The year had started off well for the European automotive sector thanks to a boost from the European regulator: in a welcome show of pragmatism, it decided to implement a three-year transition period (2025 to 2027) to allow carmakers to comply with CO₂ emissions reduction requirements. This decision effectively pushed back the risk of financial penalties that had been preventing investors from focusing on fundamentals. Unfortunately, this brief clearing in the sector’s sky was short-lived, and new storm clouds are gathering.

While many were anxiously awaiting the “liberation day” announced by President Trump, initially set for April 2, he took everyone by surprise by announcing on March 26 the implementation of a 25% tariff on all imported cars. For context, imports represent about half of all vehicles sold in the U.S. The consequences for the sector are already familiar: reduced operational efficiency and downward revisions of business outlooks and earnings forecasts.

The only realistic long-term response is to relocate part of the production — at a high cost. Due to complex supply chains and high labor costs, the United States remains one of the most expensive developed countries for car manufacturing. For example, Bernstein estimates this initiative will have an average impact of $6,700 per vehicle! Given the sector’s gross margins, this cost will likely be passed on to consumers, with Ferrari already announcing a 10% price increase as a textbook case.

Since the market is always right by definition, it’s interesting to note the market reaction to this announcement, which reshuffles the cards for the auto industry: the European sector fell by only 1% on the day of the announcement. This limited drop can be attributed to low valuations (2025 P/E of 7.8x) and investor positioning (the most underweighted sector according to the latest Bank of America survey), which likely discouraged hedge funds from shorting the sector.

While the tariff risk is now well known, another three-letter threat is emerging on the winding road of the European auto sector: BYD. The Chinese automaker, which just celebrated its 30th anniversary, has become the industry’s latest bogeyman. While Tesla reported a 13% drop in registrations in Q1, BYD’s commercial performance is nothing short of impressive: in 2024, the company exceeded $100 billion in revenue, up 29% year-over-year, and Q1 vehicle sales reached 986,000 units — a 58% increase!

Part of this success lies in BYD’s highly vertically integrated model and its engineering-heavy workforce (120,000 engineers, accounting for 10% of total staff). The result: a game-changing announcement of a battery that charges in just 5 minutes for a 400km range, with a maximum charging power of 1000kW — double that of Tesla’s Supercharger at 500kW. No wonder Warren Buffett is among BYD’s shareholders…

In 2024, BYD sold 50,000 units in Europe and plans to accelerate its expansion with its Hungarian factory — and a second one reportedly in the works. According to the Financial Times, the European Commission is preparing a preliminary investigation into the establishment conditions of the first plant. But more will likely be needed to slow down this Chinese juggernaut.

Especially since the leap from trade war to content war has just been made by BYD: the company recently announced its intention to offer its intelligent driving assistance software — modestly named God’s Eye — for free, while Tesla charges a subscription. This innovation battlefield has even led the Chinese government to delay authorization for a planned factory in Mexico, fearing tech leaks to the nearby United States — the world turned upside down!

As the global auto giants begin to reorganize their supply chains and as potential temporary exemptions are discussed, the sector is expected to remain volatile. But beyond short-term market behavior, two key points stand out:
1/ Import tariffs are inflationary. A quick glance at the U.S. one-year breakeven inflation rate confirms this: it has risen 84bps in 2025 to 3.36%.
2/ U.S. tariffs have no real impact on Chinese automakers, who are largely absent from that market — effectively strengthening their position relative to other manufacturers. These are outcomes that run counter to the White House’s strategic objectives…

*Build Your Dreams (BYD)

Pierre Pincemaille, General Secretary of Investment at DNCA. This article was finalised in April 25th, 2025.

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