foreign auto companies operating in China have faced increasing challenges. The rapid sophistication of Chinese manufacturers made them more challenging competitors. China's capacity with EVs, especially on battery production, exploded. So did capacity on advanced driving systems. Chinese OEMs are known for very rapid product development cycles that permit the integration of advances and quick iteration toward what is successful and away from what is not. As geopolitical tensions rose, the operating environment in China also became more challenging for foreign companies. This combination of better domestic competitors and operational challenges has left many foreign OEMs with economically challenged investments in China.
The transition toward EVs exploded these concerns.
EVs, batteries, geopolitics and climate change
EVs are still seen as the future of mobility, but the path there will be longer than that outlined by regulators in major markets. Nothing is more critical to an EV than the battery. Battery technology is therefore now seen as a strategically significant industry, essential to future economic success.
China is, by volume, the dominant producer of batteries for EVs. China also dominates the supply lines of critical minerals and metals essential to EV production. Many policymakers have begun to worry that dependence on China for battery supply and critical materials could be more strategically challenging than the world's reliance on OPEC for petroleum resources, particularly if tensions continue to build and commercial relationships are deeply fractured.
China has long recognised the strategic potential of EVs to ease their energy security concerns and allow the nation to capture a strategically significant industry. China's industrial policy has assiduously built this capacity through a particularly deep interconnection between government and industry.
Under President Biden, the United States responded with its own entry into industrial policy. The Inflation Reduction Act (IRA) and other legislation passed in the United States in 2022 led to the possibility of dramatic sums of public funds invested in critical infrastructure, the production of semiconductors and new energy technologies. Batteries for EVs and their supply lines of critical minerals and metals were a particular focus of the IRA.
That industrial policy initiative sought to bring production to the United States and North America. The considerable subsidies involved around EVs, and batteries concerned allies in Europe and Asia. Those concerns are eased as the United States has sought to accommodate some concerns while also encouraging those governments to enact their own policies to rapidly increase capacity beyond China.
In 2024, the Biden Administration also announced a set of aggressive tariffs on Chinese EVs and principle components such as batteries. The EU found China subsidised EV production and also imposed tariffs on EVs but at a rate that varied by manufacturer. The EU did not put tariffs on batteries and components as the United States did. Batteries are not the only focus of this competition. Advanced vehicles are at the forefront of integrating sensors, artificial intelligence and software to offer rapidly advancing driver assistance and connectivity-related functions. The production of semiconductors and the development of artificial intelligence are also areas of growing geopolitical competition, and thus governmental engagement with the market.
President Trump takes a different approach
President Trump is targeting for elimination many of the industrial policy actions undertaken by President Biden. President Trump sees the ‘EV mandate' as a government rule that is misaligned with consumer demand and is thus a costly imposition on the industry given concerns about profitability or even the ability to sell sufficient EVs to meet various regulatory demands. His Administration has announced an intention to considerably roll back emission stringency rules. In the meantime, the Environmental Protection Agency (EPA) has taken certain action to reconsider previous rules in this regard, but the further timing and exact extent of the revisions remains to be seen.
President Trump also believes the huge federal subsidies needed to incentivise EV sales and create infrastructure are costly and unlikely to be efficacious.
Misalignment between EV rules and market acceptance
Industry challenges in meeting government targets for EV penetration are not unique to the United States. These challenges are evident in the EU, the UK and other nations.
The EU recently issued the Competitive Compass and the Automotive Action plan. Both seem acknowledge challenges with regulations and a desire to make modifications that are more market aligned while also making progress on climate change.
Advanced driving capacity but not robo-taxis
Some envisioned a rapid transition to (fully) autonomous vehicles (AVs), with mobility services provided by ‘robo-taxis'. Technical issues were seen as soluble soon, and this capacity would pull along consumer acceptance and regulatory development.
This extreme optimism has, in many circles, shifted to extreme pessimism as many seem to have assumed that AV investments are a lost cause. Certain challenges in cities with full AV testing have only enhanced these pessimistic views. However, lately, there appears to be a new optimism towards the deployment of AVs in various parts of the world.
We have long argued that as to autonomous driving technology, the issue is not so much when as where. Robo-taxis will not in the near-to-medium term be a widely available mobility solution. Yet, this reality does not mean that autonomous driving technology is not developing and having a significant impact. In fact, in some regions or countries, at least the law is ready for AVs. AV technology is advancing in off-road application in agriculture and industry. This capacity will further transform as sensors and artificial intelligence increase capacity.
Driver assistance technology continues to advance, and its applications are increasingly both more robust and more widespread within new vehicles. This technological revolution is neither as rapid nor occurring where some had expected, but that does not mean it is not continuing to both develop and transform the on-road driving experience.
Governments continue to seek the development of AVs. Regulations have developed in the EU and the UK. China is particularly encouraging of AV development using Chinese technology. The Trump Administration indicates it seeks to ease the regulatory path for AV development and deployment.
Cybersecurity and privacy
As advanced driving features expand and connectivity becomes even more robust, vehicles generate ever more massive amounts of data that is economically valuable.
As the value of data expands, so does concern about privacy. Again, government policy is a critical factor. Europe's rules are more rigorous and are expected to remain so. China's rules optimise for national security with little real concern for individual privacy. Rules in the United States are less aggressive than in Europe but evolving.
With connectivity comes concern about cybersecurity, both to protect sensitive data and to ensure the safe operation of the vehicle. Recent theft cases have shown vulnerability of vehicles. In this area, government policy is again key. The Biden Administration adopted rules mirroring those in China that limit Chinese hardware and software in vehicle connectivity. The Trump Administration suspended implementation but is expected to move forward with this rule.
This regulatory development indicates the origin of software will be yet another area of the supply chain the industry will have to monitor on a global basis.
ESG and activism: the ‘new' political risk
Environmental, social and governance (ESG) concerns were of ever-increasing importance to every business. ESG disclosures initially were exclusively voluntary and largely seen as a branding function, but such disclosures were increasingly compelled by government action in the United States and Europe.
Sustainability, labour practices, governance rules, data protection, privacy and other issues have long been regulated by governments. ESG concerns add more force and depth to those regulatory efforts. Again, because the automotive and mobility industry is massive in scale and economic significance, it is greatly impacted by these efforts as the industry is a target for activism and governmental action.
Many have noted an ESG ‘backlash' in several markets. This dynamic has not eased challenges. It has made them more complex. ESG-based regulations and disclosures have continued to increase while the image and publicity issues have diverged in a way that creates deeply challenging crosscurrents.
This new political risk is of increasing importance to the automotive and mobility industry. The challenges here will grow as geopolitical factors advance. For example, concerns about labour practices in China, and lately even in the United States, have received recent attention. This attention poses branding issues for the industry and raises concerns about compliance with current regulations and the development of more stringent rules in the future.
In China, activists have used social media on occasion to generate consumer action against companies that are perceived, either by themselves or by the governments where they are headquartered, to have inappropriately addressed China's concerns. These actions are often paired with governmental action by China to create a powerful dynamic designed to force corporate action.
Given the increasing geopolitical tensions, it is not surprising that activist activities and public opinion are sometimes in tension. Appeasing one group can create further issues in another jurisdiction.
Tension between the demands of activists is far from limited to the geopolitical realm. Often enough, there is significant tension between the goals of competing activists even within a single economy. Addressing the concerns of activists is both of increasing importance and complexity.
Choices and trade-offs but marvellous transformation, too
Aggressive technological change in the context of increasingly challenging geopolitical and climate concerns, with increasing regulatory uncertainty and issues with market acceptance for EVs, all while activism becomes more aggressive, means a time of challenging choices and trade-offs for all in the automotive and mobility industry.
We do not want to minimise those challenges. So much of our work is directed at identifying those issues and trends so we can help those in the industry make informed choices to meet their goals.
Focusing on these challenges, however, obscures the marvellous evolution taking place in the automotive and mobility industry that is positively transforming the future, because transportation and movement more generally are critical to economic, social and personal development. We have expressed this optimism in other forums by discussing what we have termed ‘Living Mobility' – a mobility environment that is more inclusive, objective, unifying and sustainable.
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