European manufacturing in a shifting geopolitical landscape

The European manufacturing industry stands at a crossroads of technological innovation, sustainability and resilience. Europe now faces economic, demographic and geopolitical challenges that have diminished its competitiveness. With other regions advancing fast forward, Europe is still finding its path in scaling innovation and adapting to emerging global trends.

Drawing on insights from various reports, including the Draghi report on competitiveness, we explore the key factors influencing the place of Europe’s manufacturing industry on the global stage.

Closing the innovation and skills gap

The European Union (EU) needs to boost research and development (R&D) financing. This comes with simplifying the regulatory framework and processes for the Horizon Europe programme to attract new joiners, as well as enhancing coordination with the Member States and alignment with national research and innovation budgets.

On the other hand, private sector spending is at just 1.3% of GDP, compared to 2.4% in the US and 1.9% in China (European Research Council, 2025). This gap is attributed to Europe’s strong focus on mid-tech industries with moderate R&D intensity, while the US has shifted towards high-tech sectors. This has led to lower innovation and fewer patents in key areas such as ICT, pharmaceuticals, biotechnology, and electronics.

At the same time, Europe holds a strong position in research for emerging technologies, among which are artificial intelligence (AI), digital twin, machine learning and technologies related to energy and the environment (JRC report, 2024). However, commercialising research results remains a main challenge for Europe.

The key reason lies within the fragmented landscape of 27 distinct markets, although the EU is often compared to the US and China as a single economic bloc. For startups, this means navigating national differences in regulations, taxation, and consumer preferences—making expansion more complicated and costly. When compared to the US, corporates report a lack of skilled workforce, high energy costs, elevated uncertainty and complex regulation as key investment obstacles in the EU (ECB, 2024).

Europe’s position in advanced technologies is also weakening. “We are severely lagging behind in new technologies: only four of the world’s top 50 tech companies are European,” highlighted Mario Draghi in his address to the European Parliament.

As the workforce ages, a widening skills gap threatens its competitiveness in emerging technologies. By 2030, 50% of manufacturing employers will adopt technologies using AI, while over 66% are already planning to recruit AI specialists (Future of Jobs Report 2025). Further, McKinsey reports that employers expect to upskill 29% of workers and reskill 15% in the next five years. Education and training programmes need to keep up with the rapid pace of technological advancements

Addressing the need for a joint plan for decarbonisation and competitiveness

European manufacturing is under pressure from high energy costs. According to the Draghi report, around half of European companies see energy costs as a significant barrier to investment—30% more than their US counterparts.

On top of that, EU manufacturers face weaker foreign demand and increasing competition. The European Central Bank (ECB) reports that China competes with euro area exporters in nearly 40% of sectors, up from 25% in 2002. The EU’s share of global trade has also declined since the pandemic.

Europe’s commitment to sustainability adds opportunities and challenges for its manufacturing industry. Environmental regulations, such as compliance with the EU Green Deal and carbon neutrality goals, create pressure on businesses. The high costs include investments in renewable energy, circular economy initiatives, and emissions reduction technologies, further increasing the financial burden on manufacturers.

For the four largest energy-intensive industries, such as chemicals, basic metals, non-metallic minerals and paper, decarbonisation is projected to cost EUR 500 billion over the next 15 years. Maritime and aviation sectors estimate investment needs at around EUR 100 billion annually from 2031 to 2050 (Draghi report, 2024).

Expanding strategic partnerships to ensure resilience and security

In a world of shifting geopolitics, Europe is reconsidering long-term partnerships and setting the course for new collaborations. With trade barriers and tariffs, including growing US-EU trade challenges, the EU is working on strengthening its relationship with the MERCOSUR countries, India, Nigeria, South Africa and countries in Southeast Asia, including the Philippines, Malaysia and Indonesia.

The ongoing Russian invasion of Ukraine has disrupted energy supplies and access to raw materials, compounding broader geopolitical instability. In response, there is a push for reshoring and greater supply chain resilience to ensure strategic autonomy.

With the current political shift in the US, the EU needs to ramp up its defence manufacturing. The aggregate EU defence spending is currently at one third of US levels (Draghi report, 2024).

Several initiatives have been launched to boost security and defence investment, including the EIB Group, European Commission and the European Investment Fund, and NATO. Investment in dual-use technologies is on the rise in Europe, addressing security challenges and creating new market growth opportunities. Sifted highlighted “for years, lethal technology — weapons, ammunition, unmanned striking vehicles — was a red line for VCs.”

Moving forward

What does it take for Europe to regain its competitive edge? How to leverage the established competence for global competitiveness?

The European Commission is already working on addressing the key challenges highlighted by Mario Draghi, including, among others, the Competitiveness Compass and the Clean Industrial Deal.

This pressing topic will be further explored at the panel discussion during InnoHive 2025 in Brussels on 9 April. Panellists include Caroline Viarouge, CEO at EIT Manufacturing, Željko Pazin, Executive Director at EFFRA, Shaun Rein, Founder and Managing Director at China Market Research Group, and Segun Ajayi-Kadir, Director General at the Manufacturers Association of Nigeria.