For decades, the automotive sector has been the undisputed jewel in Germany’s industrial crown, a potent symbol of the nation’s remarkable post-war economic resurgence. The “Big Three” German Car manufacturers, Volkswagen, Mercedes-Benz, and BMW, have long been celebrated worldwide for their superior performance, groundbreaking innovation, and precision engineering. However, the german car industry today finds itself navigating a period of considerable turmoil. As economic uncertainties play a significant role in shaping the political landscape, particularly with upcoming federal elections, the critical question arises: how can this industrial powerhouse steer itself back onto the path of recovery and sustained growth?
Upon arriving in Wolfsburg, Lower Saxony, by train, the imposing Volkswagen factory immediately captures your attention. Its expansive facade, prominently displaying the iconic VW logo and flanked by towering chimneys, dominates the landscape along the city’s canal. This vast 6.5 sq km (2.5 sq mile) complex is strategically located next to the Autostadt, an automotive theme park dedicated to VW and the broader world of automobiles, celebrating VW’s position as Europe’s largest car manufacturer. Not far from this industrial and automotive heartland stands the Volkswagen Arena, a testament to the company’s deep integration into the city’s life.
Wolfsburg stands as Germany’s parallel to mid-20th Century Detroit – it’s not just a city housing a car factory; rather, it’s a city that has organically grown around and because of the factory. Approximately 60,000 individuals from the surrounding region are employed at the plant, in a town of about 125,000 residents. Locals often remark that even if one isn’t directly employed by the factory, it’s highly likely that many friends and former classmates are.
Dieter Landenberger, the VW Group’s historian, articulates this symbiotic relationship perfectly as he admiringly examines a vintage Beetle, part of a collection of meticulously restored classic cars housed in the Zeithaus, Autostadt’s sprawling, glass-fronted museum dedicated to automotive icons. “Wolfsburg and Volkswagen – they’re almost synonymous,” he notes. “We take immense pride in this plant. It stands as a symbol of Germany’s post-war reinvention and reconstruction in the 1950s. It was truly the engine driving the German economic miracle.”
However, today, the Wolfsburg plant also inadvertently symbolizes some of the core challenges confronting the broader german car industry. While its production capacity is an impressive 870,000 vehicles annually, in 2023, production figures plummeted to just 490,000, according to the German Economic Institute in Cologne. This underperformance is not isolated to Wolfsburg; car factories across Germany are operating significantly below their maximum capabilities. National car production statistics reveal a concerning trend: a decline from 5.65 million vehicles in 2017 to 4.1 million in 2023, as reported by the International Organisation of Motor Vehicle Manufacturers.
This downturn carries significant weight, especially as Germany navigates crucial political junctures. The german car industry is not merely a source of national pride; it is a vital pillar of the national economy. Disagreements over strategies to address the nation’s economic challenges were a contributing factor to the recent government coalition collapse. Regardless of the election outcome, the incoming administration will need a robust economic revival plan, and revitalizing the automotive industry will undoubtedly be a key component.
The german car manufacturing sector constitutes approximately one-fifth of Germany’s total manufacturing output. When considering the extensive supply chain, it contributes around 6% to the country’s GDP, according to Capital Economics. Directly employing about 780,000 people, the industry indirectly supports millions more jobs across various sectors.
Beyond production declines, sales figures for german car brands have also decreased significantly from their peak in recent years. Between 2017 and 2023, Volkswagen’s sales dropped from 10.7 million to 9.2 million, while BMW’s fell from 2.46 million to 2.25 million, and Mercedes-Benz’s from 2.3 million to 2.04 million, as company reports indicate. The “Big Three” all experienced roughly a third decrease in pre-tax profits in the first nine months of 2024, and each has issued warnings that their annual earnings will likely fall short of previous forecasts.
The substantial investment in electric vehicle (EV) development has yet to yield the anticipated market growth, and the industry faces increasing competition from international players. The looming threat of tariffs imposed by the US and other governments further complicates the landscape. Simon Schütz, spokesperson for the German Automotive Industry Federation (VDA), succinctly summarizes the situation: “There are so many crises, a whole world of crises. When one crisis is over, another is coming up.”
Franziska Palmas, a senior Europe economist at Capital Economics, points out that car sales across Europe have been in a general decline since 2017. “Recently, there has been a slight recovery, but sales remain about 15 to 20% lower than the 2017 peak,” she explains. “This is partly attributable to factors like the pandemic and the energy crisis. However, it’s also due to cars lasting longer, and a high level of car ownership in Europe already. Consequently, demand has been generally weak.”
Electric Dreams and Disruptions
The shift towards electric vehicles is a crucial factor reshaping the german car industry. The 2015 diesel emissions scandal, which revealed Volkswagen’s manipulation of emissions tests in the US, acted as a catalyst for a technological revolution within the sector.
Driven by the EU and individual European governments’ ambitious targets to phase out petrol and diesel cars in the coming decade, manufacturers have been compelled to invest massively – collectively, hundreds of billions of Euros – in developing electric models and establishing new production infrastructure.
While electric cars have indeed gained a significant market share – for instance, 13.6% in the EU and 19.6% in the UK in the past year – their market penetration hasn’t accelerated as rapidly as initially projected.
In Germany itself, the abrupt cessation of generous subsidies for electric car buyers in late 2023 triggered a dramatic 27% plunge in domestic electric car sales last year. This policy change has added further strain on german car manufacturers in their home market. “The sudden decision to eliminate subsidies was a misstep, as it eroded customer trust,” argues Simon Schütz of the VDA.
“Transitioning from combustion engines to electric mobility is a monumental undertaking. We are investing billions to overhaul our factories. This transformation is time-consuming, without question.”
The High Cost of Manufacturing in Germany
Amidst these technological and market shifts, german car manufacturers are also contending with persistently high operational costs within Germany. The automotive sector in Germany is known for its robust labor standards, offering employees attractive pay and benefits packages secured through agreements between unions and management. Capital Economics reports that in 2023, the average monthly base salary in the german car industry was approximately €5,300, significantly higher than the German economy-wide average of €4,300.
Historically, these favorable employment conditions have provided German companies with advantages, such as minimizing industrial unrest and attracting skilled talent. However, they also contribute to german car manufacturers facing the highest labor costs in the global automotive industry. In 2023, these costs averaged €62 per hour, compared to significantly lower rates in Spain (€29) and Portugal (€20), according to the VDA.
The situation for the german car industry in its domestic market worsened following Russia’s invasion of Ukraine. This conflict disrupted Germany’s previously reliable supply of inexpensive Russian gas, coinciding with the country’s planned phase-out of nuclear power. Consequently, energy prices surged dramatically. Although they have since moderated, energy costs for industrial users in Germany remain exceptionally high by international standards. “Energy prices here are three to five times higher than in the US or China – considerably more expensive than for our primary competitors,” notes Mr. Schütz.
These elevated energy costs are impacting the entire automotive supply chain. “From steel mills like Thysenkrupp and Salzgitter, which produce sheet metal for car bodies, to component manufacturers, energy price hikes have caused costs to skyrocket,” explains Matthias Schmidt of Schmidt Automotive Research.
A Shock to the System
These cumulative pressures reached a critical point last year. Volkswagen, with 45% of its global workforce based in Germany, initiated drastic measures to reduce costs. “It was a profound shock,” recalls Steffen Schmidt, an IG Metall union spokesman, in a conversation near the Wolfsburg factory. “The company made no public announcements.”
Daniela Cavallo, head of the VW works council and the leading employee representative, was tasked with delivering the unsettling news. “She addressed thousands of workers outside the factory gates. The silence was palpable,” describes Mr. Schmidt. “People were stunned. Thousands of people, completely silent.”
Volkswagen’s proposal was unprecedented. Union representatives had entered negotiations anticipating discussions on annual pay increases, initially seeking a 7% raise. Instead, the company presented a demand for a 10% pay cut. Further compounding concerns, VW indicated potential closures of up to three German factories and a withdrawal from a long-standing job security agreement.
Arne Meiswinkel, VW’s chief negotiator, emphasized the severity of the situation in Germany, stating, “Volkswagen will only succeed if we future-proof the company now in the face of escalating costs and intensified competition.” Volkswagen had never previously closed a German plant in its 87-year history. Facing strong opposition from unions and political figures, and following brief but disruptive “warning strikes” by unionized workers, the factory closure proposal was eventually withdrawn. However, its mere consideration sent shockwaves throughout the german car sector.
Ultimately, the workforce agreed to limitations on pay and bonuses, and Volkswagen announced plans to reduce over 35,000 jobs by the decade’s end, implementing these cuts through “socially responsible” measures to avoid compulsory redundancies. Mercedes-Benz also initiated a cost-reduction program last year, aiming for billions of euros in annual savings, though compulsory redundancies in its German workforce remain unlikely due to a job security agreement extending to 2030. Ford, operating two factories in Germany, recently announced plans to cut 2,800 jobs in the country.
The challenges facing the german car industry are not solely confined to domestic issues. With a saturated European market, manufacturers have increasingly looked to global markets for growth over recent decades.
The Shifting Sands of the Chinese Market
China emerged as a particularly lucrative market, where a burgeoning middle class displayed a seemingly insatiable appetite for premium European vehicles. VW, Mercedes-Benz, and BMW all formed partnerships with local companies, establishing factories within China to cater to local demand.
However, this growth engine is now showing signs of slowing. The “Big Three” have all experienced recent sales declines in China: in 2023, VW’s China sales decreased by 9.5% year-on-year, Mercedes-Benz’s by 7%, and BMW’s by 13.4%. Their combined market share in China has also contracted to 18.7%, down from a peak of 26.2% in 2019. This shift appears to be driven by a slowing Chinese economy, reduced interest in expensive foreign brands, and the rapid rise of domestic Chinese brands, especially in the electric vehicle segment.
“Not long ago, Western brands symbolized quality and trust,” explains Mark Rainford, founder of Inside China Auto. “However, the reputation and appeal of Chinese brands have since improved dramatically.” All of the “Big Three” acknowledge that trends in China have significantly impacted their financial performance.
Chinese brands are also actively pursuing market share in Europe, benefiting from considerably lower operating costs compared to established European rivals. This cost advantage stems from lower wage levels in China and the fact that many Chinese EV firms are not burdened by legacy costs associated with transitioning from petrol and diesel vehicle production.
The European Commission has indicated that Chinese brands also receive substantial government subsidies, enabling them to offer cars at artificially low prices. In response, the EU implemented additional tariffs on imports of Chinese-made EVs in October, aiming to create a more equitable competitive environment.
The Specter of Trade Wars
German car manufacturers opposed the EU tariffs, fearing retaliatory measures from China that could negatively affect their own exports. They now also face the potential of new protectionist policies from the US, including tariffs on cars imported from the EU. For an industry heavily reliant on exports, the rise of protectionism poses an increasing threat. “We know that trade wars only create losers on both sides. Tariffs will diminish wealth, hinder growth, and cost jobs,” warns Simon Schütz of the VDA.
Analyst Matthias Schmidt believes that while some challenges were unforeseen, a degree of complacency also contributed to the current situation. “They were aware of the structural issues but were caught off guard by the availability of cheap Russian gas,” he says. “Expansion into China and the substantial profits repatriated to Europe masked the high labor cost issues, giving unions significant leverage.”
“Germany has essentially been an export-driven economy, and when those export markets falter, Germany feels the impact acutely, which is precisely what has occurred.”
A High-Stakes Crossroads
Can german car manufacturers regain their footing and revitalize their industry? This is a critical question for the manufacturers, their extensive network of suppliers, and the German economy as a whole. “The core problem for Germany is a lack of competitiveness,” asserts Dr. Ferdinand Dudenhöffer, head of the Center for Automotive Research in Bochum. “This isn’t just about cost competitiveness but also in terms of the emerging technologies that will shape the future of the automotive world.”
He suggests that China has become the epicenter of innovation in crucial areas like digitization and battery technology. “The solution for carmakers and suppliers, in my view, will be to relocate their manufacturing facilities abroad,” he proposes.
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However, Simon Schütz maintains a more optimistic outlook. He believes the industry can thrive with appropriate government support following the upcoming elections. “Our automotive industry will remain world-leading, I am confident of that,” he states. “The crucial question is where future jobs will be located. Will they be in Germany, because we can competitively manufacture cars here, or will our companies move operations elsewhere?”
For union representative Steffen Schmidt, the solution lies in reaffirming Germany’s traditional industrial strengths. “We must regain our leadership in innovation and technology,” he argues. “This will enable us to sustain high wages and good working conditions for our employees.” He believes the path forward for the new government is clear: “Invest, invest, invest. In infrastructure, technology, green energy, and education.”
For countless workers in Wolfsburg and other German “car towns” like Ingolstadt, Weissach, Munich, Stuttgart, and Zwickau, the stakes are exceptionally high.
