The automotive industry fueled Germany’s rise as Europe’s economic powerhouse. Now, that same sector is in crisis — and is taking the country down with it.
Automakers are facing a perfect storm: a shift from the combustion engine, which showcased German engineering, to less complex electric vehicles where Germany doesn’t control crucial battery technology. They are also battling slumping demand for electric vehicles in Europe, high energy and labor costs, a collapse of sales in their key market of China, and the arrival of aggressive Chinese rivals on the continent.
A further blow could be on the way from United States President Donald Trump, who is threatening tariffs that would upend the free-trade system underpinning Germany’s export-driven economic success.
“The economy has been under a huge amount of pressure [that] was hidden by the fact that there was the pandemic and then the war,” said Nils Redeker, deputy director of the Jacques Delors Center think tank in Berlin. “It’s now coming to the forefront again and people are very, very concerned.”
That’s having a knock-on effect on German politics.
The troubles roiling Germany’s key sector are a major factor in Chancellor Olaf Scholz’s likely ouster in the Feb. 23 election as voters sour on his economic agenda.
With less than a week to go until the vote, Scholz’s opponent — the conservative alliance of Friedrich Merz — has 29 percent support in polls, while his own Social Democratic Party (SPD) is third on 16 percent.
But even a conservative win is unlikely to deliver a quick fix to the problems ailing Germany’s car industry.
Layoffs across the sector, anemic economic growth, and the sense that Germany is no longer on the path of prosperity is deepening gloom in the country. That has aided the rise of the far-right Alternative for Germany (AfD) party, now second in the polls (21 percent), and has provided oxygen to the left-populist Alliance Sahra Wagenknecht (5 percent), known by its German acronym BSW.
Although Germany is entering its third consecutive year of recession, the country’s economic woes can be traced back to 2019, when decarbonization efforts kicked off in earnest, threatening its traditional industrial prowess. Meanwhile, China, the country German industry once relied upon for massive profits, has become its biggest competitor.
A toxic relationship
Germany’s auto giants got rich in China, entering the market decades ago when domestic car sales were just starting to creep up; their Asian success helped support higher wages at home.
That trend reversed in 2018 when China’s market for new cars contracted for the first time since the 1990s, falling 3 percent. It went down 8 percent more in 2019 before the pandemic ground global markets to a halt.
These days, the market shares of the big three German automakers are shriveling as Chinese rivals introduce cheaper electric vehicles that often sport better technology.
In 2024, BMW’s sales fell 13 percent in China; Mercedes-Benz dropped 7 percent; and Volkswagen — which counts China as its largest market — declined 10 percent.
“It was so good in China for so long that the German carmakers, despite the troubles that they’re experiencing now, are trying to recreate the magic of past decades,” said Noah Barkin, a senior adviser with consultancy Rhodium Group.
But Germany, and by extension Europe, has more on the line in China than just corporate profits.
German automakers’ reliance on the Chinese market gives Beijing leverage over Berlin “because they can essentially weaponize these dependencies,” Barkin said.
That, in turn, further endangers European Commission President Ursula von der Leyen’s China derisking strategy. The Commission last year slapped duties on made-in-China EVs even though Germany lobbied against the measures, citing retaliation concerns.
Merz vows to break that dependence on China — even if it costs carmakers. He has warned German companies against making bigger investments in China and has said not to come crawling back for a bailout should such wagers blow up.
In the red
Adding to the troubles of carmakers are higher energy costs, which soared in the aftermath of Vladimir Putin’s full-scale invasion of Ukraine, underscoring the risk inherent in Germany’s decision to make its economy dependent on cheap Russian gas.
Pricey energy is also causing the costs of steel and aluminum — crucial inputs for the car industry — to gyrate. Worse still, Trump is targeting the two metals with his new tariffs.
German carmakers are also saddled with the highest labor costs in the world — a legacy of powerful unions and decades of fat profits from China.
Efforts to escape those costs are impacting the broader economy. From 2018 to 2023, as German automakers relocated to cheaper countries, production in Germany fell by 8 percent, according to a deindustrialization report from the Commission.
Squeezed by sagging sales and falling profits, the industry is scrambling to cope.
Volkswagen last year stunned its unions by calling for a 10 percent pay cut and the closure of three car factories in Germany — the first time that’s happened in the company’s 87-year history. VW walked this back in the face of labor outrage and warning strikes, leaving the plants open — though workers did agree to pay and benefit cuts.
German automakers have also bet big on the electrification of cars, investing billions in developing new models and retooling factories. But a decision in late 2023 by Scholz’s coalition to end generous EV subsidies kicked the legs out from under electric car sales in Germany.
The shocks buffeting Germany’s largest industry and biggest employer are drawing in politicians.
Together with other conservatives, Merz wants the European Union to scrap its planned phaseout of combustion engine cars by 2035. Both the AfD and the BSW are pushing for the same.
That creates yet another potential post-election headache if Merz tries to build a grand coalition with the SPD or link up with the Greens, both of which back the 2035 measure.
But carmakers aren’t all sold on the idea of messing with the EU targets, as that could throw their long-term investment plans geared toward going electric into disarray.
The Trump factor
Trump has thrown another curveball into that calculation by scrapping U.S. EV subsidies and demanding a “drill, baby, drill” return to oil and gas.
Moreover, if he unleashes tariffs against Canada and Mexico, he could upend decades of careful planning for the North American market by German carmakers — adding to their bottom-line woes.
Faced with the collapse of the model that made them — and Germany — rich, automakers face an existential challenge. Above all, they must figure out if Germany’s traditional engineering prowess is still capable of producing attractive EVs that defeat the Chinese competition and again make cars the driving force of the German economy.
Merz would have to reform Germany’s sclerotic economy, notorious bureaucracy, high costs, and the ingrained risk aversion that is baked into policies ranging from dropping the debt brake preventing government borrowing to slashing cherished welfare benefits.
That likely means closer cooperation with Brussels as the EU works to save the bloc’s industrial base from U.S. and Chinese competition, Redeker said.
“The fact that Germany is part of the problem now maybe also makes it realize that Europe needs to be part of the solution,” he said.
Merz has signaled a willingness to do just that, saying in a January speech that he will provide more robust leadership within Europe. The question is whether that’s enough to save Germany and its carmakers.
“I would love to see Germany be a strong Germany in an even stronger Europe, but I have my doubts,” said Matthias Zink, president of auto supplier lobby CLEPA and CEO of car parts maker Schaeffler.
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