The IAA Mobility Show last week in Munich highlighted a clear shift in the European auto industry; contract manufacturing, used primarily for overflow from European OEMs, is now being redefined as Chinese brands seek to establish a local foothold.
Legacy OEMs step back, contract manufacturers left idle
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Companies such as Magna Steyr in Austria, Valmet Automotive in Finland, and VDL Nedcar in the Netherlands traditionally built additional models for Europe’s automakers. These included low-volume projects or temporary runs when in-house plants operated at full capacity. Today, however, consolidation sweeps across the industry and the phase-out of many Internal Combustion Engine (ICE) vehicle lines leaves European OEMs with low utilization rates at their own facilities. Volkswagen Group is on track to shed 30% of its manufacturing capacity in Germany alone over the next 4-5 years, while BMW Group will bring all European production in-house from 2028, despite outsourcing as much as 10-20% of it annually in the past.
The result is falling demand for external manufacturing. Magna Steyr has been particularly affected, with contracts for Jaguar’s E-Pace and I-Pace ending in 2024, BMW’s 5-Series stopping in 2023, and production of the Toyota Supra and BMW Z4 scheduled to finish by 2027. This has created significant spare capacity at its plant in Graz, which can produce up to 235k units per annum, while also presenting an opportunity for smaller Chinese brands looking for a low-risk, ready-made European launchpad to test the waters.
Chinese automakers localize in Europe
Enter Guangzhou Automobile Group (GAC) and Xpeng. At this year’s IAA Mobility Show, GAC announced that its Aion V Midsize SUV and Aion UT Hatchback will be built at Magna Steyr, while Xpeng confirmed that assembly of its G6 and G9 SUVs is already underway at the same facility. By producing locally, the companies aim to avoid EU tariffs on Chinese Electric Vehicles (EVs) while increasing their responsiveness to European tastes and demand. To this end, Xpeng also announced it will open a new R&D centre in Munich, with the explicit goal of expanding its regional model range.
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By GlobalDataA broader push across the continent
GAC and Xpeng are part of a broader second wave of Chinese models entering Europe, characterized by a greater emphasis on localization and sheer variety compared to the first wave in the early 2020s. BYD confirmed at the show that the Dolphin Surf will be the first model at its new Hungarian plant, coming online at the end of 2025. Leapmotor, in partnership with Stellantis, unveiled the B05 Hatchback which it intends to localize from 2027. Chery has also begun production in Spain through a joint venture with Ebro, while other Chinese brands continue to explore local assembly arrangements.
Contract manufacturers reposition themselves
For European contract manufacturers, the arrival of smaller Chinese OEMs offers a crucial lifeline. Magna Steyr’s new contracts with GAC and Xpeng will help offset its loss of business with established European players. Valmet Automotive, meanwhile, has faced reduced order volumes and a change in ownership structure, with CATL exiting and the Finnish state stepping in as a shareholder. VDL Nedcar has also faced contract losses from BMW and remains under pressure to secure long-term agreements, having ended large-scale vehicle assembly in early 2024 and partially transitioned to mobility solutions and defense. For Magna Steyr and Valmet, at least, partnering with Chinese automakers represents a way to continue operating as car producers, even as their traditional clientele reduces its reliance on outsourced manufacturing.
Chinese presence at the IAA
The strong Chinese presence in Munich underlined this strategic shift. A total of 116 Chinese exhibitors participated, making them the largest foreign group at the event. GAC emphasized its “in Europe, for Europe” strategy, with executives stressing that localization is central to its international plans. Xpeng showcased updated models with record charging speeds, while also outlining plans to diversify its line-up with new Sedans developed in part through its Munich R&D centre. The breadth of the Chinese offering, from affordable Hatchbacks to Premium Sedans and SUVs, underscored how quickly these brands have built comprehensive product portfolios.
Europe faces a market realignment
For European OEMs, the trend represents both competitive pressure and a structural shift in the supply base. Domestic automakers still dominated the Munich event, but with stagnant demand and shrinking margins, their competitive position looks increasingly challenged. GlobalData estimates that Chinese automakers could reach European market shares similar to those of Japanese and Korean OEMs, at 13% and 7% respectively, within the next decade. In this environment, contract manufacturing is no longer simply a mechanism to handle overflow. Instead, it is becoming a strategic channel through which new entrants establish themselves and compete on equal terms.
Conclusion
The announcements at the IAA Mobility Show 2025 confirm that Europe’s contract manufacturing capacity is being repurposed. As traditional OEMs reduce their reliance on outsourcing, Chinese automakers are stepping in to use existing facilities, manage tariff exposure, and accelerate their entry into the market. For companies such as Magna Steyr and Valmet, these partnerships may be vital to their future as car manufacturers. For European automakers, the shift signals a more competitive landscape where capacity-for-hire, once entirely at their disposal, is now becoming a key conduit for the second wave of Chinese EVs.
Jeremy Worlock, Analyst, Production Forecasts, GlobalData
This article was first published on GlobalData’s dedicated research platform, the Automotive Intelligence Center.
