EU relaxes restrictions on fuel vehicles, but automakers can't go back? Hundreds of billions already invested; the shift to electrification is hard to reverse.

EU relaxes restrictions on fuel vehicles, but automakers can't go back? Hundreds of billions already invested; the shift to electrification is hard to reverse.

Brussels has proposed abandoning the 2035 deadline for a full transition to purely electric vehicles, a policy shift that gives traditional European automakers more time to boost sales in the hybrid sector. However, analysts point out that despite this major concession, considering the huge sunk costs already invested by the automotive industry, electric vehicles will remain the inevitable future for the sector in the long run.

According to Reuters, the European Commission unveiled a plan this Tuesday to cancel the 2035 deadline that effectively bans internal combustion engine cars. Under this new proposal, plug-in hybrids, range extender EVs that use small combustion engines to charge batteries, and even some traditional internal combustion vehicles will remain legally permitted after 2035. In addition, Brussels is proposing a new category for small electric vehicles and extra credits for emission support for models produced in Europe.

This policy not only marks a significant shift in the EU’s regulatory landscape but also diverges from the path taken by the United States, where President Trump has withdrawn support for electric vehicles. For luxury brands like Mercedes-Benz and BMW, it means they have a longer window to sell plug-in hybrid models before moving wholly to electric vehicles; while companies like Stellantis and France's Renault, who own popular small models like the Fiat 500 and Clio, stand to benefit from subsidies for a new category of small urban EVs targeting city dwellers.

Although it offers “breathing space,” industry experts warn that policy volatility poses a challenge for companies that have already allocated capital based on 2023 legislation. Previously, automakers and suppliers put hundreds of billions of euros into designing EVs and expanding factory capacity. Analysts believe this policy rollback is a short-term boon for traditional technologies but does not alter the long-term capital logic of the industry’s shift toward electrification.

Policy Shift Trades Hybrid Buffer Period for Time, but Market Doubts Long-term EV Market Share

At the core of this EU policy change is allowing traditional automakers more choice on technology paths. Under the new proposal, hybrid technology will continue to play a key role in the coming decade. Phil Dunne, Managing Director at Grant Thornton Stax, said the Commission’s move gives Europe’s auto industry room to make choices and a chance to compete.

However, market consultancies remain cautious about the long-term impact of this policy shift on actual sales. Prior to Tuesday’s announcement, AlixPartners forecasted that by 2035, fully electric vehicles would account for only 62% of Europe’s sales, citing market doubts that a ban could be strictly enforced. Nick Parker, a partner at AlixPartners, said he does not believe the company's forecasts will change significantly due to the new policy.

Moreover, slowing the transition to electric vehicles objectively buys time for market development of charging infrastructure. Even strong supporters of electrification admit that lagging infrastructure is one of the main reasons for currently low EV adoption rates. Industry data shows that as of October this year, EU sales of battery-only EVs rose 25.7% year-on-year to account for 16.4% of total sales, but the ratio remains extremely low in Southern and Eastern European markets.

Policy Shift Hits Aggressive Transitioners; Auto Firms Face Billions in Investment Risk, Accelerate Cooperation

The sudden policy change is a blow to those automakers aggressively pushing the transition. The EU’s combustion engine ban only just became law in 2023, prompting many companies to plan long-term capital expenditures. The change means billions already spent on R&D and capacity based on the old policy now face longer return cycles or risk of strategic misalignment.

Just a day before the EU announcement, American auto giant Ford publicly declared a $19.5 billion asset write-down and its plan to scrap several EV models. Such industry turbulence is prompting companies to seek closer partnerships to share risk, such as Ford’s recently announced collaboration with France’s Renault last week to jointly develop small EVs.

Joe Stevenson, CEO of UK startup Anaphite, noted that this situation will ultimately drive more collaboration and platform sharing among automakers. His company is working on battery electrode dry coating technology to help lower EV costs.

Industry Calls for Policy Certainty

Facing repeated regulatory changes, auto industry executives have expressed a strong need for policy certainty. Back in March this year, the European Commission gave the auto industry “breathing space,” allowing three years to meet 2025 emission targets, only to propose further amendments nine months later.

Before Tuesday’s announcement, Ford CEO Jim Farley urged Brussels to settle on one policy and stick to it rather than revising it every few months. Farley bluntly said: “This is not the way to do long-term capital investment planning. We need certainty.”

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