China crisis looms as Europe’s gravy train stalls: ‘nobody is making money’
It was just past 11 on a freezing December morning on the outskirts of Brussels, but already workers at the city’s Audi factory were cracking open frosty cans of beer.
They had just finished a long night shift – not on one of the production lines at a plant that has produced 8 million cars since 1949, according to a huge sign on its exterior wall – but on a picket line outside.
Pallets and old furniture were added to roaring fires in the middle of a road. Hand-painted signs raged, in French, against “Audi, premium thief” and parent company Volkswagen’s plans to move some production to Mexico once it closed this plant and two in Germany later this year – a historical first.
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A greying worker who gave only his first name, Pierre, spent 23 years at this plant. It will close for good next month, and he said he did not know what he would do after that. “This is my second city, my second home,” he said in halting English.
For a growing number of analysts and industry insiders, this is ground zero for Europe’s “China shock” – even if the Asian giant does not appear on the bedsheets emblazoned with workers’ demands.
Sluggish consumption in China has slashed Europe’s exports to the country and stifled demand there for products made by European companies. Chinese customs data this week showed a 4.4 per cent drop in its imports from the EU in 2024 compared with a year earlier.
Nowhere in Europe has the pain been felt more acutely than Germany. The EU’s biggest economy faces a third successive year of recession, prolonging its longest spell of economic stagnation since World War II.
Germany’s exports to China fell by 10.7 per cent last year and firms feared being further squeezed in 2025.
The plunge has sent a chill across Europe, reflected by the shivering workers outside the Belgian Audi factory.
“This month, China’s trade surplus has just passed the milestone of – get this – a trillion dollars … This is a strategy that has been planned for 10 years, whose aim, consequence and purpose is purely and simply to replace our industry,” the new French Prime Minister Francois Bayrou told lawmakers last week.
According to Corinne Abele, chief representative for Germany Trade & Invest in Shanghai: “One of the main arguments why companies are pessimistic about the prospects in 2025 is lagging demand, and this is totally different from the years before.”
She told an event hosted by the Mercator Institute for China Studies (MERICS) on Wednesday that the problem had been “unfair competition, which is still there, or not opening up, but now it’s actually a lack of demand”.
In the automotive sector, “cheques from China are not coming any more”, said an industry source, noting that booming sales of German cars in the world’s fastest-growing market helped deliver high wages and lucrative dividends in Europe.
But the gravy train is slowing down: sales for BMW in China fell 13.4 per cent last year, 9 per cent for Mercedes-Benz, and 11 per cent for Audi, compounding declining demand in Europe.
A report from the Central European Institute of Asian Studies on Thursday found that Volkswagen, “the largest German investor in China, is experiencing declining profits even as it increases its investments in China”.
The situation for European carmakers has deteriorated so rapidly that there is talk of Chinese rivals buying up plants VW plans to close.
This comes as cutthroat competition from Chinese firms pummels European rivals in China, Europe and in third markets.
Faced with the same bleak domestic demand as their European counterparts, these firms are pushing their products overseas, exporting growing levels of industrial overcapacity. This resulted in a near-trillion dollar trade surplus with the world in 2024, Chinese customs data showed, and a 12.6 per cent increase in its surplus with Europe.
As recently as 2020, China was a net importer of cars – a situation that morphed dramatically over the course of the pandemic. It now boasts a 5 million-vehicle trade surplus, while Germany’s own surplus in cars is down 50 per cent over the same period.
For Chinese manufacturers, “Europe is super profitable, especially with an extreme price war in China,” the industry source said. “Nobody is making money in China any more,” the source added, pointing to the “extreme deflation” implicit in 27 consecutive months of falling producer price inflation.
The picture threatens to get even worse for Europe when US president-elect Donald Trump takes office next week. Trump has threatened to impose high tariffs on Chinese goods, with many predicting that a large portion will be diverted to Europe, which remains relatively open to many Chinese goods.
All of this comes ahead of a German federal election in February, which is “haunted by the spectre of deindustrialisation”, wrote analysts in a joint paper from the Centre for European Reform, and the Council on Foreign Relations this week.
“Germany is starting to realise that China’s new automotive, clean technology and civil aviation industrial base directly competes with Germany’s manufacturing foundation. China’s macroeconomic imbalances now directly infringe on German industrial interests,” the analysts said.
The paper is part of a growing body of literature dedicated to the “second China shock”. The first such shock was when China joined the World Trade Organization in 2001 and subsequently gobbled up a large share of global manufacturing, helping hollow out swathes of industrial economies in parts of the United States, Britain, France and Italy.
Germany was spared the brunt of this and, in fact, benefited from China’s accession to the WTO given the complementarity between the two economies. German companies provided much of the machinery to power China’s extraordinary manufacturing boom, while its auto giants got rich off the country’s burgeoning middle class.
“That is no longer the case: China’s economy is much larger; its industry now produces the same goods as Germany and its export-biased growth is cutting into Germany’s European and global export markets,” the analysts wrote.
The problem is only going to spiral, many believe. Already fraught trade tensions are set to further fray in 2025, with the European Commission vowing to continue countering the impact of Chinese overcapacity.
“When the EV train really begins to roll, when the really major shock, the Volkswagen crisis, which is just beginning now, unfolds over the next coming years, that is – whether the Europeans recognise it or not – a China crisis,” the economic historian Adam Tooze told the Post in a recent interview.
“Because whether it’s visible in Europe or not, VW’s, Mercedes’ and BMW’s business models depend on large China markets, and those are under huge threat.”
Politically, however, policymakers are sober about the prospects of this improving any time soon.
Speaking at the MERICS event on Wednesday, the EU’s top official for Asia, Niclas Kvarnstroem, said “the origins of these policies are systemic, meaning that they are part and parcel of the strategic direction that China is taking”.
“Of course, there can be some kind of win-win, but that would require serious, concrete steps by China … I wish I could say we see immediate, concrete signs of that. We don’t at the moment,” Kvarnstroem added.
Back at the Audi plant in south Brussels, workers were nonplussed about rumours that Chinese buyers would reopen the plant to produce electric vehicles, and gloomy about Europe’s industrial prospects.
“EVs, maybe in 30 or 40 years, but not now,” Pierre said. “We in Europe … we are too small, China is cheap, America is big. We are trapped between two giants.”
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2025 South China Morning Post Publishers Ltd. All rights reserved.
Copyright (c) 2025. South China Morning Post Publishers Ltd. All rights reserved.
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