Autonews — 2025-02-19
Automotive Industry
Germany’s auto industry is in crisis. Sales have declined while production costs soared, leaving Volkswagen Group, Mercedes-Benz and hundreds of parts makers dangerously behind in the transition to electric vehicles.
Now, with US President Donald Trump threatening tariffs on their cars, executives are banking on the election on 23 Frebruary to deliver a new German government that will ease their pain.
The stakes could not be higher. Germany, Europe’s biggest economy, is in the midst of an industrial decline triggered by the ascendancy of advanced Chinese manufacturing and successive crises — from the pandemic to the cut-off of cheap Russian gas.
Without fresh stimulus, Germany risks losing tens of thousands of manufacturing jobs to lower-cost nations lobbying aggressively for investments.
“We need an economic turnaround now,” said Hildegard Müller, who heads Germany’s VDA car lobby. The next government, she added, must cut red tape and jumpstart growth to make Germany competitive again.
The outlook for Germany’s auto industry, which represents about 5% of the economy and employs nearly 780,000 people, is bleak. Carmakers are now cutting costs, revamping their product portfolios and swapping out top management after being hit hard by intensifying competition in China and waning demand for EVs in Europe. Sentiment has reached a new low.
Still, Germany’s political parties have yet to come up with bigger plans to get the auto industry back on its feet. With the vote just days away, these are the key issues on auto executives’ minds:
German auto executives have repeatedly spoken out against tariffs, including EU duties targeting Chinese EVs, with BMW CEO Oliver Zipse earlier this month calling free trade “one of the most crucial drivers of growth and progress.”
The US’s robust demand for large SUVs and its slower shift to EVs make it a lucrative market for BMW, Porsche and Mercedes to sell their high-margin combustion-engine models.
German automakers operate several factories in the US where they produce cars both for local buyers and for export, meaning the fallout from the trade spat could worsen if Europe adopts countermeasures — a scenario that looks increasingly likely.
“Europe will fight back,” Benedicte Lowe, an equity strategist at BNP Baripas, told Bloomberg Television last week, adding that she expects negotiations between Brussels and Washington to drag on for a while.
Chancellor Olaf Scholz has signaled his willingness to back a European response. Executives will be looking to Christian Democrat Friedrich Merz, the front-runner to succeed him, to strike a more conciliatory tone if elected. A former supervisory board chairman at Blackrock’s German unit, Merz has expressed a more optimistic view of Trump, calling him a “very predictable leader” with a clear agenda.
Predictability is a key theme for industry executives, especially when it comes to manufacturing costs. They are mainly complaining about energy prices, which have jumped since Russia’s invasion of Ukraine hit Germany’s supply of cheap pipeline gas. Germany still relies heavily on fossil fuels to help keep the lights on, especially during winter.
Electricity prices in Germany are around three times those in the U.S. and China, and still roughly 40 percent higher than in neighboring France, which relies on dozens of nuclear reactors for cheap and stable energy.
All mainstream parties have pledged to cut energy costs, but they disagree over how.
While Scholz’s SPD is in favor of adding more renewables and capping grid fees, Merz has floated the idea of rethinking Germany’s decision to exit atomic energy.
“Germany is one of Europe’s last truly industrialized nations, with Salzgitter and BASF supplying steel and chemicals to the country’s car industry,” said Matthias Schmidt, an independent auto analyst based near Hamburg. “Low energy costs or at least price stability is of paramount importance.”
German automakers are struggling against Chinese competition
China is the biggest single market for most German automakers, which generate a major share of their revenue and profit in the Asian country. But they have struggled with intensifying competition and weaker luxury spending, and a fierce EV price war started by Tesla and local automakers including BYD.
Scholz’s government has tried to reset relations with China and called for German companies to reduce their exposure there, after the Ukraine war laid bare the danger of being too dependent on Russia for gas. Merz issued a similar warning last month, calling investing in China a “great risk.”
But Germany’s automakers are not retreating. They are raising investments and banking on partnerships with local companies to claw back market share.
VW, which operates more than three dozen factories in China, aims to increase its car sales in the country to around 4 mn annually by 2030, from 2.93 mn last year.
BMW plans to invest an additional 20 bn yuan ($2.7 bn) in its Shenyang manufacturing base as it ramps up local EV production.
Germany lost its title as Europe’s biggest EV market to the U.K. last year when sales collapsed after Scholz’s government unexpectedly removed subsidies.
Major automakers including VW and Mercedes have since walked back their electrification strategies, citing underwhelming demand.
Porsche expects an €800 million hit this year
Porsche expects to take an €800 mn ($837 mn) hit this year for expanding its portfolio with more combustion-engine and plug-in hybrid models. Challenges with making the jump to EVs have cost the luxury brand dearly in China, where its deliveries dropped 28 percent last year.
“Porsche’s strategic shift sends a clear message that German cars running on gasoline may get a longer lease on life, and I would expect a Merz-led government to back that push,” Schmidt said.
Merz’s conservatives want to sell new combustion-engine vehicles beyond a planned 2035 EU ban, while Scholz has called for EV tax incentives to revive sales of battery-powered cars.
Both parties have argued that automakers should not be penalized with large fines for missing the EU’s more stringent emissions targets for this year.
Elon Musk, who stirred up the German campaign by endorsing the far-right AfD party, has been one of the most vocal crusaders against German bureaucracy after red tape delayed a Tesla factory near Berlin. He is not alone: The VDA has called on Berlin to speed up permitting processes and slash excessive documentation requirements and ensure that Brussels does not pass down more bureaucratic hurdles that stifle growth.
All major parties have vowed to cut red tape, including Scholz’s SPD and the Greens. Merz is campaigning on a program that includes lower taxes, limited regulation and only basic social handouts. But his conservatives are also reluctant to significantly ease the country’s public-spending restrictions, known as the debt brake, which most analysts say is needed to return the country to growth.
“Germany needs stimulus, but the question is: Will there be enough money in the budget for new aid? I am not so sure,” Schmidt said.