Europe Gives Up On Its 2035 Internal Combustion Engine Ban

The European Commission has abandoned its planned 2035 ban on new internal combustion engine cars after Germany withdrew support, with a formal proposal to scrap the ban expected next week; Chancellor Friedrich Merz endorsed ‘technological openness,’ citing synthetic fuels alongside electric mobility and leaving other emission targets uncertain. The policy reversal amplifies regulatory uncertainty for automakers already facing a slowdown in EV demand—global EV registrations rose just 6% in November to roughly 2 million (China +3% to ~1.3m; North America -42% to ~100k; Europe +36%)—as U.S. tax-credit expirations and subsidy cuts in China weigh on growth. Concurrent trade and corporate responses—Mexico’s new tariffs up to 50% on Chinese vehicles (estimated to raise $2.8bn in 2026) and Volkswagen’s study of range‑extending EVs and local production options—signal accelerating supply‑chain fragmentation and a shift in capital allocation toward diversified powertrains and regional manufacturing, with material implications for margins, demand trajectories and investment planning across the auto sector.

Analysis

The European Commission has moved to abandon its February 2023 plan to ban new internal-combustion-engine (ICE) cars by 2035 after Germany withdrew support, with a formal proposal expected next week; Chancellor Friedrich Merz endorsed "technological openness," citing synthetic fuels alongside electric mobility and saying the shift gives industry planning security, while it is unclear whether the 55% emissions reduction target for 2030 remains. Global EV demand momentum has slowed materially: November registrations rose 6% to just under 2 million, led by China (+3% to >1.3m) and Europe (+36%), but North America plunged 42% to ~100,000 following expiry of the $7,500 federal tax credit, putting the region on track for its first EV sales decline since 2019. Trade policy and corporate responses are fragmenting the market: Mexico approved tariffs up to 50% on Chinese-made vehicles (50% for autos; Chinese share ~20% of Mexico) and budgets to raise ~$2.8bn in 2026, while Volkswagen is studying range-extended EVs and regional production shifts (including Audis in the U.S.). Collectively these developments raise near-term demand risk for pure EV plays, increase regulatory and tariff-driven supply-chain dispersion, and shift capital-allocation uncertainty for OEMs and suppliers.

Key Decisions for Investors

• Re-evaluate positions in OEMs and suppliers that have the highest pure-EV exposure and consider trimming or hedging those positions given the slowdown in EV registrations (global +6% Nov; North America -42%),
• Favor or add selective exposure to manufacturers and suppliers with diversified powertrain capabilities or strong regional manufacturing footprints (ability to shift production to U.S./Europe/Mexico) as tariffs and policy reversals increase the value of flexibility,
• Monitor three near-term indicators—monthly EV registrations in China/NA/EU, U.S. fuel-economy policy moves, and Mexico tariff implementation—and be prepared to adjust allocations quickly if NA demand deterioration or further subsidy cuts occur,
• Consider tactical exposure to suppliers of range-extender engines, synthetic-fuel technologies or ICE components if VW and other OEMs confirm EREV programs, while keeping position sizes modest until commercialization and consumer uptake are evident,
• Use downside protection (options or pairs trades) on cyclical auto suppliers to guard against margin pressure from tariff pass-through to consumers and continued weak EV demand