Germany's once-mighty car industry is in crisis. What will it take to fix it?

Germany's car industry, once a shining example of the nation's industrial strength, is now facing significant challenges. The 'Big Three' car manufacturers—Volkswagen, Mercedes-Benz, and BMW—have long been celebrated for their engineering excellence and innovation. However, the current state of the industry raises questions about its future, especially with the upcoming federal elections. The Volkswagen factory in Wolfsburg is a prominent landmark, showcasing the importance of the automotive sector to the local economy. This massive facility, adorned with a large VW logo, is not just a factory; it is a symbol of the city itself. With around 60,000 employees, the factory plays a crucial role in the lives of many residents. Dieter Landenberger, an in-house historian for Volkswagen, reflects on the factory's historical significance, noting its role in Germany's post-war recovery. Yet, the factory's current output tells a different story. Capable of producing 870,000 cars annually, it only managed to manufacture 490,000 by 2023. This decline is indicative of a broader trend affecting car production across Germany, where factories are operating well below their potential. The total number of cars produced in Germany has dropped from 5. 65 million in 2017 to just 4. 1 million in 2023. This decline is alarming, especially as the nation prepares for elections. The automotive industry is not only a source of national pride but also a vital contributor to the economy, accounting for about one-fifth of manufacturing output and supporting millions of jobs. The decline in car sales is another pressing issue. Between 2017 and 2023, Volkswagen's sales fell from 10. 7 million to 9. 2 million, while BMW and Mercedes-Benz also experienced similar downturns. All three companies reported a significant drop in pre-tax profits, with estimates suggesting a one-third reduction in the first nine months of 2024. The shift towards electric vehicles has required substantial investment, but the market for these cars has not expanded as quickly as anticipated. Additionally, foreign competitors are becoming more formidable, and the looming threat of tariffs from the US and other nations adds to the uncertainty. Simon Schütz, a spokesperson for the German Automotive Industry Federation, describes the situation as a series of interconnected crises. Car sales across Europe have been declining since 2017, although there has been a slight recovery recently. However, sales remain 15 to 20 percent lower than their peak in 2017, influenced by factors such as the pandemic and the energy crisis. The transition to electric vehicles is another critical aspect of the industry's challenges. Following the diesel emissions scandal in 2015, the automotive sector has undergone a technological transformation. With the European Union aiming to phase out petrol and diesel cars within the next decade, manufacturers have been compelled to invest heavily in electric vehicle development. Despite electric cars now representing a significant portion of sales, their market share has not grown as rapidly as expected. In Germany, the abrupt removal of subsidies for electric car buyers in late 2023 led to a staggering 27 percent drop in electric vehicle sales, further complicating the situation for domestic manufacturers. Schütz emphasizes the detrimental impact of this sudden policy change, highlighting the need for trust among consumers during this transition. The automotive industry is also grappling with high operational costs in Germany. Workers in this sector enjoy competitive salaries and benefits, but this has resulted in the highest labor costs in the global automotive industry. In 2023, the average monthly salary in the German auto industry was approximately €5,300, compared to €4,300 across the broader economy. While this approach has historically attracted skilled workers and minimized industrial unrest, it has also made German manufacturers less competitive. The situation worsened following Russia's invasion of Ukraine, which disrupted the supply of affordable energy. Energy prices in Germany remain significantly higher than in other countries, impacting the entire industry. Matthias Schmidt from Schmidt Automotive Research notes that rising energy costs have affected not only car manufacturers but also suppliers of essential components. Last year, Volkswagen faced a critical moment, prompting management to consider drastic measures to reduce costs. Union representatives were taken aback when they were informed that instead of negotiating for a pay raise, they were being asked to accept a pay cut. The company also hinted at the possibility of closing several factories in Germany, a move that would have been unprecedented in its history. Although the proposal faced strong opposition from unions and politicians, it highlighted the severity of the challenges facing the industry. In response to these pressures, Volkswagen and other manufacturers have implemented cost-cutting measures, including job reductions. Ford, which operates two factories in Germany, recently announced plans to cut 2,800 jobs. The challenges facing the German car industry are not limited to domestic issues. For years, manufacturers have sought growth in international markets, particularly in China. However, recent trends indicate a decline in sales in this lucrative market. In 2023, Volkswagen's sales in China dropped by 9. 5 percent, while Mercedes-Benz and BMW also experienced declines. The changing dynamics in China, including a slowing economy and increased competition from local brands, have raised concerns for German manufacturers. Chinese brands are not only gaining market share in China but are also looking to expand into Europe, aided by lower operating costs and government subsidies. The European Union has responded by imposing tariffs on Chinese-made electric vehicles, but German firms fear retaliation that could impact their exports. The rise of protectionism poses a significant threat to an industry heavily reliant on international trade. Despite the challenges, there is hope for the future of Germany's car industry. Dr. Ferdinand Dudenhöffer, an automotive expert, suggests that manufacturers may need to relocate some production facilities abroad to remain competitive. However, Simon Schütz remains optimistic, believing that with government support, the industry can thrive. Union representatives emphasize the need for a return to Germany's traditional values of innovation and technology leadership. The path forward is clear: investment in infrastructure, technology, and education is essential for the future of the automotive sector. For the thousands of workers in cities like Wolfsburg, the stakes are incredibly high as they navigate this uncertain landscape.