Germany’s auto industry in crisis – a perfect storm of challenges

STUTTGART: Germany’s auto industry is facing a significant crisis, marked by declining sales, escalating production costs, and a slow transition to electric vehicles (EVs). This has left companies like Volkswagen AG and Mercedes-Benz Group AG vulnerable. The industry is experiencing a decline, fuelled by both global economic shifts and local challenges.

Trade Wars and Tariffs

The potential for tariffs on their cars, particularly from the US, has become a pressing concern. About 75% of cars produced in Germany are exported, and increased trade barriers could significantly harm the industry. Trump’s recent threats of tariffs and the responses from other countries, the US’s robust demand for large sport utility vehicles and its slower shift to EV make it a lucrative market for BMW, Porsche and Mercedes to sell their high-margin combustion-engine models.

European carmakers to raise prices of petrol cars, make EVs more affordable

High Costs and Energy Prices

High manufacturing costs, particularly electricity prices, are a major concern. Energy prices have increased significantly due to the Russia-Ukraine war. Germany’s reliance on fossil fuels and the resulting high electricity costs create an unfavourable environment. These factors make it difficult for German carmakers to compete.

China Dependence

China is the primary market for many German carmakers, and generates a substantial portion of their revenue and profit. They face intense competition and a price war from Tesla and local manufacturers.

The government seeks to reduce their exposure to China and have called for German companies to reduce their exposure there, after the Ukraine war.

They’re raising investments and banking on partnerships with local companies to claw back their market share.

EV Slowdown

The shift to EVs is also proving to be a challenge, with sales declining in Europe. This leads to challenges for luxury brands. Some companies are re-evaluating their electrification strategies, shifting towards hybrid models, and a Merz-led government may back this push, they want to sell new combustion-engine vehicles beyond a planned 2005 EU ban.