The automotive industry in Germany is experiencing a tumultuous phase, characterized by a severe drop in sales and skyrocketing production costs. This trend has left major players such as Volkswagen and Mercedes-Benz, as well as countless parts manufacturers, struggling to keep up with the rapid transition towards electric vehicles (EVs). The overall situation is precarious and points towards an urgent need for reform and revitalization.

Germany, as Europe's largest economy, finds itself in a critical state, grappling with a substantial industrial decline. This predicament has arisen due to several factors, including the rapid rise of advanced manufacturing in China, the impacts of the COVID-19 pandemic, and the disruption in the supply of inexpensive natural gas from Russia. Without substantial and innovative measures, Germany risks losing tens of thousands of manufacturing jobs to low-cost countries that are eager to attract foreign investment.

The President of the German Association of the Automotive Industry (VDA), Hildegard Müller, has spoken out about the dire need for an economic turnaround, urging the next government to cut bureaucratic red tape and foster economic growth to restore Germany's competitiveness. The automotive sector, contributing about 5% to Germany’s overall economic output and employing nearly 780,000 individuals, is particularly vulnerable as it faces heightened competition from both the Chinese market and a subdued demand for electric vehicles in Europe. As a result, manufacturers are resorting to cost-cutting measures, altering their product offerings, and undergoing changes in senior management. Confidence in the industry has plummeted to unprecedented lows.

Trade disputes are intensifying, and the German automotive sector is especially sensitive to rising trade barriers, as approximately 75% of German-made vehicles are exported. Recent threats from the U.S. President to impose punitive measures on countries like Canada, Mexico (where major German car manufacturers like Volkswagen, BMW, and Mercedes maintain factories), and the EU have exacerbated tensions. Executives within the German automotive industry have voiced strong opposition to tariffs, including those imposed by the EU on Chinese electric cars. Recently, Oliver Zipse, the CEO of BMW, emphasized that free trade is one of the “key drivers of growth and progress.”

In the United States, the insatiable demand for large SUVs, coupled with its slow shift to electrification, presents a lucrative opportunity for the German luxury brands such as BMW, Porsche, and Mercedes that continue to sell high-margin fuel-powered models. The German automakers operate several plants in the U.S., catering to local consumers while also facilitating exports. This dual market approach means that potential countermeasures from Europe could significantly exacerbate the repercussions of ongoing trade disputes.

A strategist at BNP Paribas, Benedict Löwe, anticipated that “Europe will retaliate,” and predicted that negotiations between the EU and the U.S. could be protracted. Meanwhile, German Chancellor Olaf Scholz has expressed his willingness to support a robust European response. Industry executives are closely monitoring Friedrich Merz of the Christian Democratic Union, who is poised to take over from Scholz. They hope that under Merz’s leadership, a more conciliatory approach could prevail.

High costs of production remain a vital concern for automotive executives, particularly regarding energy prices. Germany's dependence on fossil fuels for electricity generation, especially during winter months, continues to be a significant burden. The electricity costs in Germany are about three times higher than those in the U.S. and China, and still approximately 40% above the neighboring country of France, which relies on numerous nuclear reactors for its inexpensive and stable energy supply. While mainstream political parties pledge to lower energy costs, they conflict over the methodology. The Social Democratic Party (SPD), to which Scholz belongs, advocates for increasing renewable energy sources and limiting grid fees, while Merz suggests reconsidering Germany's decision to phase out nuclear power.

In addition, reliance on the Chinese market is becoming a worrisome issue for German car manufacturers, as this country represents their largest single market, providing a substantial portion of revenues and profits. However, competition has intensified, alongside a downturn in consumer demand for luxury goods in China. Additionally, the fierce price war initiated by Tesla and local manufacturers such as BYD has put immense pressure on German automakers. Nevertheless, they are not retreating; instead, they are ramping up investments and seeking partnerships with local companies to reclaim market share. Volkswagen operates over thirty factories in China, aiming to increase its annual sales from 2.93 million vehicles last year to approximately 4 million by 2030. BMW plans to invest 20 billion yuan (around $2.7 billion) in its manufacturing facility in Shenyang to ramp up electric vehicle production.

The transition to electric vehicles has also faced its setbacks. Following the unexpected discontinuation of subsidies by Scholz's government last year, the sales of electric vehicles in Germany plummeted, allowing the UK to claim the title of Europe’s largest electric vehicle market. Consequently, major manufacturers like Volkswagen and Mercedes have slowed down their electrification strategies due to insufficient market demand. Porsche anticipates losses of up to €800 million ($837 million) this year as it expands its portfolio of fuel-powered engines and plug-in hybrids. These challenges in the shift towards electric vehicles have led to a significant decline in Porsche's sales in China, falling by 28% last year.

Analyst Matthias Schmitt suggests that Porsche’s strategic adjustments signal that traditional fuel vehicles may enjoy a longer market lifespan. He expects that a government led by Merz will support this approach. The conservative faction under Merz wishes to continue selling fuel vehicles even after the EU's planned ban on new fuel vehicles in 2035. In contrast, Scholz calls for tax incentives for electric cars to rejuvenate sales. Both parties believe that automotive manufacturers should not face hefty fines for failing to meet the EU's stricter emissions targets this year.

Bureaucratic hurdles have also emerged as a major stumbling block. Elon Musk's support for the far-right Alternative for Germany (AfD) party has stirred significant controversy in Germany. Musk has been one of the most vocal critics of the bureaucratic red tape that delayed the construction of Tesla's factory near Berlin. He is not alone in this criticism, as the VDA has urged Berlin to expedite approval processes, reduce excessive paperwork, and ensure that the EU does not introduce further bureaucratic barriers that could stifle economic growth.

All major political parties, including the SPD and the Greens, have promised to reduce bureaucracy. Merz’s campaign agenda calls for lower taxes, reduced regulations, and the provision of only essential social benefits. However, his conservative party is also reticent to significantly loosen Germany’s public spending constraints, known as the “debt brake,” which most analysts believe is crucial for reviving the German economy.

Schmitt concludes, "Germany needs economic stimulation; the question is, is there enough budgetary room for new assistance? I'm not so sure."