Factors such as the transition to electric vehicles and increasing international competition are bringing the German automotive market to its knees.
The German automotive sector, which has always been one of the pillars of the national economy, is going through a difficult time.
The crisis that this iconic industry is going through is the result of a series of challenges ranging from the transition to electric to disruptions in supply chains, through increasing regulatory pressure and international competition.
These factors, combined with an increasingly unstable global economic environment, are testing the major German car manufacturers, forcing them to rethink their business models.
The Decline of the German Auto Industry
The difficulties that the German auto market is experiencing, highlighted by the decrease in production and sales, are the reflection of a structural crisis that involves various factors, from the slowdown in sales in the European and Chinese markets, to the costly transition to electric mobility.
Car production in Germany, once a symbol of the post-war economic miracle, has collapsed to 4.1 million in 2023, compared to 5.65 million vehicles in 2017.
This decline weighs heavily on the national wealth, given that the sector represents about a fifth of German manufacturing production and 6% of GDP.
Making matters worse are the high energy costs that arose after the war in Ukraine, which have made German companies less competitive compared to their international counterparts.
The country had to do without massive Russian gas resources just as it was phasing out nuclear power. This has made German energy costs higher than international standards.
The massive investment in the transition to electric vehicles also weighs heavily, which has not yet yielded the expected results.
German government policies, such as the drastic elimination of subsidies for electric cars, have further damaged consumer confidence.
High operating costs and struggling manufacturers
The costs of running a business in Germany are no joke: manufacturers are having difficulty paying the salaries of hundreds of thousands of employees, which are traditionally higher than in other sectors.
According to Capital Economics, in 2023 there was an average monthly salary of €5,300, which led to higher automotive labor costs for German manufacturers compared to other European countries.
While Spain’s average hourly cost was €29 and Portugal’s €20, German manufacturers had a wage of €62 per hour, according to VDA data.
For years, this approach, the result of agreements between companies and unions, has given German automotive companies advantages, from avoiding strikes and work stoppages to attracting and retaining talent resources.
But with rising production costs and the car sales crisis, companies have found it difficult to keep wages at bay, leading to drastic wage cuts.
Volkswagen announced a 10 percent pay cut, as well as a 35,000 job cuts, threatening to close up to three of its plants in Germany.
Arne Meiswinkel, head of negotiations for Volkswagen, said at the time that the situation in Germany was extremely critical and that VW could only survive “if we can make the company fit for the future, in an environment of rising costs and increasingly fierce competition”.
Mercedes-Benz has also launched a cutting plan to save billions OF EUROS, but layoffs in Germany are off the table until 2030 thanks to an agreement.
Ford, on the other hand, has planned 2,800 redundancies in its German plants.
Despite this, the crisis in the German automotive industry goes beyond national borders, with manufacturers trying to grow outside Europe, where the market is now saturated.
The transition to electric
The investment that various car manufacturers have had to make for the electric transition has been another destabilizing factor for the market.
The European Union has gradually pushed European governments to phase out petrol and diesel cars, leading car manufacturers to invest heavily in developing electric models and building innovative production lines.
However, these transition policies have not had the desired effect, with electric cars accounting for 13.6% of sales in European countries and 19.6% in the UK, proving to be too low a return on investment.
The situation has not improved with the elimination of state subsidies for electric cars, which has contributed to a 27% drop in sales in the country, making the return on investment increasingly less achievable for German companies.
Competition with China
China has entered the European automotive market with a vengeance, seeking to gain a significant share thanks to its European rivals’ much lower operating costs, lower wages and production costs.
Last October, the European Union introduced duties on imports of electric vehicles of Chinese origin, in order to create a level playing field with the costs of European products.
This has caused considerable concern in the German market, fearful of possible retaliation and influence on exports to China, one of Germany’s most profitable markets. The big three such as Volkswagen, Mercedes-Benz and BMW had in fact collaborated and opened factories in China to satisfy local demand.
In 2023, however, sales also fell in that market, with a 9.5% drop for VW, 7% for Mercedes-Benz and 13.4% for BMW.
This highlights a decrease in sales for European cars in China and an increase in the growth of Chinese car manufacturers, especially following the birth of electric-only companies in the Asian country, which have not felt the burden of the transition from traditional to electric cars.
As long as Germany and its companies are not able to make themselves competitive in the market, through investments in infrastructure, innovation and emerging technology, the future prospects are uncertain and could be increasingly bleak for the German industry.
The elections in view of 2025 will be decisive in understanding the direction that the German market can take.
Original article published on Money.it Italy 2025-02-14 17:21:45. Original title: Perché il settore auto in Germania è in crisi?
