"This Is a Real Crisis": Proud Europe Losing Out to China in Cars, Clothes... and Even AI Is Falling Behind Due to Soaring Electricity Prices [Weekend Money]

Consumption Keeps Rising, But Domestic Production Remains Stagnant for Years
Chinese Cars Boom and Low-Cost Chinese Consumer Goods Gain Popularity
"Traditional Manufacturing Is Losing Out and AI Investment Is Lagging Behind"

Industrial production in the eurozone has not been able to return to a recovery trajectory for several years. However, this does not mean that European consumers are simply closing their wallets. Goods are selling, but European factories are not operating at matching levels.

It is Chinese products that have filled the gap left by European factories. In the first half of this year, the combined market share of major Chinese brands such as BYD, Chery, and Geely among newly sold cars in Europe exceeded 10%. This figure jumped more than 3 percentage points from 6.8% a year earlier. Despite facing tariffs of up to 45%, their market share continued to increase.

The trend is even more pronounced with clothing and household goods. A surge in cheap parcels arriving from Chinese online platforms has even led to the closure of some local fast-fashion companies in France.

Heejin Kwon, a researcher at KB Securities, analyzed in a recent report that "traditional manufacturing in Europe is losing competitiveness as cheap imports from China increase, and in terms of artificial intelligence (AI) investment, Europe is being outpaced by East Asia and others."

Surveys Positive for 6 Months...But It's Just Backlog Clearance

In July, the eurozone’s manufacturing PMI stood at 51.9, the highest in three months. It has also remained above the baseline of 50 for six consecutive months.

The PMI (Purchasing Managers’ Index) is a survey indicator that asks purchasing managers at businesses whether conditions have improved compared to the previous month. A reading above 50 means more respondents reported improvement. It shows the direction of change, but does not indicate how much actual production increased. This explains how survey results can look positive while industrial output remains flat.

A similar scene played out last year. Ahead of the imposition of U.S. tariffs, European companies received export orders in advance, causing a temporary spike in industrial production. However, since these were orders brought forward, once they were fulfilled, production slumped again.

The pattern in July was similar. As supply chain pressures eased and backlogged orders were fulfilled, production increased, but there was only a minimal improvement in new incoming orders. Clearing a buildup of old work and receiving new orders are two different things. The prospects for the emergence of a new engine to generate manufacturing demand within the eurozone remain uncertain.

Value Flat, Volume Up...Chinese Products Win on Price

The first issue Kwon highlights is the gap between consumption and production. These are two main indicators reflecting the real economy, but in the eurozone, retail sales have been rising for several years while industrial production has failed to catch up. It is a rare situation in which consumption is growing but domestic production is not.

Import statistics provide a clear picture. China’s share of total EU imports has remained flat by value since 2022, but continues to rise by volume. In other words, Europe is spending roughly the same amount but importing more items, indicating that unit prices have fallen. The influx of cheap Chinese consumer goods has led to a sharp decline in domestic consumer goods production.

The issue is that this pattern is not limited to consumer goods. Since the start of this year, there are signs that it is spreading to industrial goods such as machinery and general manufactured products. The European think tank CER pointed out that China’s influence is growing in capital goods sectors as well, including cars, machinery, and aircraft manufacturing, while the French Prime Minister’s Office has warned that about 55% of European manufacturing could be threatened by competition from China.

AI Investment Bypasses Europe...Power Grid and Regulations Are Obstacles

When traditional manufacturing declines, it is typically up to new industries to pick up the slack. However, Europe has little presence even within the AI value chain.

In East Asia, there is a high concentration of hardware manufacturers supplying core AI components, such as semiconductors, whereas the eurozone has a larger share of software companies. Kwon explained, "Even if AI investment increases, its impact on production at European factories is limited." The share of AI companies in the total market capitalization of publicly listed firms also shows that the eurozone lags significantly behind the United States and Korea.

The incentive for non-European companies to build data centers in Europe is also diminishing. Electricity prices in Europe are noticeably higher than those in the United States, with Ireland, Italy, the United Kingdom, and Germany being particularly expensive. There are also power grid constraints. The key market for Europe’s data center industry—FLAP-D (Frankfurt, London, Amsterdam, Paris, Dublin)—is facing such strong demand that it is estimated to take 7 to 10 years to connect new power grids.

Meanwhile, Northern Europe, where electricity is relatively abundant, is taking the opposite approach. To protect energy resources and curb price increases, AI infrastructure investments are facing tightening regulations. As a result, in regions with high electricity costs there is little reason to build data centers, while regions with surplus electricity are becoming less accessible due to regulatory barriers.

Kwon emphasized that "for a rebound in industrial production beyond just fulfilling backlogged orders, momentum to create new manufacturing demand within the eurozone is needed as supply chain pressure eases." He added, "Given the limits to offsetting the weakness in traditional manufacturing through expanded AI investment, it appears difficult to expect a manufacturing recovery beyond temporary base effects."

This content was produced with the assistance of AI translation services.