German car manufacturers are grappling with the burden of American customs tariffs, competition with China, and a challenging transition to electric vehicles. Chinese companies are also making mistakes, but fewer, while evolving rapidly.
In January, at the anniversary event marking 140 years since the founding of Mercedes-Benz, the centerpiece was a patent application filed in 1886 by engineer Carl Benz for a „gasoline-powered vehicle.”
Mercedes executives spoke about this handwritten document – at one point projected on a giant wall inside the company's headquarters in Stuttgart, Germany – as if it were a sacred parchment. Not only does this attest to Germany being the birthplace of the automobile, but it also helps explain why the challenges faced by the country's auto manufacturers – Volkswagen, Mercedes, and BMW – pose a threat beyond the German economy and the livelihoods of thousands of employees, notes The New York Times.
These auto manufacturers' difficulties also jeopardize national identity, destabilizing a fragile government coalition and fueling support for far-right politicians.
German car manufacturers are struggling with the burden of American customs tariffs, competition from China, and a challenging transition to electric vehicles. The severity of the situation became evident this summer as company executives discussed factory closures, model cancellations, and the elimination of tens of thousands of jobs.
The German model of the auto sector, which aims to balance profits with job security – offering employees, among other things, a significant role in the managerial decision-making process – is capable of adapting to astonishing technological changes, allowing for the rapid launch of new car models in 18 months or less, a fraction of the time needed by most Western manufacturers.
The German automotive DNA
Alongside the chemical and machinery industries, the auto sector represents "one of Germany's three sources of strength, rooted in the 19th century, in areas where German engineers have made remarkable progress," said Holger Schmieding, chief economist at Berenberg Bank.
When the industry undergoes rapid changes, "labor relations in Germany become an obstacle," Schmieding stated. "You can discuss moderate staff reductions with employees, but the situation becomes much more difficult when it comes to radical change."
Ola Källenius, the CEO of Mercedes, stated that Germany still possesses the competencies that have allowed Mercedes, BMW, as well as the Audi and Porsche divisions of the Volkswagen group, to dominate the luxury segment of the market.
In a statement made in January during the presentation of the latest version of the flagship sedan S-Class, he said, "The automobile has origins, spirit, DNA, engineering expertise, precision, and a quality philosophy specific to Germany."
However, he noted that the design was the result of the work of "a global team." He also mentioned that Germany is negatively affected by high energy costs and taxes, as well as regulations that make employee layoffs difficult.
"There is much to be done in Germany to improve competitiveness – or, better said, in Europe," Källenius stated in an interview at the company's headquarters in Stuttgart.
When German companies expand or build factories, they often choose countries like Hungary, China, or Mexico. The number of cars produced in Germany has decreased by 28% from 2016 to the present, according to the VDA (German Automobile Manufacturers Association), placing the country far behind China, the United States, Japan, and India. Germany could soon be surpassed by South Korea and Mexico as well.
U.S. automakers may soon face similar challenges, the cited newspaper notes. Currently, General Motors and Ford Motor are shielded from Chinese competition by customs tariffs. However, "we cannot expect to keep them at bay indefinitely," said William Clay Ford Jr., executive chairman of Ford, at an Axios event held this month in Washington.
The Chinese have moved much faster
The American newspaper mentions that German car manufacturers are facing a two-front offensive. In China, the world's largest auto market, sales of foreign brands are plummeting. At the same time, Chinese automakers are making significant progress in Europe. In June, they surpassed Japanese manufacturers for the first time in sales in Western Europe, according to data compiled by Schmidt Automotive Research.
China was once an extremely profitable market for German companies, generating 37% of Volkswagen's sales in 2019. However, the situation changed drastically after Chinese manufacturers learned to produce cars through "joint venture" partnerships with foreign partners.
The BAIC Group, a state-owned automaker in China, became the largest shareholder of Mercedes, holding a nearly 10% stake. Chinese companies like BYD and Geely Auto were quicker in developing electric vehicles – heavily promoted by the Beijing government – which are now selling briskly in Europe.
The Germans entered the market late with attractive electric vehicles, as mentioned by The New York Times. Volkswagen sold 26% fewer cars in China in the first six months of the year compared to the same period last year, while Mercedes reported a 28% decline, and BMW, a 20% one.
"Despite better products, we cannot compete with the costs and prices of models exported from China," Oliver Blume, CEO of Volkswagen, told employees this month.
Blume expressed doubts about the competitiveness of Volkswagen's factories in four German cities, although he mentioned that there might be ways to avoid their closure – for example, by converting them to serve the defense industry.
Volkswagen employee representatives agreed in 2024 to effectively reduce the company's workforce by 50,000 people by 2030, through retirements and voluntary departure programs. With a total of 657,000 employees worldwide, the company still has a surplus of 50,000 people compared to the necessary level, Blume stated.
The Volkswagen Case: A giant caught between a rock and a hard place
Implementing such drastic cuts is very challenging for Volkswagen. On one hand, this colossus needs to reduce the number of employees. But on the other hand, they hold a significant position in the company.
Volkswagen employees – as with all three German auto manufacturers – hold half of the 20 seats on the supervisory board, in accordance with the country's legislation. These boards oversee executive management and have the power to dismiss the CEO. Shareholders also hold 10 seats and appoint the board chairman, who can cast a decisive vote in case of a tie.
However, a unique aspect at Volkswagen is that two of the shareholder-reserved seats are held by the Lower Saxony state, which owns 20% of the company's voting shares. This state – where Volkswagen's headquarters are located in Wolfsburg – almost always sides with the employees.
Olaf Lies, the Prime Minister of Lower Saxony and one of the state's representatives on Volkswagen's board, stated that he will not accept any plan "based on closing factories as an apparent simple solution."
Over time, Volkswagen and its employees have managed to find compromise solutions in times of crisis, but recently, their collaborative relationship has become strained.
"There is already a huge loss of trust among employees towards the man who, at the beginning of his CEO tenure, presented himself everywhere as 'Olli' and a 'local boy'," stated the Volkswagen Works Council in a statement representing workers' interests, referring to Mr. Blume.
The auto sector crisis, a "powder keg" for extremists
Candidates from the far-right party "Alternative for Germany" (AfD) have exploited the industry's challenges, promising a return to the golden age of German industrial production. This discourse has helped the party attract voters in regions in western Germany, where AfD is generally much less represented than in areas that belonged to former East Germany.
The far-left has also tried to capitalize on this crisis. This month, members of the Marxist-Leninist Party of Germany distributed pamphlets at the gates of an Audi factory in Neckarsulm, in southwestern Germany, urging workers to strike.
Friedrich Merz, the center-right leader, directly linked the industry's problems to China. He promised to collaborate with France and the rest of Europe to counter Chinese imports. French automakers Renault and Peugeot (owned by the Stellantis group) are facing similar issues.
"We are doing everything possible to restore stability to the auto industry. Currently, this is the most difficult sector in Germany," Merz stated in an interview given earlier this month to the ZDF public television station.
And China makes mistakes, but fewer
Auto manufacturers often complain that Chinese companies benefit from an unfair advantage as they receive subsidies from their government. However, Chinese manufacturers excel in equipping cars with features such as rotating screens, fast-charging batteries, and advanced autonomous driving systems, at lower costs than Western manufacturers.
A significant part of the auto industry's problems "are due to wrong decisions and arrogance," in addition to increasing competition from China, said Thorsten Benner, director of the Global Public Policy Institute in Berlin.
Jörn Buss, a German who leads the automotive and industrial division at the consulting firm Arthur D. Little for the Americas region, noted that Chinese companies also face difficulties. They either lose money or make modest profits because there are dozens of auto manufacturers in China. Most of these companies produce cars for only a few years, which means that no one knows if these vehicles will prove to be reliable or durable.
"They haven't made the mistakes that everyone else has learned from over 50 years," Buss said.
Fast and ironies
Germans continue to excel in at least one area: extravagant marketing events, notes the American newspaper. The celebration in Stuttgart, organized to mark 140 years of the Mercedes brand, culminated in the unveiling of the German-made S-Class sedan.
The car was presented in a live broadcast show featuring laser light displays, cameras mounted on drones, a digital projection of John Lennon, and the actual presence of Roger Federer. The vehicle is equipped with an AI-based screen the size of a small windshield, an illuminated emblem on the hood, and heated seat belts.
However, the seat belts have become a sort of national joke, being mocked in the German press as an example of how Mercedes lags behind the spectacular innovations that the Chinese have become experts at, according to NYT.
"These German companies will survive," said Tom Narayan, senior auto sector analyst at RBC Capital Markets. "However, most likely, they will be smaller companies than they are now," he added.
T.D.