Volkswagen closed a factory in Germany, and the "blame" lies with combustion engine cars.

Chinese supremacy in the global electric vehicle market is sounding the alarm for European automakers, who started the transition from gasoline-powered cars to hybrid and electric versions too late and are unable to keep up with Chinese competition – both in Europe and in the Asian country.

Volkswagen , for example, will stop manufacturing vehicles at its factory in Dresden starting Tuesday, December 16th. This is the first time in its 88-year history that the automaker will shut down a car production line at a plant in Germany.

The decision, at first glance, is not directly related to competition from Chinese electric cars, but it reveals Volkswagen's difficulties in allocating its investment budget of approximately €160 billion for the next five years, considering the expected longer lifespan of gasoline-powered cars.

The revolving budget, which is updated annually, has suffered cuts in recent years. For the period from 2023 to 2027, the equivalent amount was €180 billion.

The German automaker had already been facing widespread challenges, with the expectation of a longer lifespan for fossil fuel engines requiring new investments, at a time when Europeans are beginning to embrace electric cars.

In 2025, for the first time, sales of hybrid vehicles will surpass those of gasoline cars in the European market, with 34.8% compared to 27.2%.

The Dresden plant has produced fewer than 200,000 vehicles since production began in 2002 – less than half the annual output of VW's main plant in Wolfsburg.

The factory was conceived as a showcase for Volkswagen's engineering excellence, and its initial function was the assembly of the sophisticated VW Phaeton. After the Phaeton was discontinued in 2016, the Dresden plant focused on Volkswagen's electrification efforts, most recently producing the ID.3, an electric vehicle.

However, high production costs led to a restructuring of the German automaker's verticals. Volkswagen CEO Thomas Schäfer said earlier this month that the decision to end production was made from a "fundamental economic perspective."

Strictly speaking, the measure represents a symbolic step by the automaker in its plans to reduce production capacity in Germany. The changes are part of an agreement signed with the unions last year, which will also result in the cutting of 35,000 jobs at VW in Germany.

The land where the plant is located will be leased to the Technical University of Dresden for the creation of a research campus focused on the development of artificial intelligence, robotics, and chips.

Cash flow

Volkswagen's decision fits into a broader picture of difficulties faced by European automakers in maintaining cash flow due to falling sales in China and regional demand, as well as US tariffs impacting sales in the United States.

The German automotive giants – which include BMW and Mercedes-Benz , as well as Volkswagen – depend on China for about a third of their sales and have been hit by a weaker economy in the country and fiercer competition from Chinese automakers, amid a fierce price war for electric vehicles.

The drop in European demand didn't help either. New car sales in the EU fell 18.3% in August compared to the same month of the previous year, reaching their lowest level in three years, with double-digit losses in the main markets — Germany, France and Italy.

There was a recovery in September (+10%), October (+5.8%) and November (+3.7%), supported by increased sales of hybrid vehicles.

A study conducted by the TradingPedia platform, based on new car registrations from the European Automobile Manufacturers Association (ACEA) between January and September of 2024 and 2025, reveals a structural transformation in consumer behavior and the strategies of European automakers.

“Hybrids are acting as a market stabilizer, smoothing the transition between conventional engines and pure electric vehicles, especially in regions where purchasing power and infrastructure still limit the full advancement of electrification,” explains Michael Fisher, an analyst at TradingPedia.

European consumer appetite for hybrid and electric cars is growing consistently, but at a slower pace than the European Union's targets. Although they will represent more than 60% of new car sales in 2025, this growth is not enough to guarantee the energy transition within the established timeframe – which foresees a ban on combustion engines in 2035.

The EU itself is discussing relaxing rules to avoid stifling local industry, studying regulatory loopholes and even a five-year extension (until 2040).

Brussels has already signaled that there will be no complete ban in 2035, but rather gradual restrictions, with the possibility of limited production of combustion vehicles under certain conditions – due to advances in synthetic fuels (e-fuels) and biofuels.

Pressure from the European automotive industry, including Stellantis (owner of Fiat and Jeep) and Mercedes-Benz, which fear losing competitiveness to Chinese automakers, is also being taken into account.

While any easing of restrictions would be welcome for a sector that accounts for around €1 trillion (R$6.4 trillion) in economic output, it also brings risks. Excessive flexibility could slow technological development and widen the gap with American companies like Tesla and Chinese competitors such as BYD.