"Spending Hasn't Slowed, Yet Cars and Clothes Are Made in China... 'Electricity Bills Are Too High,' and Even AI Investments Bypass Europe [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 failed to recover for several years. However, this does not mean that European consumers have stopped spending. Products are being sold, but European factories are not ramping up output to match demand.

The gap left by European factories has been filled by Chinese-made goods. In the first half of this year, the combined market share of major Chinese car brands such as BYD, Chery, and Geely among new cars sold in Europe surpassed 10%. This figure has increased by more than 3 percentage points from 6.8% a year ago. Market share grew even after facing tariffs of up to 45%.

This trend is even more pronounced in 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: “Traditional manufacturing in Europe has been losing competitiveness as low-priced imports from China expand, while the region is also falling behind East Asia and other areas in AI investments.”

Surveys Remain Positive for Six Months... The Effect of Processing Backlogged Orders

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

The Purchasing Managers’ Index (PMI) is a survey indicator that asks corporate purchasing managers whether conditions improved compared to the previous month. A reading above 50 means more respondents reported improvement. While it indicates the overall direction, it does not measure exactly how much production has increased. This is why PMI survey results might look good even as actual industrial production remains flat.

A similar situation occurred last year. As U.S. tariffs were looming, European companies front-loaded their export orders, causing a temporary surge in industrial production. Since these orders were brought forward, once the backlog was cleared, production slowed back down.

July saw a similar pattern. As supply chain bottlenecks eased and backlogged orders were processed, production increased. However, there was only minor improvement in incoming new orders. Clearing backlogged work is not the same as receiving new work. The prospects of generating new manufacturing demand within the Eurozone remain uncertain.

Monetary Value Remains Flat, Volume Increases... China Outpaces with Lower Prices

The first point highlighted by researcher Kwon is the disconnect between consumption and production. These two indicators reflect real economic activity, but in the Eurozone, retail sales have been increasing even as industrial production has failed to keep up for years. In other words, consumption is rising while regional production is not, resulting in an unusual situation.

Import statistics reveal the trend clearly. Since 2022, China’s share of total EU imports has remained flat in terms of monetary value, but has continued to rise in quantity. This means Europeans are spending roughly the same amount of money, but the number of imported goods has increased, which implies that unit prices have fallen. The influx of cheap Chinese consumer goods can thus be interpreted as having caused a sharp decline in domestic consumer goods production.

The issue is that this trend is no longer limited to consumer goods. Starting this year, it has expanded to industrial goods, such as machinery and general manufactured products. According to the European think tank CER, China’s influence is growing in capital goods sectors as well, including automobiles, machinery, and aircraft manufacturing. The French Prime Minister’s Office has also warned that about 55% of European manufacturing could be threatened by competition from China.

AI Investments Also Bypass Europe... Power Grid and Regulation as Obstacles

When traditional manufacturing loses ground, new industries are usually expected to take over. However, Europe lacks a strong presence in the AI value chain as well.

East Asia has a high proportion of companies supplying hardware such as semiconductors for AI, while the Eurozone has a larger share of software developers. Researcher Kwon explained, “Even if AI investment increases, the effect is limited when it comes to boosting production in European factories.” Looking at the percentage of AI companies in the total market capitalization of listed firms, the Eurozone still lags behind the U.S. and Korea.

There is also diminishing incentive for foreign companies to build data centers in Europe. Electricity rates in Europe are markedly higher than in the U.S., with Ireland, Italy, the UK, and Germany among the most expensive. There are also grid constraints. In the core FLAP-D markets for the European data center industry (Frankfurt, London, Amsterdam, Paris, and Dublin), demand is so heavy that new power grid connections are expected to require 7 to 10 years.

Even in the Nordic countries, which have relatively abundant electricity, the trend is the opposite. Regulations on AI infrastructure investment are being strengthened to protect energy resources and contain electricity price increases. Thus, places with expensive electricity offer little incentive to build, while places with surplus electricity are raising regulatory barriers.

Kwon emphasized, “Beyond the rebound from clearing supply chain backlogs, it will require momentum to create new manufacturing demand within the Eurozone to see a meaningful improvement.” He added, “As the expansion of AI investments is limited in its ability to compensate for the weakness in traditional manufacturing, it is difficult to expect a manufacturing recovery beyond a mere base effect.”

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