For decades, Germany’s automotive industry has been a cornerstone of its economic strength, symbolizing the country’s post-war recovery. The “Big Three”—Volkswagen, Mercedes-Benz, and BMW—have been globally renowned for their innovation, performance, and precision engineering. However, the sector now faces significant challenges. How can it regain its competitive edge?
Arriving in Wolfsburg, Lower Saxony, by train, one of the first sights is the vast Volkswagen factory. Its imposing facade, featuring a giant VW logo and four towering chimneys, dominates the canal-side cityscape. The 6.5 sq km (2.5 sq mile) complex is adjacent to the Autostadt, an automotive theme park celebrating VW, Europe’s largest carmaker. Nearby stands the Volkswagen Arena sports stadium.
Wolfsburg is often compared to mid-20th-century Detroit—more than just a city with a car factory, it’s a factory around which a city has grown. Approximately 60,000 people from the region are employed at the plant, while the city itself has a population of about 125,000. As locals say, even if you don’t work at VW, many of your friends and former classmates likely do.
“Wolfsburg and Volkswagen are practically synonymous,” says Dieter Landenberger, VW Group’s historian, while admiring an early-model Beetle in the Zeithaus, a glass-fronted museum showcasing classic cars in the Autostadt. “The plant symbolizes Germany’s post-war reinvention and the economic miracle of the 1950s,” he adds.
However, the factory now also represents broader struggles within Germany’s automotive sector. Although capable of producing 870,000 cars annually, by 2023, its output had fallen to just 490,000, according to the German Economic Institute. This downturn is not unique to VW; car production across Germany has declined significantly, dropping from 5.65 million vehicles in 2017 to 4.1 million in 2023.
The auto industry remains critical to Germany’s economy, contributing about 20% of its manufacturing output and, with its supply chain, accounting for roughly 6% of GDP. It directly employs around 780,000 people and indirectly supports millions of additional jobs.
Beyond production, sales of German cars have also slumped. Between 2017 and 2023, VW’s annual sales fell from 10.7 million to 9.2 million, BMW’s from 2.46 million to 2.25 million, and Mercedes-Benz’s from 2.3 million to 2.04 million. By the first nine months of 2024, all three saw their pre-tax profits shrink by about a third, forcing them to lower earnings forecasts.
The push toward electric vehicles has required massive investments, yet market growth has been slower than anticipated. Meanwhile, international competitors are gaining ground, and the threat of tariffs from the US and other nations adds further uncertainty.
“There’s a constant cycle of crises—when one ends, another begins,” says Simon Schütz, spokesperson for the German Automotive Industry Federation (VDA).
Car sales across Europe have declined since 2017, according to Franziska Palmas, senior economist at Capital Economics. “Though there’s been some recovery, sales are still 15–20% lower than their 2017 peak,” she notes. Factors include the pandemic, the energy crisis, and longer vehicle lifespans. Many consumers in Europe already own cars, leading to weaker demand.
Another major challenge is the transition to electric vehicles. Since the 2015 diesel emissions scandal—when VW was caught manipulating emissions tests—the industry has been undergoing a technological overhaul. With the EU phasing out petrol and diesel vehicles over the next decade, carmakers have been forced to invest billions in electric models and new production lines.
Despite these efforts, electric vehicle adoption has been slower than expected. In the EU, electric cars accounted for 13.6% of sales in 2023, and in the UK, 19.6%. However, in Germany, a sudden withdrawal of subsidies for electric car buyers in late 2023 led to a dramatic 27% drop in sales, compounding difficulties for domestic manufacturers.
“The abrupt end to subsidies was damaging—it eroded customer trust,” Schütz remarks. “Shifting from combustion engines to electric mobility is a huge process, requiring billions in factory transformations. It takes time.”
Adding to these challenges is the high cost of operating in Germany. The country’s car industry has long been known for generous wages and benefits, negotiated through agreements between unions and employers. In 2023, the average base salary in the German auto sector was €5,300 per month, compared to €4,300 across the broader economy.
This approach helped maintain labor peace and attract skilled workers, but it also made Germany’s car manufacturers the most expensive in the world in terms of labor costs. In 2023, these averaged €62 per hour—far higher than Spain’s €29 or Portugal’s €20.
The situation worsened after Russia’s invasion of Ukraine, which disrupted Germany’s supply of cheap Russian gas just as the country was phasing out nuclear energy. This led to soaring energy costs, which, despite some decline, remain significantly higher than those in the US or China.
“Energy prices in Germany are three to five times higher than in key competitor nations,” says Schütz.
This affects not just automakers but also their suppliers. “From steel mills producing sheet metal to manufacturers of drivetrain components, costs have skyrocketed,” explains Matthias Schmidt of Schmidt Automotive Research.
In response to these pressures, VW, with 45% of its global workforce in Germany, announced drastic cost-cutting measures.
“It was a huge shock,” says IG Metall union spokesperson Steffen Schmidt. “Workers were expecting a 7% pay raise, but instead, they were told they needed to take a 10% pay cut.”
Further, VW considered closing up to three German factories and scrapping a longstanding job security agreement—an unprecedented move in its 87-year history. Though union resistance and warning strikes ultimately prevented plant closures, the episode sent shockwaves through the industry.
Instead, VW implemented cost-saving measures, including pay and bonus reductions, and announced plans to cut over 35,000 jobs by the decade’s end through voluntary exits rather than forced layoffs.
Germany’s car industry also faces challenges beyond its borders. With the European market saturated, manufacturers have long sought growth in other regions—most notably, China.
For years, China’s expanding middle class had an insatiable appetite for luxury European cars, prompting German automakers to establish joint ventures and factories there. However, demand is now waning.
VW’s sales in China dropped 9.5% in 2023, Mercedes-Benz’s fell by 7%, and BMW’s plummeted by 13.4%. Their combined market share has fallen from 26.2% in 2019 to 18.7%. Slowing economic growth, rising interest in domestic brands, and China’s dominance in electric vehicles have all contributed to this decline.
“Not long ago, Western brands symbolized quality and reliability,” says Mark Rainford, founder of Inside China Auto. “Now, Chinese brands have significantly improved their reputation and appeal.”
All three major German carmakers acknowledge that trends in China have deeply impacted their earnings. The industry is now at a crossroads, grappling with high domestic costs, slow EV adoption, and shifting global demand—all while seeking a path back to growth.
