Challenges in the German Automotive Industry
Once considered the backbone of the German economy and a symbol of technological innovation, the German automotive sector is currently facing many structural, technological and geopolitical challenges. In particular, falling sales in China and the tariffs imposed by the US pose serious threats to the sector’s profitability. German luxury car manufacturers Mercedes-Benz, BMW and the Volkswagen Group saw their first-quarter 2023 profits fall by 40,7 percent, 25,2 percent and 37 percent, respectively. The Volkswagen Group, which includes the Audi, Bugatti, Seat, Skoda and Porsche brands, the BMW Group and Mercedes, which own brands such as BMW, MINI and Rolls-Royce, are notable for their continuous decline in profit margins and the shakiness of their export-oriented business models.
China, the world’s largest new car market, poses significant challenges for German manufacturers. Luxury sedans with internal combustion engines, such as the Mercedes S-Class, BMW 7 Series or Audi A8, are finding fewer buyers in China. German carmakers used to make half of their profit margins from customers in China, but this is no longer the case. According to first-quarter figures, the Volkswagen, BMW and Mercedes brands failed to deliver a total of 1 million vehicles in China.
Mercedes-Benz's vehicle deliveries in China in the January-March period of the year fell by 10 percent in the first quarter to 152, BMW's (including the Mini brand) deliveries fell by 800 percent to 17,2 and Volkswagen's fell by 155 percent to 195.
Hope for Transformation with New Technologies
Germany's famous automotive expert Prof. Dr. Ferdinand Dudenhöffer evaluated the falling profits and future situations of German car manufacturers Mercedes, BMW and Volkswagen. Dudenhöffer stated that the main reason for the decline was the Chinese market and stated that German car manufacturers have a great chance to reverse this negative trend with new technologies.
“At a recent congress in Shanghai, Mercedes, BMW and Volkswagen, which showcased their innovations in the automotive sector, showed ways to cooperate with Chinese technology companies in integrating higher technology into cars,” Dudenhöffer said. Stating that they expect German carmakers’ profits to continue to fall in the next three or four quarters due to their decreasing market share in China and increasing competition, Dudenhöffer said, “However, we think that there is a possibility that this situation could reverse in 2026 thanks to the many new technologies included in the new models of BMW, Mercedes and Volkswagen. So we are in a kind of optimism.”
On whether competition with China will mean “lower prices” for customers, Dudenhöffer said: “German car manufacturers do not sell cheap cars. They are focused on innovation, they are brand-focused and they offer more premium cars.”
US Customs Duties and Uncertainties
US President Donald TrumpThe uncertainties created by the additional customs duty imposed on European cars by the European Union were highlighted by Dudenhöffer. “There is a lot of uncertainty for investors to invest in the US. If you don’t know what will be demanded in an hour, you can’t trust it. Therefore, it is not possible for you to come to invest,” Dudenhöffer said.
Many manufacturers will have to look for new facilities that have a sustainable risk for their business models in the future. Dudenhöffer said, “We think the big market is Asia and China. I think the US will be the loser.” Dudenhöffer also stated that the US automotive sector is not interested in the effects of climate change, and said, “Donald Trump is not interested in anything. He is destroying our climate. I think China on the one hand and Europe on the other hand will have to fight climate change.”
Cost-cutting Measures and Electric Mobility
Costly software issues, restructuring costs and car recalls are weighing on German car companies’ profits as weak sales and investments in electric mobility have yet to yield the expected returns. Trump’s recent imposition of a 25% tariff on all car imports poses a significant threat to German manufacturers who rely on the US, their largest export market.
While German automakers are implementing cost-cutting measures, including layoffs, the economic recession in Europe, the impact of newly implemented tariffs in the US and intense price competition in China are expected to keep German manufacturers under pressure in the future.
Competition and Cost Pressure
German carmakers are under severe pressure to cut costs and remain competitive due to weak demand from China and Europe, while coping with the high costs of the electric vehicle transition. Labor costs per vehicle, which are an average of $600 in Chinese factories, rise to $3 in German car factories. Due to high import tariffs of 300 percent, the US is no longer a substitute market for German luxury cars.
The German press is commenting that if this trend continues, not only will manufacturing companies lose control, but Germany, the automotive nation, will also “lose its current life insurance.” While the crisis in the German automotive industry has emerged from the complex interactions of overlooked trends, structural problems and geopolitical risks, the automotive sector was once the economic backbone of Germany.
The Importance of the Automotive Industry for Germany
The automotive sector accounts for 5 percent of total value added in Germany and 3 percent of employment. In terms of revenue, it is by far the largest industrial sector. German car manufacturers (including other transport vehicles such as trains and spare parts) exported 290 billion euros last year. This corresponds to 17 percent of total exports. As of June 2024, the German automotive sector employed approximately 773 people, excluding suppliers. Approximately 14 percent of the workers in the industry are in the automotive sector, making it the second largest industrial sector in terms of workforce after mechanical engineering, which employs 952 people.
China's Influence
While Germany’s greater dependence on China compared to other major European economies is noteworthy, the fact that China can produce more cars than it buys from Germany makes it harder for the economy to grow. China is of great importance to German companies, especially German car manufacturers, in terms of both sales and growth. German companies are developing and testing the latest technologies in China for the global market.
German cars are in high demand in China. More than 30 percent of German carmakers Volkswagen, Daimler and BMW’s revenues come from China. China has long been a central growth market for German carmakers, with brands such as Mercedes, Audi and BMW known to be very popular with the growing Chinese middle class. However, recently, Chinese manufacturers have started to largely catch up. While brands such as BYD, Nio and Geely are increasingly dominating the Chinese domestic market, the market share of German manufacturers in China has been falling significantly. In recent years, the share of Chinese manufacturers in electric cars sold in European countries has been rising rapidly. Sales of low-cost and subsidized electric cars produced in China are outpacing their competitors.
