If Iran Threat Recedes, Europe Still Faces Turbulence

If Iran Threat Recedes, Europe Still Faces Turbulence.

“2026 looks like another year of pain for all EU manufacturers”

Europe’s automakers are breathing easier thanks to signs the Iran crisis and its existential threat might be resolved sooner rather than later. That’s great news because now they can concentrate on the host of negatives that were already threatening disaster.

 Threat number one is China, and probably two and three as well.

“The global rise of Chinese (manufacturers) remains the top challenge for European manufacturers and suppliers in 2026,” said investment banker UBS.

HSBC Global Investment Research didn’t like the prospects for 2026.

“2026 looks like another year of pain for all EU (manufacturers). The fourth quarter of 2025 was difficult for EU autos as we saw earnings misses but more importantly weak 2026 (profit) guidance as well,” HSBC said in a report on Volkswagen.  

Sales in Western Europe are expected to stagnate in 2026, according to GlobalData, at between 11.6 and 11.8 million, ina forecast made before the Iran war. This is still significantly below pre-pandemic  levels of around 15.6 million.

There is nothing new in the well-established Chinese advantages, but the threat gathers pace. There is the 30% (at least) Chinese cost advantage, and its formidable manufacturing and technological edge which doesn’t seem to have been slowed by increased European Union tariffs.

European automakers’ earnings threatened
Reuters’ BreakingViews Column last month quoted Morgan Stanley analysts saying that surging Chinese car exports imply long-term operating earnings for European automakers 29% below what the market already expects.

 Other challenges facing European carmakers concern industry regulations which insist carbon dioxide emissions from new cars are eliminated by 2035.  They say these rules must be eased because they threaten viability.

The European Commission, the EU’s executive body, recently proposed a mild easing of the rules, which included changing CO2 emission rules to 90% for 2035 compared with 100%. This concession was heavily hedged, to the point only the likes of Ferrari or Rolls-Royce would benefit.

Mercedes CEO Ola Kallenius, who is also president of the European Automobile Manufacturers Association, said these rules could distort the market for new vehicles. They risk triggering a collapse in demand, he said, according to Automotive News Europe.

Threat from China gathers speed
These rules are currently being considered by the European Parliament.

The threat from China is ratcheting up, according to BMI, a Fitch Solutions company, as local price wars force consolidation and a desperate search for more profitable markets. 

“Based on what we are seeing, consolidation is clearly accelerating overseas expansion, not slowing it. There are several reasons for that. First, the domestic consolidation is creating strong push factors. China’s brutal price wars and overcapacity at home are forcing the stronger players to look abroad for better margins and growth opportunities,” BMI said. 

“BYD and other leading manufacturers can earn markups of over 100% in Europe compared to small margins in Mainland China. In fact, overseas investment by Chinese EV makers has now surpassed domestic investment for the first time, which shows where the industry sees growth opportunities,” BMI said after hosting a webinar entitled Autos Key Themes For 2026.

China building factories in Europe
BYD, Geely and Chery are either building factories in Europe, or seeking sites to build them. 

Europe’s auto suppliers are facing what its representative body, the European Association of Automotive Suppliers (CLEPA), describes as a  perfect storm, where systemic shocks feed back into one another, sometimes creating uncontrollable conditions.

CLEPA said the combination of slow electric vehicle sales, intensifying Chinese competition, pressure on prices, and EU regulation threaten 350,000 jobs by 2030. The industry already lost 104,000 jobs between 2024 and 2025. Job losses by 2030 include leading companies like ZF Friedrichshafen, Bosch, Continental and Schaeffler.

One unexpected spinoff from slow EV sales was Stellantis’s decision to reinstate diesel versions of some its models in Europe. Diesel power was supposedly close to death, and its revival in popularity conveniently reminds Europeans that China offers no oil burners.

Germans don’t like Industrial Accelerator Act
The EU has proposed the Industrial Accelerator Act. Designed to protect Europe’s auto industry from Chinese competition and would require 70% of EV value to be made in Europe to qualify for government incentives. Export-oriented German manufacturers don’t like this plan, now being debated in the European Parliament. 

 Last week S&P Global Mobility said in report that the Iran conflict will increase immediate automotive industry supply chain and logistics costs, may jeopardize European auto markets, and if extended, may spur greater demand for electrified vehicles as oil prices spurt

“The duration of the war is the critical factor, with potential impacts ranging from immediate supply chain disruptions and rising fuel costs to long-term shifts in vehicle production and consumer demand toward EVs,” the report said.

“From immediate logistical headaches to a potential long-term realignment of production strategies and consumer preferences, the war in the Middle East presents a significant news story and a complex challenge for the entire automotive value chain,” S&P said.

Recovery from short war in 2026
Short war S&P said if the war is short – up to three months – the economic impact will be the least disruptive and recovery could begin by the end of this year. If the conflict continues for four months to a year, recovery in 2026 becomes less likely and the economic impacts may spread.

“Globally, production impacts are likely to stem from supply and shipping disruptions. Production cost inflation would become more entrenched. Cost pressures would affect the profitability of entry-level ICE vehicles, potentially leading automakers to prioritize limited supply toward higher-margin products, similar to patterns seen during the semiconductor crisis,” the report said.

“However, vehicle affordability remains important to consumers, and they may become more price sensitive if the war continues. In either case, automakers will be looking to balance increased costs, customer willingness to pay and profitability level across all markets they participate in.”