Europe’s China dilemma: firms double down on manufacturing hub despite rising risks and EU ‘de-risking’ push

China’s manufacturing dominance remains unchallenged due to a combination of cost efficiency, vast supplier ecosystems, and unmatched scale that global firms find economically irresistible. Western automakers, for instance, pragmatically accept halving their profits to manufacture in China rather than fully profiting from plants elsewhere, underscoring the country’s irreplaceable role in global supply chains. This is exemplified by GM’s export surge of 312,000 Chinese-made vehicles in 2024, a 65% increase over two years, highlighting how China’s advanced manufacturing capacity continues to attract foreign investment and production.

Even tech giants like Apple remain deeply embedded in China’s manufacturing infrastructure, with CEO Tim Cook emphasizing in early 2026 that China is the company’s most critical production base despite diversification efforts into India and Vietnam. This highlights how China’s sophisticated manufacturing ecosystem and infrastructure create a supply chain complexity that is difficult to replicate elsewhere, reinforcing its centrality in global production networks.

China’s strategic pivot from reliance on labor quantity to technological superiority is central to its sustained manufacturing leadership amid demographic decline. By investing heavily in automation, AI, and robotics—boasting more industrial robots than the rest of the world combined—China offsets its 76-year low birth rate, transforming economic inputs from human labor to technology-driven productivity. This shift is supported by China’s massive electricity generation capacity, which at 3.89 terawatts by the end of 2025 dwarfs the U.S. and powers its advanced manufacturing machinery, illustrating how infrastructure scale now underpins economic output more than workforce size.

By mid-2026, German firms operating in China exhibited a marked improvement in business sentiment despite ongoing geopolitical strains such as the Iran war and trade tensions. Survey data revealed that 37% of these companies anticipated an economic upturn in China within six months—a 22-point increase from the previous year—while 42% expected higher turnover and 29% forecasted profit growth by year-end, underscoring resilient optimism even as 75% grappled with rising logistics costs.

Contrary to the European Union's push for de-risking supply chains away from China, a dominant 68% of European companies surveyed by the EU Chamber of Commerce in China confirmed they were either maintaining or expanding their manufacturing footprint in the country. Jens Eskelund emphasized this dependence, noting that de-risking has yet to become a prevailing theme as firms recognize that competing on price and quality often necessitates integration into Chinese supply chains, where many competitors already leverage local advantages.

European firms’ commitment to China is strongly driven by the country’s cost efficiencies and technological advancements, particularly in automation. Denis Depoux highlighted the dramatic leap in automation over just two years, exemplified by Nio’s factory employing 941 fully autonomous robots enabling round-the-clock production. Coupled with lower industrial energy prices, raw material costs, and selective state subsidies, these factors create a compelling value proposition that outpaces other manufacturing hubs, reinforcing China’s role as a critical production base.

While the majority of European companies double down on China, about a quarter are cautiously adopting a dual strategy by expanding operations within China while simultaneously diversifying supply chains to alternative locations. This nuanced approach reflects a measured response to geopolitical uncertainties, balancing the undeniable efficiencies and market access China offers with a hedging tactic to mitigate potential risks without abandoning the country’s manufacturing ecosystem.

Despite the complex geopolitical landscape marked by the Iran war and escalating US-China and EU-China trade tensions, German firms operating in China have demonstrated a surprising resilience and optimism. According to a May 2026 survey, nearly 61% of these companies plan to increase their investments in China over the next two years, with 42% anticipating higher turnover and 29% expecting increased profits by year-end. This optimism persists even as over half of the firms report tangible operational impacts such as rising logistics costs and trade challenges stemming from these geopolitical frictions.

By May 2026, the European Union is set to enforce stringent supply chain diversification mandates that will fundamentally reshape procurement strategies across critical sectors. Companies will be required to source components from at least three non-Chinese suppliers, ensuring no single provider accounts for more than 30%–40% of their supply. This regulatory shift from voluntary guidelines to binding rules underscores the EU’s strategic imperative to reduce dependency on Chinese manufacturing and bolster supply chain resilience amid mounting geopolitical uncertainties.

The new EU sourcing regulations will compel companies operating within the bloc to undertake significant adjustments in their supplier relationships and compliance frameworks. Firms must now navigate a more complex procurement landscape that demands diversified sourcing and rigorous adherence to regulatory mandates, effectively transforming corporate compliance requirements. This evolution reflects the broader geopolitical and industrial policy drive to 'untangle' European industries from vulnerabilities linked to Chinese manufacturing dominance.

By 2026, European firms have transitioned from traditional risk management to crisis-driven sourcing strategies in China, compelled by a convergence of structural forces including export controls, tariffs, and carbon regulations. Ugo Flumian, Chief Procurement Officer, encapsulates this shift: “Il y a un an, l’approvisionnement en Chine était une conversation de gestion des risques. En 2026, pour de nombreuses industries, c’est devenu une conversation de gestion de crise.” This evolution demands granular, product-level decision-making rather than broad country-level judgments, as Pierre Courtemanche emphasizes, focusing on specific inputs, associated risks, and ready alternatives amid China’s export restrictions on critical minerals like gallium and tungsten, which have weaponized supply chains and heightened fragility.

The EU’s Carbon Border Adjustment Mechanism (CBAM), effective by 2026, has disrupted cost dynamics by imposing 15-20% higher costs on Chinese steel and aluminum imports, prompting firms to reconsider sourcing economics and explore near-shore alternatives in Europe and Turkey. Flumian notes that Chinese aluminum production’s heavy reliance on coal contrasts with European and Turkish foundries, which may now hold a structural cost advantage once CBAM is factored in. This regulatory pressure, combined with structural tariff unpredictability, has led advanced companies to shorten contract durations and maintain qualified alternative suppliers to enhance agility and mitigate supply chain shocks.

Despite mounting pressures to diversify, companies often avoid full withdrawal from China due to its unparalleled manufacturing ecosystem characterized by rapid tooling development, dense supplier networks, and superior engineering capabilities. Wil Liew highlights China’s unmatched speed and infrastructure, which cannot be quickly replicated elsewhere, compelling firms to rebalance rather than abandon their supply bases. However, this reliance is a strategic trap; chasing Chinese deflationary pricing risks deepening dependency and incurring steep costs when future disruptions inevitably force costly supply base reconstructions.

The transatlantic geopolitical divide further complicates sourcing strategies, necessitating differentiated, category-specific responses that carry distinct regulatory and board-level implications. Flumian points to sensitive electronics and power motors as categories requiring meticulous risk assessment due to intellectual property vulnerabilities and hidden dependencies on Chinese rare earth materials. Effective resilience now hinges on tracing rare earth content to its origin, underscoring the need for nuanced, product-level sourcing decisions that balance strategic and commercial considerations amid evolving global tensions.

By early 2026, European firms have moved beyond a simplistic 'China or not' sourcing dilemma, adopting a nuanced approach that evaluates risks and alternatives on a product- and material-specific basis. As Pierre Courtemanche emphasizes, the critical question is no longer whether to source from China, but rather which inputs carry what risks and have ready alternatives. This strategic resilience manifests in balancing China’s unparalleled cost and speed advantages—especially in commodity PCBA production—with diversification into nearshoring or other regions for sensitive electronics where intellectual property concerns and carbon border adjustment mechanisms (CBAM) impose significant pressures.

Despite mounting geopolitical and regulatory pressures, wholesale exits from China remain rare because replicating its manufacturing ecosystem’s scale, speed, and dense supplier networks is a formidable challenge. Wil Liew underscores that China’s unmatched capabilities in rapid tooling development and iterative engineering have been decades in the making, making swift relocation efforts impractical. Consequently, firms must integrate China’s strengths with strategic diversification rather than abandon it outright, underscoring the competitive necessity of maintaining a foothold in China while managing emerging risks.