The European Commission is weighing plans to subsidise operational costs for car battery manufacturers and to push through quotas on local rates of vehicle production as the Union’s auto industry grapples with existential pressures.

With the strategic dialogue on the automotive sector’s future to continue only after the summer break, carmakers are struggling to align their positions on its various provisions—even among themselves. Brussels, for its part, seeks to salvage its floundering battery-production ambitions through state aid, even as Chinese firms cement their dominance.  

Uphill battle

Europe’s bid to establish a homegrown battery industry faces mounting setbacks. Northvolt’s insolvency, scaling challenges at remaining EU plants, and China’s stranglehold on critical minerals and production costs have left Brussels scrambling.

BYD and CATL already operate cell factories in Europe, while EU-based ACC (backed by Stellantis, Mercedes, and Saft) recently halted German and Italian factory plans due to weak EV demand. Volkswagen’s PowerCo, once a beacon of hope, has gone quiet on its Salzgitter and Valencia projects.

Battery booster

In response, the Commission has been reported to be drafting a “battery booster” package mirroring America’s Inflation Reduction Act (IRA). The plan, championed by Commission President Ursula von der Leyen, could channel €1.8bn from the EU Innovation Fund to subsidise operational costs (Opex) by €0.20 per kilowatt-hour of battery capacity. “We need European car supply chains to be more robust and more resilient, especially when it comes to batteries,” Ms von der Leyen referred to the neuralgic point of European carmaking in March.

A delegated act is underway to adjust state-aid rules, with formal proposals expected by Q3. But hurdles abound: the subsidies must bypass Chinese firms like CATL and BYD, which dominate Europe’s supply chains, while navigating strict WTO rules on local-content preferences.

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Meanwhile, German automakers have reached their own provisional consensus on the entire automotive package. They want combustion engines to retain a 10 per cent share of new vehicles post-2035, arguing emissions should not drop to zero. (This pits them against the EU’s current phase-out agenda.)

Red-herring strategy?

Securing agreement across the European Automobile Manufacturers’ Association (ACEA)—which includes Stellantis and Renault—remains fraught. Key industry demands include:

– revisions to the CO₂ fleet rules to permit plug-in hybrids and range-extender engines beyond 2035.

– a shift from tailpipe-only emissions measurement to a life-cycle analysis (LCA) model, factoring in production, operation, and disposal.

We need European car supply chains to be more robust and more resilient, especially when it comes to batteries. Ursula von der Leyen, EC President

The latter is where battery subsidies come into play. The LCA proposal, if adopted, would upend the regulatory landscape. Battery-electric vehicles (BEVs), currently rated at zero grams of CO₂, would suddenly reflect emissions from battery production, electricity generation, and recycling. For automakers, this compliance pivot could delay electrification timelines—which may be a calculated gamble to prolong the combustion engine’s relevance.

The European Commission has also been reported to mull the launch of consultation on rules for minimum ratio of European production in the sector, known as local content requirement. Commission Vice-President Stéphane Séjourné wants to incorporate local content requirements into the legislative proposals on company cars—corporate fleets, in Brussels parlance—and social leasing.

The industry is sceptical. Supply chains are so intertwined that local content requirements would be very difficult to implement.

Geopolitical tightrope

Brussels walks a delicate line. Subsidising Opex could temporarily buoy EU battery plants, but it risks subsidy wars with China and legal challenges over discriminatory practices. Meanwhile, delaying the combustion-engine phase-out undermines climate goals—and invites backlash from greener member states. The auto sector’s divided loyalties (German hybrids vs. French electrification) further strain consensus.

As the summer pause looms, the Commission’s dilemma crystallises: Can it reconcile competitive industrial policy with decarbonisation mandates? Or will battery subsidies become a costly stopgap, masking deeper structural declines? With Chinese EVs claiming 28 per cent of the EU market and local production floundering, the stakes have never been higher. The bloc’s automotive future—once the engine of European integration—now hinges on a high-wire act of subsidies, semantics, and survival instincts.