The End of the ICE Age: Why Did the European Automakers Fall Behind China in the EV Battery Race?

Abstract

The decades of dominance in internal combustion engine (ICE) technology allowed German car manufacturers to secure their position as one of the incumbents in the global automotive industry. As a strategic industry within the European Union, German carmakers were backed by their national and the EU policy frameworks. However, in recent years, electric mobility has begun to challenge the status quo. China gained an advantage in battery-powered electric vehicles (BEVs) through strategic policies and firm-level dynamics. This paper examines why the European carmakers have fallen behind China in the EV battery race, focusing on German automakers as a critical case. The study builds primarily on the theoretical foundation of economic statecraft and economic catch-up, along with related concepts of incumbent trap, windows of opportunity and leapfrogging. These conceptual underpinnings facilitate identification of the essential mechanisms that enabled China’s rise in battery technology and help to explain the challenges faced by German carmakers and the EU. This qualitative study employs an iterative approach, through which a conceptual framework is developed and adapted in relation to the empirical base and insights gained from policy analysis, reports and interviews with several automotive industry experts and battery researchers. Findings indicate that the German automakers' delay in developing EV battery technology stems from structural factors and the strategies of the country's biggest car manufacturers, VW, BMW and Mercedes-Benz. The car producers heavily relied on their dominance in the ICE technology and thus fell into an incumbent trap. The delayed focus on developing EV battery production increased their reliance on Chinese battery providers. Furthermore, the German state contributed to the delay because economic statecraft was not a motivating factor in their policy-making, thus leading to a delayed strategy implementation and insufficient funding to foster EV battery innovation. Moreover, the role of lobbying by the incumbent automakers and the German state in delaying EV adoption is a key factor. The European Union did not develop an EV battery ecosystem due to fragmented policy, delayed strategy, funding misallocation, and narrow battery regulation. However, in recent years, Germany’s shift toward industrial policy has contributed to the transformation of EU policy measures, though their effects have yet to fully materialize. 1 Meanwhile, China forged ahead in the battery race due to a combination of policies from the state, the local governments and the firm strategies. The state initially supported the establishment of the auto industry, aided by the learnings from joint ventures with Western automakers. Eventually, a particular focus on BEVs was fostered by domestically-oriented economic statecraft motivations, as well as R&D expenditures, financial incentives and firm entrepreneurship. This enabled Chinese leadership in EV battery making, allowing them to catch-up and leapfrog Germany in EV battery technology. This study contributes to the broader academic literature on incumbent traps, the competitiveness of the German automotive incumbents and the European EV battery industry. Finally, the paper presents the broader implications for the EU's competitiveness highlighting an innovation gap and threat to strategic technological autonomy in the increasingly challenging geopolitical landscape.