Electrification Transformation of Traditional Automakers: Analysis of Cost Structure and Competitive Advantages of Production Base Relocation

Based on collected data and analysis, I will provide you with a systematic and comprehensive research report.

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Mercedes-Benz Group recently made a strategic decision: to relocate production of the all-electric GLB compact SUV from Mexico to the Kecskemét plant in Hungary [1]. The model is priced at around €59,000. Meanwhile, Mercedes-Benz ceased production of the B-Class station wagon at its Rastatt plant in Germany by the end of 2024 [1]. This move marks that traditional European luxury automakers are accelerating their electrification transformation and optimizing their global production layout.

The Kecskemét plant in Hungary has become Mercedes-Benz’s second-largest production base globally, second only to its home base in Germany [2]. In 2025, the plant will not only start production of the electric flagship model GLB, but also take over production of the A-Class, and plans to expand into prototype development [2]. This trend reflects that Hungary’s strategic position in the European automotive industry landscape is significantly improving.

The factors prompting traditional automakers like Mercedes-Benz to shift production from North America (Mexico) to Europe (Hungary) are multi-dimensional. First,

. The 25% US automobile tariff policy implemented in 2025 poses significant pressure on imported goods that are not compliant with the USMCA (original US-Mexico-Canada Agreement) [3][4]. Mexico, as an important base for automobile exports to the US, faces the challenge of a sharp increase in tariff costs.

Second,

. According to McKinsey research, there are significant differences in model preferences between European and Chinese consumers: European users prefer station wagons (32% share) and small SUVs (28%) [5]. Local production in Europe can better adapt to local market demand and reduce product adaptation costs.

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There are fundamental differences in the manufacturing cost structure between electric vehicles (EVs) and fuel vehicles. According to research from the International Energy Agency (IEA),

[6], which is the main source of cost differences between EVs and fuel vehicles. Overall, the direct manufacturing cost of EVs is higher than that of fuel vehicles, mainly due to battery pack costs [7].

The specific cost structure comparison is as follows:

Cost Category	EV Share	Fuel Vehicle Share	Difference Analysis
Battery Pack	35%	5%	+30%
Powertrain	25%	30%	-5%
Body/Interior	20%	35%	-15%
Electronic Systems	12%	8%	+4%

The high cost of battery manufacturing makes supply chain localization a key strategy for traditional automakers to reduce costs. This is also an important reason why automakers are moving production closer to battery supply chains, rather than simply pursuing labor cost advantages.

European energy costs are among the highest globally, which poses significant pressure on manufacturing competitiveness. McKinsey research shows that

[5], and price volatility is high due to geopolitical influences, directly pushing up the operating costs of local manufacturing.

Regional differences in battery manufacturing costs are particularly obvious. According to industry data,

[7]. This cost advantage stems from China’s comprehensive advantages in economies of scale, industrial experience, access to critical mineral supply chains, and technological innovation in lithium iron phosphate (LFP) batteries.

European automakers face severe supply chain dependence issues. Research shows that

[5], and China controlled more than 80% of the global battery value chain in 2023 [5]. Europe’s battery cell production capacity accounts for less than 10% of the global total, with an even lower share in upstream links [5].

The slow progress of battery supply chain localization has further exacerbated this dilemma. Nearly half of the announced European battery capacity projects have disappeared in the short term due to corporate bankruptcies [5]. It is expected that European EV battery demand will reach 3-4 times the 2024 capacity by 2030, and up to 4-6 times in extreme cases [5].

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Traditional automakers are facing unprecedented pressure to lose market share. Since 2017,

, while the global market share of new energy vehicle (NEV) startups has doubled [5]. Currently, the two sides each account for approximately one-quarter of the global market.

This trend reflects fundamental changes in the industrial structure: China’s share of global automobile production has increased from 1% to 39%, surpassing Europe (13%), Japan (12%), and the US (3%) [8]. China is not only the world’s largest EV market (with a BEV share of 44% in 2024) [9], but also a major automobile exporter, including EV exports to Europe [10].

NEV startups have shown significant advantages in product development speed and cost control. According to research, global NEV startups can

, and their launch speed is twice as fast [5].

In terms of technological iteration, the product development cycle of startups (especially Chinese automakers) can be shortened to less than 2 years, which is half that of traditional European automakers [5]. In areas such as software-defined vehicles, intelligent cockpits, and advanced driver-assistance systems (ADAS), startups have faster technological iteration speeds. Chinese consumers have much higher demand for ADAS and intelligent cockpits than European consumers, and startups’ products are more in line with such needs [5].

Traditional European automakers are clearly behind in software talent reserves:

[5].

The EU’s 2035 ban on fuel vehicles is driving automakers to accelerate their electrification transformation, but it also brings compliance pressure. According to Transport & Environment research,

[9].

The EU’s policy that “local production can receive clean energy subsidies” (such as Germany’s €9,000 subsidy per EV) provides incentives for local production in Europe [11]. Meanwhile, CATL has reached an agreement with the Hungarian government to invest €7.3 billion in a battery factory, receiving a 30% land purchase subsidy and a 10-year tax break, with the condition of opening CTP battery technology licensing to European companies [11].

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The trend of traditional automakers relocating production bases from North America to Europe reflects the following strategic logic:

. Under the US 25% tariff policy, goods that are not USMCA-compliant face a surge in costs. Producing locally in Europe to serve the European market can effectively avoid high tariff risks.

. Moving production closer to battery supply chains (such as CATL’s factory in Hungary) can reduce logistics costs, shorten supply cycles, and improve supply chain resilience.

. European consumers prefer station wagons and small SUVs, which are completely different from the North American market’s preference for pickup trucks and large SUVs. Local production can better adapt to regional market demand.

Although adjusting production bases can optimize the cost structure to a certain extent, traditional automakers still face deep-seated challenges:

. European automakers need to invest nearly €15 billion annually in electrification transformation (with R&D and capital expenditures accounting for about half each), and must maintain a healthy balance sheet to sustain this level of investment [5].

. Traditional European automakers have long-term accumulation in fuel vehicle and hybrid technologies, and the market related to fuel vehicles will still be worth €100 billion by 2035 [5]. How to use cash flow from fuel vehicle businesses while avoiding resource and energy dispersion that affects electrification transformation is a complex strategic balancing task.

. The global unified platform strategy of traditional European automakers is facing challenges. There are huge differences in electrification progress, technological needs, and consumption habits across regions: China’s NEV penetration rate and demand for intelligent connectivity are much higher than those in Europe, and a single platform cannot meet regional differentiated needs [5].

Looking ahead, the global layout of production bases for traditional automakers will show the following trends:

1. Strengthening of regionalized production patterns
   . Affected by tariff policies and supply chain security considerations, automobile production will become more regionalized. North America, Europe, and China will each form relatively independent industrial chains.

2. Accelerated localization of battery manufacturing
   . To reduce battery costs and supply risks, automakers will accelerate the localization of battery manufacturing. The case of Stellantis and CATL investing in a 50GWh LFP battery factory in Spain foreshadows this direction [12].

3. Cost control becoming a core competitiveness
   . Facing price competition from NEV startups, traditional automakers must significantly reduce production costs while maintaining brand premiums. LFP battery technology will be more widely adopted due to its cost advantages [12].

4. Software capability development becoming a key factor
   . Future competition will not only lie in hardware manufacturing, but also in software development. Traditional automakers need to significantly increase investment in software R&D and enhance their digital capabilities.

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The relocation of production bases by traditional automakers from North America to Europe is the result of the combined effect of multiple factors. From a cost perspective, this adjustment helps avoid US tariff risks, get closer to battery supply chains, and reduce logistics costs, but Europe’s high energy costs and supply chain dependence remain structural disadvantages.

From a competitive advantage perspective, this adjustment is a passive response strategy by traditional automakers to cope with dramatic changes in the market pattern. Deep-seated problems such as market share loss, gaps in product development efficiency, and insufficient software capabilities cannot be solved solely by adjusting production bases. Traditional automakers need to make simultaneous efforts in technological innovation, cost control, and software capability building to maintain competitiveness in the new round of industrial transformation.

Geographical adjustment of production bases is only a tactical optimization, and the real strategic challenge lies in how to reconstruct business models, organizational structures, and capability systems to adapt to the competitive requirements of the electrification and intelligent era.

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[1] Bloomberg - “Mercedes Starts SUV Output in Hungary as Costs Weigh” (https://www.bloomberg.com/news/articles/2026-01-19/mercedes-starts-suv-output-in-hungary-as-costs-tariffs-weigh)

[2] LinkedIn - István Joó’s Post on Mercedes-Benz Hungary Production (https://www.linkedin.com/posts/istván-joó-11469734_mercedes-benz-has-decided-to-relocate-activity-7414334193415102465)

[3] LinkedIn - “The Global Automotive Industry in 2025: Tariffs Reshape Pricing” (https://www.linkedin.com/pulse/global-automotive-industry-2025-tariffs-reshape-pricing-barry-hillier-uclzc)

[4] Dickinson Wright - “EV Tariffs and Trade Shifts: May 2025 Auto Industry Update” (https://www.dickinson-wright.com/news-alerts/an-ev-newsletter-vol-3-no-5)

[5] McKinsey - “A New Era: An Action Plan for the European Automotive Industry” (https://www.mckinsey.com/features/mckinsey-center-for-future-mobility/our-insights/a-new-era-an-action-plan-for-the-european-automotive-industry)

[6] IEA - “Electric vehicle batteries – Global EV Outlook 2025” (https://www.iea.org/reports/global-ev-outlook-2025/electric-vehicle-batteries)

[7] IEA - “Executive Summary – What Next for the Global Car Industry” (https://www.iea.org/reports/what-next-for-the-global-car-industry/executive-summary)

[8] Zero Hedge - Global Car Production Share Analysis (https://assets.zerohedge.com/s3fs-public/inline-images/Ge4V_5MWwAAOn6H.jpg)

[9] Transport & Environment - “EV Progress Report 2025” (https://www.transportenvironment.org/articles/ev-progress-report-2025)

[10] American Security Project - “How the U.S. Can Close the Gap in the EV Race” (https://www.americansecurityproject.org/charging-ahead/)

[11] Analysis of Chinese NEV Exports to the EU Market (https://pdf.hanspub.org/ecl_2314114.pdf)

[12] S&P Global - “Where are EV battery prices headed in 2025 and beyond?” (https://www.spglobal.com/automotive-insights/en/blogs/2025/01/where-are-ev-battery-prices-headed-in-2025-and-beyond)