CRU auto outlook: Ongoing Iran conflict continues to cloud outlook

• Global production: Output will remain broadly flat this year, with further downgrades in Europe due to ongoing costs, regulatory, and competitive pressures, as well as a weaker economic outlook and rising inflationary pressures. While domestic demand in China is set to remain weak this year, exports continue to be robust, supporting production volumes and partially offsetting softer conditions at home. Meanwhile, the outlook in North America remains unchanged, although domestic demand is still muted amid affordability concerns.
• EV demand: EV growth in China has been weak so far this year, held back by tighter incentives and regulations, as well as holiday-related timing distortions, although there are some signs that BEV sales are beginning to rebound. North American EV sales appear to have bottomed out. US BEV sales remain weak, although there are more encouraging signs in Canada and Mexico. Nevertheless, we expect regional EV sales to contract this year. EV sales in Europe remain strong, supported by intensifying competition, new model launches, and regulatory standards.
• Key risks: Multiple risks continue to cloud the automotive outlook, including semiconductor shortages, tariff uncertainty, weaker demand, policy changes, geopolitical disruption, the war in Iran, supply-chain shocks, protectionism, cost pressures, and intensifying competition. Overall, production risks remain skewed to the downside, led by softer domestic demand in China and a subdued outlook in North America and Europe, and the ongoing conflict in the Middle East. In addition, rising material prices remain a concern.

Volvo switches to megacasting in Europe

Volvo’s EX60, based on the SPA3 platform, highlights how new BEV architectures are changing material use in the body-in-white.

The vehicle combines a press-hardened steel safety cage, steel doors, and a steel tailgate with greater use of aluminum in the front fenders, hood, bumper beams, shock towers, and floor. It also features a rear floor megacasting and a cell-to-body battery configuration, underlining how platform redesign can affect both structural layout and average material intensity.

While more OEMs are now exploring aluminum megacasting, adoption remains largely concentrated among pure-play EV makers, particularly in the premium segment, though it is beginning to spread to more multi-fuel OEMs. Aluminum megacastings will compete not only with steel, but with other aluminum product forms, including rolled products and extrusions. However, the technology often involves high capex, greater manufacturing risk, and a steeper learning curve mean adoption is likely to remain selective, and probably faster in China than in other regions.

Where it is deployed successfully, megacastings can deliver meaningful benefits. By reducing part count and simplifying assembly, it can shorten manufacturing time, lower joining complexity, and support weight reduction, which in turn can create secondary savings elsewhere in the vehicle and help improve range.

More broadly, the Volvo example shows the impacts of megacastings go beyond a simple material substitution story. It is increasingly tied to wider changes in platform design, structural integration, and battery packaging.

All these factors and trends are covered in CRU’s latest Automotive Materials Service.

For more information or to request a demo of the new service, please get in touch.

Global light vehicle production outlook muted in 2026

Automotive outlook remains clouded by Iran conflict uncertainty

Our current forecast assumes the ceasefire holds and that a deal is reached before the end of June, allowing the Strait of Hormuz to reopen gradually thereafter. However, any protracted conflict would likely lead to further downward revisions to the automotive outlook.

The conflict has hurt the automotive outlook in the region, with Iran the most affected. Globally, rising energy prices have added to inflationary pressures, with increasing pump prices weighing on disposable income and consumer confidence. CRU has made some downward revisions, as inflationary pressures are now expected to persist for longer than previously anticipated, affecting consumer purchasing.

On the supply side, Iranian producers have faced significant disruption since the onset of the conflict. Although several carmakers have resumed production since the ceasefire took hold, utilization rates remain below normal, while supply constraints and shortages of key components continue to weigh on output. Globally, higher energy prices, rising logistics costs, bottlenecks, and material price increases have added to cost pressures for suppliers and carmakers, particularly for materials and feedstocks linked to the Middle East, such as aluminum and petrochemical inputs used in plastics production.

While some suppliers and carmakers have experienced disruption and adopted workarounds, direct production impacts outside the Middle East have so far been limited, aside from some vehicles destined for the region. For instance, some Japanese OEMs have reduced output at plants in Japan for vehicles bound for the Middle East. However, there are signs that supply bottlenecks are beginning to affect a broader range of suppliers and OEMs, particularly if the conflict and associated disruptions persist. Some suppliers have indicated that more pronounced disruption could begin to emerge from June onwards.

If the conflict lasts longer than expected, costs are likely to remain elevated, supply risks will increase, and demand could weaken further as inflationary pressures intensify. For more analysis of the impact of the Iran conflict, read our latest insight: Auto outlook cut as Iran conflict hits costs, supply, and demand.

North America: Domestic demand remains subdued

North American short-term production analysis

Preliminary April actuals indicate that North America recorded modest growth for the second consecutive month, although performance remained mixed across OEMs. Stellantis and BMW posted strong gains, helped by a low base of comparison following production pauses for some models last year due to parts disruptions and tariffs.

The production outlook remains virtually unchanged from last month. While domestic demand has stayed relatively weak, and higher fuel prices linked to the conflict in Iran could place further pressure on consumer spending, output should continue to be supported by the ramp-up of newer models, localization, and inventory recovery following the retooling of some plants ahead of new model launches. We also expect some lost Ford output to be recouped, particularly in H2 2026, following the Novelis hot mill fire last year.

Yet, risks remain skewed to the downside. Ongoing tariff pressure, rising commodity prices, a DRAM chip supply imbalance, and continued demand softness could intensify inflationary pressures and further erode consumer confidence.   

Domestic sales in the US have remained relatively subdued since the start of the year, weighed down by affordability concerns and weak EV demand. Declines in March and April were further amplified by a high base of comparison, as consumers had brought forward purchases in the same period last year ahead of higher tariffs.

Stellantis and JLR have signed a non-binding memorandum of understanding to explore potential collaboration on product development in the US. While no official details have yet emerged, the agreement highlights Stellantis’ continued use of partnerships to strengthen its strategic capabilities, reduce costs, and improve utilisation rates. For JLR, which does not currently have a manufacturing footprint in North America, such a partnership could provide a faster and more cost-effective route to begin production in the region and mitigate exposure to higher tariffs. JLR exported around 105,000 units from Europe in 2025, underlining the scale of the potential opportunity.

The policy backdrop also remains uncertain. The US administration has shown a willingness to adjust trade policy and, with the USMCA review scheduled for July 2026, further changes remain possible. The outcome of the USMCA renegotiation could have significant implications for the automotive sector, given the high degree of cross-border integration among suppliers and OEMs. Canada and Mexico are likely to push for a reduction in Section 232 tariffs, while the US may seek stricter domestic content requirements.

North American electric vehicle trends and outlook

The North American BEV share softened in April from the previous month. Sales have stayed weak in the US since the removal of the consumer tax credit last September. By contrast, used BEV demand has remained relatively firm, supported by lower resale prices and rising inventory from increased lease returns.

Despite higher fuel prices, new EV demand remains subdued, while demand for conventional hybrids continues to rise as consumers look to improve fuel economy. Hybrid sales continued to accelerate even as the overall market declined.

In Mexico, EV sales have increased, supported by broader model availability and intensifying competition, with Chinese carmakers gaining share despite higher tariffs. In Canada, there are signs that the recently introduced EV subsidy is supporting sales.

Despite these positive signs, regional BEV sales are expected to remain weak, given the dominance of the US market.

Several OEMs have reset their EV strategies in response to softer demand and limited policy support, including cancelling BEV programmes, repurposing underutilised plants and shifting focus back towards ICE and hybrid line-ups.

BEV sales are likely to remain weak in 2026 amid softer consumer sentiment and the absence of incentives. However, we expect growth in Mexico and Canada, supported by a low base, some policy support and greater model availability.

Europe: Automakers continue to face headwinds

European short-term production analysis

Using the latest actuals from Germany, the United Kingdom, Spain, Italy, and the Czech Republic as a proxy for European production (see chart above), output grew by 1% y/y in April, marking a second consecutive month of growth, although the picture varied by market.

Germany recorded a 4% y/y decline, weighed down in part by weaker export demand, while output in the UK fell for the ninth consecutive month, albeit at a more moderate pace, helped by a low base. Meanwhile, Italy continued to post strong growth, supported by a low base and the production of several new Stellantis models in the country, such as the Jeep Compass and Fiat 500 Hybrid, which entered production at the end of last year.

Despite the increase in regional production and some positive domestic demand indicators in the first four months of the year, output across the region remains relatively weak, particularly relative to pre-COVID-19 levels and following last year’s decline. Output is expected to remain constrained by weaker export demand, intensifying competition, cost and regulatory pressures, and the ongoing conflict in Iran, which has weakened the macroeconomic outlook and is likely to weigh on domestic demand. As a result, CRU has made downward revisions to our production forecast. 

European output is set to decline this year before rebounding next year, supported by a relatively low base, some localization, and the ramp-up of several high-volume models. However, risks remain tilted to the downside given the significant headwinds.

European short-term sales analysis

Total light-vehicle sales across the “Big 5” Western European markets (Germany, France, the UK, Italy, and Spain) rose y/y in April 2026, marking the tenth consecutive month of growth.

Most major markets recorded growth, despite the clouded macroeconomic outlook. For instance, UK saw sales grow by 24% y/y, amplified by a low base due to buyers pulling forward purchases to March last year to avoid vehicle tax changes. While in Spain sales grew by 8%, boosted by strong private vehicle sales, and in Italy, it recorded double-digit growth of 11.6%, boosted by one extra selling day and favorable incentives.

Despite the relatively upbeat start to the year, we expect European vehicle demand to weaken in the second half of the year due to the economic impact of the ongoing conflict in Iran on consumers. Higher energy costs and fuel prices are expected to weigh on consumer confidence and purchasing behavior. We expect sales to be flat this year, but risks to the forecast remain tilted to the downside, given the Iran conflict remains ongoing.

European electric vehicle trends and outlook

BEV growth remained robust in April, with almost all European markets recording growth. BEV sales continue to grow, supported by widespread incentives in key markets, additional model launches, rising competition, and price reductions by a number of carmakers aimed at boosting sales and helping them meet emissions standards.

Plug-in hybrid growth continues to strengthen, although from a lower base compared with BEVs. Plug-in hybrid demand remains strong, supported by a broader model offering, larger batteries, and growing competition from Chinese carmakers, with a number launching plug-in hybrids at an attractive price point.

Chinese-made PHEVs are subject to a 10% import duty, compared with BEVs, which face tariffs of up to 45%. This allows these carmakers to offset higher tariffs, diversify their offering, and boost sales by launching PHEVs.

Early signs suggest interest in EVs has picked up since the onset of the Iran conflict. Online searches have increased, and some OEMs are reporting stronger orders as fuel prices rise, although delivery lead times mean the sales impact may take time to fully materialise. However, rising electricity costs and broader inflationary pressures could temper demand by weighing on consumer confidence and spending power.

Overall, we expect both BEV and PHEV sales to continue outpacing the broader market this year, increasing their share.

China: Domestic demand remains weak

China short-term analysis

According to the China Association of Automobile Manufacturers (CAAM), passenger car wholesales declined by 3% y/y in April, marking the fourth consecutive month of y/y decline. Meanwhile, the China Passenger Car Association (CPCA) reported a 21% y/y fall in domestic sales, the sixth consecutive month of contraction.

Chinese domestic vehicle sales continued to decline, weighed down by policy changes that created a pull-forward effect last year, as well as broader economic and geopolitical headwinds that have weakened sentiment. However, trends continue to vary significantly by OEM, powertrain type, and model.

Despite weaker domestic sales, exports continued to grow strongly, as Chinese carmakers expanded further into overseas markets to gain market share and help offset domestic margin pressure and intense competition. Export growth was recorded across all major powertrain types, with BEVs and PHEVs posting the fastest gains, as Chinese carmakers continue to leverage their competitive advantage in these segments.

Since the start of the year, the Chinese administration has tightened a series of measures relating to regulation and incentives, aimed both at encouraging the industry to become more self-sustaining and at providing targeted support for innovation and technological development, particularly in electric vehicles. For instance, the government has adjusted both the trade-in policy and the EV purchase tax.

China electric vehicle trends and outlook

Chinese BEV sales declined y/y for the fourth consecutive month in April, although the rate of decline was less severe than in previous months. BEV demand also fell by less than the overall market, lifting the BEV share to a record high.

The overall market remained subdued in the first four months of the year, while EV sales were hit particularly hard by the tightening of trade-in policy, changes to EV tax exemptions, and stricter technical requirements, with the A-segment most affected.

PHEV sales fell more sharply than BEV sales, pressured by stricter incentive criteria, including a minimum electric-only range of more than 100 km. As a result, PHEV share was below the level seen in the same period last year.

However, there are some signs that EV demand is beginning to recover, supported by new product launches. Higher fuel prices also appear to have supported EV demand relative to ICE vehicles. In addition, domestic brands have increased their share of sales, helped by relatively stronger EV demand.

Domestic sales are set to contract y/y this year for the first time since 2020, as incentives taper and a period of structural reform takes hold. However, while we expect vehicle sales to decline, output should still increase marginally, supported by strong export demand. However, rising inventory levels and growing cost pressures pose downside risks. OEMs are facing cost pressures from semiconductors, lithium, aluminum, and copper, prompting some carmakers to raise prices on certain models.

Policymakers have sought to curb aggressive pricing under the “involution” banner, with recent measures aimed at preventing carmakers from selling vehicles below cost. Although competition is likely to remain intense, there are signs that the market is shifting from volume towards value as price cuts begin to ease. However, strategies vary by OEM.

Over the medium to long term, we continue to expect BEVs to become the dominant powertrain, with ICE share declining, albeit at a slower pace and with meaningful variation by segment. PHEV share is likely to plateau over our forecast horizon before gradually easing as consumer preference shifts increasingly towards BEVs. However, in certain segments and use cases, particularly where range requirements and charging constraints persist, and in the absence of an ICE phase-out target, ICE vehicles and PHEVs are likely to remain attractive options.

Established key trends

These are some of the key established trends that CRU believes are having a profound effect on the automotive industry. (newly added, existing trend)

• Supply risk – Protectionism remains an ongoing supply-side risk. In addition, concerns around the availability of certain semiconductor chips remain firmly on automotive stakeholders’ radar. While the Nexperia-related chip shortage has eased somewhat, there are signs that another supply squeeze may be emerging. Reports suggest demand for DRAM (dynamic random-access memory), used in infotainment and ADAS systems, may exceed supply, which could drive price increases and potentially lead to supply disruption. Given DRAM content is typically higher in more premium vehicles, the impact may be more pronounced at the premium end of the market, although premium OEMs generally have more room to absorb price increases.
• Material price increase – Recent price rises in several raw materials, such as aluminum, copper, and battery raw materials, have pushed underlying vehicle prices upwards, with BEV raw material costs rising disproportionately relative to ICE vehicles. There are also risks that energy prices could rise due to the ongoing conflict in Iran. This could add further cost pressure to stakeholders, such as OEMs, potentially resulting in higher costs for consumers and weighing on vehicle demand.
• Rising protectionism –The US administration has imposed an additional 25% tariff on imported vehicles and key components. While there has been some flexibility for USMCA-compliant parts and vehicles, as well as through bilateral agreements with key trading partners, tariffs remain significantly higher than pre 2025 levels. In addition, uncertainty persists regarding future policy measures, including the 2026 USMCA negotiations. There is also a lingering risk that tariffs could escalate into broader protectionist actions.
• Rising protectionism continued – China’s growing control over automotive supply chain is becoming increasingly evident. Export controls on rare earths, restrictions on battery materials, and recent limits affecting semiconductor supply are heightening industry uncertainty. We expect China to continue leveraging its strategic position, while other countries move to diversify and secure access to critical materials and components. As a result, downside risks to automotive supply are likely to persist.
• Rising protectionism continued – The EU’s Industrial Accelerator Act proposes new measures, including “Made in the EU” (Union origin) requirements for vehicles and low-carbon requirements in a range of energy-intensive industries, and is designed to increase investment and localization in the EU. While many EV models may already source a substantial share of components domestically (excluding the battery), some components and models are likely to fall below the thresholds set out in the proposal. As a result, OEMs will need to weigh the costs of increasing domestic sourcing against the risk of becoming ineligible for public intervention and financial support schemes for corporate vehicles. These measures could also increase trade frictions with countries that are not exempt from the act, such as China.
• Protracted Iran conflict – A protracted conflict in Iran would have significant repercussions not only in the Middle East but globally. Inflationary pressures, particularly through higher energy prices, would weaken consumer confidence and increase costs across the automotive value chain. In addition, disruption to the supply of key materials and trade routes would add further cost and sourcing pressures, potentially affecting production and build rates. Ultimately, a prolonged conflict would weaken demand relative to our base case, with all regions affected, albeit to varying degrees.
• Regionalization – Increased protectionism, trade barriers, and diverging EV demand and consumer preference are promoting OEMs to increasingly regionalize their operations and product offerings, aimed at ensuring they remain responsive and competitive in an ever-changing market landscape.
• EV and emissions policy rollback – The US administration has rolled back IRA consumer tax credits, as well as taken steps to water down EPA and CAFE regulations. These changes are dampening EV demand and reducing compliance pressure on automakers, potentially prompting a shift back toward ICE and hybrid vehicles. In the EU, the European Commission has also adopted a more flexible approach to emissions targets, allowing compliance to be measured over three years instead of annually. Despite this adjustment, we remain optimistic about BEV growth. Automakers must still manage their emissions performance, even if regulations are softened. Additionally, the introduction of more affordable, high-volume models, increasing competition from Chinese brands, and the UK’s ZEV mandate will continue to drive BEV sales growth. The European Commission has announced an Automotive Package designed to support EU manufacturers and introduce greater flexibility in emissions regulation. A central proposal is to relax the 2035 mandate for a 100% tailpipe emissions reduction (versus 2021 levels), replacing it with a 90% target. As a result, we have revised our BEV forecast lower, with the reduction largely reallocated to a higher share of PHEVs and other ICE powertrains. Even so, BEVs are still expected to remain the dominant powertrain type.
• Competition in China – Competition remains intense in China, with cost pressures felt across the value chain. As a result, the Chinese government has increased scrutiny on the industry to curb aggressive price cuts and stabilize the market. Given the fierce competition, further brand consolidation is expected over the forecast period. Foreign brands are facing growing challenges, particularly in the EV segment, prompting some to reconsider their strategies –including potential market exits or deeper partnerships with local players.
• Chinese expansion – Chinese carmakers are increasing their footprint globally. A reversal of historical trends is possible, with Western OEMs potentially forming joint ventures with Chinese brands in Western markets or even selling underutilized plants to Chinese automakers seeking to localize production. Chinese brands aim to increase their BEV and plug-in hybrid penetration across various regions, intensifying competition in those markets.
• Opportunity for Chinese carmakers in Europe – Postponement of the 2035 effective ICE ban, the planned introduction of a minimum import price for Chinese-made BEV exports (potentially replacing higher BEV tariffs), Chinese OEMs’ localization plans, and increasingly compelling battery and EV offerings should provide Chinese automakers with an opportunity to build on their growing success in Europe and continue gaining market share.
• Anti-involution in China – China’s anti-involution campaign has eased price wars as automakers shift to value-based incentives—such as offering higher-spec vehicles at the same price—while the government tightens oversight by warning OEMs against aggressive discounting and low-price dumping. Reinforcing this push to curb aggressive competition, regulators have also moved to require export licenses for electric-vehicle makers starting in 2026, adding to measures aimed at stabilizing the market.