Chinese manufacturing is accelerating its capture of European market share, but the overall risk to European equities is smaller than the apparent shock suggests

Overview

This report discusses in Q&A format the impact of China's manufacturing export expansion on the European equity market. The core judgment is that, against a backdrop of weak domestic demand and excess capacity across multiple industries, Chinese companies are accelerating their search for growth overseas and, aided by cost advantages in labor, financing, electricity, land, and exchange rates, are continuously gaining share in Europe and third-party markets. The most directly pressured areas in Europe are autos, chemicals, medtech, and some industrial companies; but for the broader European equity index, the market has exaggerated the risk because index weights have shifted toward more resilient sectors such as technology hardware, utilities, financials, and services.

Core views

The report argues that Chinese competition is a structural rather than short-term issue for European manufacturing. China's exports to Europe have maintained double-digit annualized growth in recent months, and Chinese brands have gained more than 400 basis points of share in the European auto market within a year. Competition has also accelerated in capital goods, chemicals, machinery, LED lighting, excavators, heat pumps, light commercial vehicles, heavy trucks, and tractors. Goldman Sachs continues to recommend underweighting autos and chemicals, which have high exposure to Chinese competition. At the same time, Europe is not losing across the board: ASML still retains significant barriers in EUV and DUV immersion lithography tools, European utilities are entering a long-term earnings cycle driven by electrification and grid investment, and pharmaceuticals still rely on innovation momentum.

Analysis framework

The report assesses the transmission channels of Chinese competition to European sectors and the index by combining indicators including trade share, sector profit-margin correlation with China's PPI, mentions of Chinese competition in company conference calls, thematic basket performance, relative valuation, R&D and capital-expenditure intensity as a share of operating cash flow, regional revenue exposure, and the market-cap structure of the European index.

Methodology notes

• strategy_screeningChina competition exposure basket

  GSXECHNX

  Goldman Sachs screens STOXX 600 companies that mention the threat of Chinese competition, and its GBM division constructs a liquidity-optimized basket to measure the price and earnings performance of European companies affected by Chinese competition.

• macro_trade_analysisEU-China trade share analysis

  trade share and trade deficit

  By examining China's share of EU imports, China's share in Europe's exports, and the euro area's trade balance with China, the report tracks the continued expansion of Chinese manufacturing's market share in Europe.

• sector_sensitivityEBITDA margin sensitivity to China PPI

  sector profit-margin sensitivity to China's price cycle

  The correlation between European sector EBITDA margins and China's PPI inflation is used to identify the sectors most affected by low-cost Chinese manufacturing. The report points to chemicals, autos, and basic resources as the most sensitive.

• valuation_analysis12m forward P/E premium or discount vs STOXX 600

  relative valuation premium/discount

  The report compares the 12-month forward P/E premium or discount versus the STOXX 600 for the China competition exposure basket and the China sales exposure basket to judge whether negative expectations are already reflected in valuations.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• GSXECHNX

  European basket exposed to Chinese competition

  Strengths

  It already reflects fairly clearly the market's pricing of the losers from Chinese competition and can serve as a tool to track pressure on European manufacturing.

  Weaknesses

  Constituents are concentrated mainly in autos, medtech, chemicals, and some industrial stocks, and earnings remain pressured by low-cost Chinese competition and expanding export share.

  Comparison

  The report says this basket has consistently underperformed the STOXX 600 and also the China outbound basket GSXACHGG.

  Risks

  If EU policy defense proves stronger than expected, or Chinese price competition eases, the basket could see a phased recovery.

• STOXX 600

  Benchmark for the European equity market

  Strengths

  Index weights have shifted toward more resilient areas such as technology hardware, utilities, financials, and services, so the index is not fully equivalent to traditional manufacturing risk.

  Weaknesses

  It still includes autos, chemicals, and industrial sectors affected by competition from Chinese manufacturing.

  Comparison

  The report notes that European equities have outperformed Chinese equities across most medium- to long-term dimensions.

  Risks

  If Chinese competition spreads into more high-value-added industries, or if the quality of European earnings deteriorates, index-level risk will rise.

• ASML HOLDING NV

  Core representative of European technology hardware and semiconductor equipment

  Strengths

  It has a significant lead in EUV and DUV immersion lithography tools, with an ecosystem, lenses, lasers, mirrors, engineering experience, and leading-customer feedback that are hard to replicate.

  Weaknesses

  Highly dependent on global semiconductor capital spending and the geopolitical licensing environment.

  Comparison

  The report says ASML's market value is about 2.5 times that of the entire European auto sector, reflecting the rising weight of technology hardware in the European index.

  Risks

  Chinese technological catch-up, export controls, a downcycle in semiconductors, or slower customer capital spending.

• GSSBRNEW

  Goldman Sachs renewables basket

  Strengths

  Benefiting from Europe's electrification, renewables, and grid investment cycle, the report continues to recommend this basket.

  Weaknesses

  A long investment realization cycle and sensitivity to regulation, financing costs, and the pace of grid construction.

  Comparison

  Unlike traditional manufacturing affected by Chinese competition, renewables and electrification are areas of internal investment expansion in Europe.

  Risks

  Higher interest rates, weaker policy support, project-approval delays, or pressure in the equipment supply chain.

• European autos

  Industry with high exposure to Chinese competition

  Strengths

  European premium brands are more resilient than mass-market brands.

  Weaknesses

  Chinese brands are rapidly gaining share in Europe, mass-market brands are broadly losing ground, and the European auto sector's share of market capitalization has fallen to a very low level.

  Comparison

  Technology hardware market value has already significantly exceeded autos, and ASML's market value is about 2.5 times that of the European auto sector.

  Risks

  Further price cuts in Chinese EVs, insufficient EU policy protection, and continued downward earnings revisions.

• European chemicals

  Industry with high exposure to Chinese competition

  Strengths

  Some specialty chemical segments may still retain barriers in technology or customer relationships.

  Weaknesses

  Weak Chinese demand and excess capacity are driving exports and undermining the competitiveness of European chemicals; the report says China is also strengthening its lead in semi-specialty chemicals.

  Comparison

  Chemicals, along with autos and basic resources, are among the European sectors most sensitive to China's price dynamics.

  Risks

  Recovery in Asian supply, continued expansion of Chinese exports, and persistent high European energy costs and underinvestment.

Key data

• China's share of EU imports23%The report states that China currently accounts for 23% of EU imports, while China's share in Europe's exports has declined significantly since 2020.
• Change in Chinese brands' share of the European auto market+more than 400 bpsAccording to Goldman Sachs auto analysts, over the year through the end of May, domestic Chinese brands gained more than 400 basis points of market share in Europe, while European mass-market brands lost about 400 basis points correspondingly.
• Valuation discount of stocks exposed to Chinese competitionabout 25%-30%Companies with exposure to Chinese competition such as GSXECHNX already trade at a substantial discount to the market, so future underperformance is more likely to come from earnings pressure rather than further valuation decline.
• Coverage ratio of temporary or special tariffs on Chinese imports by the EUbelow 10%The report says that less than 10% of Chinese goods entering the EU currently face tariffs, clearly different from the broad US tariff path.
• Europe's growth investment intensityabout 20% of CFOOver the past five years, growth investment by non-financial listed companies in Europe, including R&D and above-depreciation capex, accounted for about 20% of operating cash flow, below the roughly 40%-45% level in the US and China.
• European auto sector market-cap shareabout 1%The report points out that autos are important to Europe's economy and employment, but their share of European equity market capitalization has become very small.
• ASML relative to the European auto sector in market valueabout 2.5xThe report states that ASML's market capitalization is about 2.5 times that of the entire European auto sector, reflecting the shift in the European index structure toward areas such as semiconductor equipment.
• European power investment demand€3.5 trnGoldman Sachs utilities analysts expect European power generation and grid investment demand to total about €3.5 trillion in 2026-2035, mainly driven by renewables and electrification.

Impact & implications

From an investment perspective, the report argues for distinguishing between 'competitive pressure on European manufacturing' and 'the overall outlook for the European equity index.' Earnings revisions for autos, chemicals, medtech, and some industrials still face downside risk, and related baskets may continue to underperform; however, technology hardware, semiconductor equipment, utilities, financials, services, and domestic defensive sectors can partly offset the impact. EU policy is more likely to shift toward targeted trade defenses and supply-chain de-risking rather than comprehensive tariffs, so sector-level differentiation will matter more than a directional call at the index level.

Risks

• China's manufacturing cost advantage continues to expand, leading to further downward earnings revisions for European autos, chemicals, medtech, and industrials.
• If the EU cannot effectively implement targeted tariffs, quotas, or supply-chain de-risking policies, European manufacturing's loss of market share may accelerate.
• China may retaliate against European companies, especially affecting luxury goods, medtech, autos, and industrial companies with high sales exposure to China.
• Chinese competition may spread from traditional manufacturing into semi-specialty chemicals, medical devices, software, robotics, and other higher value-added industries.
• If European companies continue to underinvest, their long-term innovation capacity and manufacturing competitiveness may weaken further.
• If China expands exports through aggressive pricing while profit margins remain weak, Chinese equities may not necessarily benefit, and global investors need to be alert to a disconnect between share growth and shareholder returns.

What to watch

• Whether China's export growth to Europe and China's share of EU imports continue to rise.
• Changes in Chinese brands' share of the European auto market, especially the divergence between mass-market brands and premium brands.
• The performance of GSXECHNX relative to the STOXX 600 and GSXACHGG, and whether earnings expectations continue to be revised down.
• EU progress on tariffs, quotas, or investigations in areas such as steel, hybrid vehicles, machinery, wind-power components, basic chemicals, semiconductors, batteries, and robotics.
• China PPI, chemical exports, capital-goods exports, and machinery export data.
• Whether R&D and capital-spending intensity among European companies improves, especially in chemicals, autos, medtech, electrical and electronic equipment, and industrial transport.
• Changes in orders, technological barriers, and regulatory restrictions for ASML and the broader European technology hardware sector.
• Whether investment in European grids, renewables, and electrification drives earnings for utilities and the industrial supply chain as expected.