German car giants struggle as Chinese rivals steer ahead

Germany’s once-dominant auto industry is facing a perfect storm, with rising competition from Chinese electric vehicles, shrinking market shares, and economic turmoil threatening the country’s industrial might. 

Politico highlights in a recent article that the automotive industry played a key role in propelling Germany to the forefront of Europe's economic power. However, the same sector is now in crisis, dragging the country down.

German automakers are grappling with a perfect storm: the transition from combustion engines, once a symbol of German engineering, to electric vehicles that are simpler to manufacture and where Germany lacks control over vital battery technology. The industry is also struggling with declining demand for electric vehicles in Europe, rising energy and labour costs, a significant drop in sales in China—its largest market—and the emergence of fierce Chinese competitors in Europe.

Moreover, an additional setback may be looming, as US President Donald Trump threatens tariffs that could disrupt the free-trade system that has been central to Germany’s export-driven economy.

“The economy has been under a huge amount of pressure [that] was hidden by the fact that there was the pandemic and then the war,” said Nils Redeker, deputy director of the Jacques Delors Center think tank in Berlin. “It’s now coming to the forefront again and people are very, very concerned.”

This situation is having a ripple effect on German politics.

The challenges affecting Germany's key industry are playing a major role in Chancellor Olaf Scholz's likely downfall in the upcoming February 23 election, as voters become increasingly dissatisfied with his economic agenda.

With less than a week left before the vote, Scholz's opponent, the conservative alliance led by Friedrich Merz, enjoys 29 per cent support in polls, while Scholz's own Social Democratic Party (SPD) trails in third place with 16 per cent.

However, even if conservatives win, it’s unlikely that a swift solution will emerge for the problems plaguing Germany’s automotive industry.

Layoffs throughout the sector, sluggish economic growth, and a growing perception that Germany is no longer on the road to prosperity are contributing to the country’s increasing sense of pessimism. This climate has fueled the rise of the far-right Alternative for Germany (AfD) party, which now holds second place in polls with 21 per cent, and has bolstered the left-populist Alliance Sahra Wagenknecht (5 per cent), known by its German acronym BSW.

Although Germany is entering its third consecutive year of recession, the country’s economic struggles can be traced back to 2019, when decarbonization efforts began in earnest, threatening its traditional industrial strength. At the same time, China, once a major source of profits for German industry, has become its biggest competitor.

Germany’s automotive giants grew wealthy in China, entering the market decades ago when domestic car sales were beginning to rise; their success in Asia helped support higher wages at home.

That trend reversed in 2018 when China’s market for new cars shrank for the first time since the 1990s, falling by 3 per cent. It declined another 8 per cent in 2019 before the pandemic caused a global market slowdown.

Currently, the market shares of the three major German automakers are shrinking as Chinese competitors roll out more affordable electric vehicles that often feature superior technology.

By Naila Huseynova