Shares in Europe's traditional automakers got a boost from earnings this week, but a full recovery remains elusive as shifting markets and waning competitiveness cloud the sector's long-term prospects.

Volkswagen , Stellantis (STLAM.MI) and Renault (RENA.PA) each managed to halt a punishing selloff as they dig deep to restore investor confidence, be it through electric model offensives or radical restructuring measures.

But as Chinese competition intensifies and technological change reshapes the industry, investors are increasingly questioning whether Europe's established carmakers can regain the profitability and valuations they once enjoyed.

"There is a great deal of scepticism around the industry," said Massimo Baggiani of London-based Niche Asset Management, whose portfolio includes Renault, BMW (BMWG.DE), Mercedes (MBGn.DE), Volkswagen and Stellantis.

"At this stage, it's hard to identify a clear catalyst for a sustained, long-term recovery," he added.

Europe's automotive index (.SXAP) is hovering at lows not seen since late 2020, when the COVID-19 pandemic disrupted global supply chains and hit demand.

Today, European carmakers are playing catch-up with Chinese players such as BYD (002594.SZ) and Geely (0175.HK) , which have raced ahead in the transition to electric vehicles, setting new standards on cost-competitiveness and software.

In 2021, when Volkswagen shares were at their peak, Chinese carmakers had a negligible share of the European market. By the middle of this year, that share had progressed to more than 10%. In that time, Volkswagen's stock market value has collapsed by around three-quarters, pressured further by tariff woes.

"The fundamentals of the industry, in terms of competitive pressure, are getting worse," said Jefferies analyst Philippe Houchois. "The Chinese are taking too much share at home and abroad to give investors visibility on where the floor is." Under strain from low-cost Chinese imports, Volkswagen, Stellantis and Renault have appealed to Brussels for help, amid negotiations over proposed incentives for local manufacturing.

"Financial markets feel that if Europe is not deciding urgently to support automotive, then the Chinese will continue to import cars (into Europe) and at the end this industry will die," Renault CEO Francois Provost told Reuters. "That's why I say to the EU that now it's urgent to decide."

Some investors argue the selloff has gone too far. Despite years of share-price declines, Volkswagen, Stellantis and Renault still control vast industrial assets and retain balance sheets that compare favourably with many companies valued more highly by the market.

"Massive amounts of capital are flowing into AI companies and stocks, draining money away from other sectors," Baggiani said. "As a result, struggling sectors such as autos are suffering, and way more than they should." Carmakers are also undertaking increasingly radical change in an effort to restore confidence.

Volkswagen has embarked on the biggest restructuring in its history, including plans to cut around 100,000 jobs and potentially close plants in Germany, while Stellantis, the owner of brands including Fiat, Peugeot and Jeep, is betting on a turnaround driven by a raft of new models, a revamped brand strategy and partnerships with Chinese automakers.

Recent earnings offered a glimpse of that potential. Confidence that Stellantis could exceed its cost-cutting targets helped lift its shares 15% in a single session on Wednesday after third-quarter results, while Volkswagen and Renault inched up from multi-year lows.

But the respite may only buy them time in the face of structural change, Houchois said. "The result is an industry that becomes a bit of a zombie industry: They're alive, but they're dying, and they can survive like that for a long time."