[SMM Analysis] Europe's Postponement of Internal Combustion Engine Vehicle Ban Is a Correction, Not a Reversal

The European Union's original plan to completely ban the sale of internal combustion engine vehicles by 2035 has been effectively canceled or weakened and is now entering the formal legislative process, rather than remaining merely a proposal. The revised proposal recently put forward by the European Commission no longer insists on the requirement that "all new cars must be zero-emission from 2035," but instead changes the target to achieving a more relaxed emission reduction goal (e.g., 90% CO₂ reduction) by 2035 and allows a certain proportion of traditional internal combustion engine vehicles and hybrid vehicles to continue to be sold. This proposal has become the official policy direction of the EU and has been widely reported, but its specific content still requires formal approval from EU member states and the European Parliament to be implemented.

Europe's decision to delay or weaken the 2035 ban on internal combustion engine vehicles marks a shift in its electrification policy from a "single-path drive" to a "multi-path buffer." This policy adjustment does not equate to a "regression" of the electrification strategy but stems from a rebalancing under practical pressures. Over the past three years, European automakers have generally faced multiple challenges, including insufficient profitability of EVs, lagging construction of local power battery capacity, high supply chain costs, and changes in the global competitive landscape. Meanwhile, against the backdrop of a weak macro economy and high interest rates, consumers have become significantly more price-sensitive towards BEV models, leading to a slowdown in the growth rate of EV penetration. Insisting on the mandatory ban by 2035 at this point would place excessive pressure on both automakers and consumers. Therefore, a moderate extension at the policy level is more akin to a "correction" rather than a "reversal."

From an industrial competition perspective, this policy change does indeed weaken the acceleration opportunities for Chinese BEVs in the European market in the short term. With the ban postponed, European automakers no longer face an absolute deadline for transitioning to pure electric vehicles. Their traditional strengths, such as hybrid and highly efficient internal combustion engine technologies, have gained a longer transition period, objectively delaying the direct competitive pressure between China and Europe in the pure electric vehicle track. Simultaneously, the EU is strengthening tariffs, subsidy reviews, and localization production requirements, further increasing the compliance costs for imported BEVs and diluting the advantages of Chinese brands in the pure electric market for a certain period. However, the expanded policy space for PHEVs conversely opens up another growth path for Chinese companies. In plug-in hybrid technology, Chinese automakers possess globally leading advantages in energy efficiency, cost, and overall vehicle performance. European consumers also show a preference for hybrid forms that combine internal combustion engines and electric power. Therefore, in the short to medium term, the expansion of the PHEV market size in Europe will benefit the penetration of Chinese products.

From the perspective of long-term global new energy vehicle trends, the loosening of European policies may lead to a smoother upward curve in global BEV penetration rates, but it will not change the core judgment that "the endgame remains electrification."The decline in battery costs, improvement of the supply chain, and gradual maturation of infrastructure are long-term irreversible driving forces. The impact of the delayed ban is mainly reflected in the time dimension, rather than a directional change. More importantly, Europe is not simply "abandoning pure electric vehicles," but introducing a more flexible emission reduction mechanism, achieving overall carbon reduction targets for the 2030s through multiple pathways such as carbon offsets, sustainable fuels, and powertrain efficiency.

The impact on the battery industry chain is also twofold. In the short term, lowered expectations for BEV demand may exert some pressure on ternary high-nickel batteries, while the demand structure for LFP and mid and low-cost systems is more robust, and the high growth in ESS demand provides important support for the battery industry.As the space for PHEVs expands in Europe, the sources of power battery demand will become more diversified, and battery cell manufacturers will make certain adjustments to the production schedule mix of different systems.However, from a longer-term perspective, the overall demand for power batteries will still be dominated by the global electrification process, and Europe's policy relaxation does not constitute a substantial change to the medium and long-term demand curve.

Overall, Europe's postponement of the internal combustion engine vehicles ban brings structural changes rather than a trend reversal. In the short term, it puts pressure on China's pure electric vehicle exports, but in the medium and long term, there are still penetration opportunities based on the advantages of plug-in hybrid technology; for European automakers, this is a practical choice to ease the pressure of transition; for the global new energy industry chain, it represents a shift from "aggressive promotion" to a "sustainable development pace." The policy pace is changing, but the direction of electrification remains unchanged.

Lithium Battery and Terminal Analyst Yang Le 13916526348