In 2025, German auto industry faces make-or-break year

Going into 2025, the German economy remains stuck in recession, with a crisis in the country's all-important automotive industry significantly contributing to the downturn.

Europe's biggest carmaker, Volkswagen (VW), for instance, is planning to cut thousands of jobs in Germany over the next few years.Mass layoffs are also on the horizon at other German automakers, affecting many of the industry's multiple suppliers.

The current state of affairs in the German car industry is plain to see for everyone, but opinions diverge when it comes to identifying the causes of the crisis.

Industry expert Stefan Bratzel from the Center of Automotive Management describes the situation as a "combination of difficulties," calling the problems a "German polycrisis."

He told DW that the industry is "still learning new skills in the transformation toward e-mobility, software-based vehicles and autonomous driving." Additionally, Bratzel said a "new competitive environment" has emerged in the industry, with challenges "not limited to [US electric-vehicle pioneer] Tesla and new Chinese manufacturers."

A spokesperson for the German Association of the Automotive Industry (VDA) laid part of the blame for the difficulties on policymakers, telling DW that the sudden termination of electric-vehicle (EV) subsidies in December 2023 by the government of Chancellor Olaf Scholz and an insufficient charging infrastructure in Germany were "dampening sales figures and contributed to the overall situation."

Ferdinand Dudenhöffer from the Center for Automotive Research think tank shares this view, criticizing politicians for sending conflicting signals. "One moment, they want electric cars, and the next, they're promoting combustion engines, which confuses people," he told DW.

Boardroom execs asleep at the wheel

For quite a few years now, it has been clear that the future of the automobile lies outside the traditional internal combustion engine, no matter whether fueled by fossil fuels or synthetic alternatives. The trend in the industry is moving decisively toward electrically driven cars.

Frank Schwope, who teaches automotive economics at the University of Applied Sciences for Small and Medium Enterprises in Germany, sees "serious management errors at some manufacturers." He said executives have buried their heads in the sand, hoping "everything would work out fine."

But it hasn't, said Bratzel, and the German car industry has fallen behind in the global competition "due to high labor costs, including health care expenses and extensive vacation days." These privileges for German workforces "worked as long as Germany was better and more innovative than others," he said.

German automakers upset by sudden China shift

Bratzel has identified a critical shortfall: While German automakers excel in building conventional cars, they lag behind in making EVs, as these require automotive software and electronic components rather than mechanical parts.

"The erosion of old paradigms and knowledge is truly tragic," he said.

Dirk Dohse from the Kiel Institute for the World Economy (IfW) believes German developers and engineers are "still among the global elite." Nevertheless, he told DW, there is a "lack of flexibility, particularly in management, to attract new customer groups, such as tech-savvy young people in Asia."

Dohse sees China clearly leading Germany not only in EV technology but also with regard to market power. "The Chinese EV market is the largest and most dynamic globally, which suggests China will continue to pull ahead," he said.

China's huge technological advances and a dramatic shift in Chinese customer preferences have created massive problems for Germany's big three automakers VW, BMW and Mercedes, who had long dominated the Chinese car market with their combustion engine vehicles.

But there are even new rivals competing against the Germans for market share, said Bratzel.

"It's not just China. In the medium term, stronger players will also emerge in India, modeled after Chinese manufacturers. Many companies from China and Korea are likely to enter India, possibly through joint ventures," he said.

For Frank Schwope, German automakers can still see some hope in the development of state-of-the-art batteries, a key component of EVs at the moment and in the future.

"Batteries for electric vehicles are far from mature. Significant advances are possible, and by the end of the decade, we could see a shift toward solid-state batteries, which could change the game," he said.

Clock is ticking for German carmakers

Stefan Bratzel believes 2025 will be a decisive year for the German auto industry's efforts to catch up with global developments — not only in terms of regulatory improvements but also in terms of creative and courageous action on the part of management. "Germany must be at least as innovative as it is expensive," he said.

What's at stake wasvividly illustrated by a recent study conducted by the Swiss-based Prognos Institute on behalf of the VDA industry group. If the current EV trend continues, the study said, about 186,000 fewer carmaking jobs will exist in Germany by 2035 compared to 2019.

Between 2019 and 2023, the industry already lost some 46,000 jobs, the VDA spokesperson quoted from the study, with "another 140,000 likely to disappear by 2035."

As a result, said the spokesperson, VDA is calling for swift political action that must include "less bureaucracy, more trade agreements, a competitive tax system, as well as simpler and faster approval processes."

A rough road ahead

Even if policymakers create more favorable conditions and German carmakers regain competitiveness, the industry's recovery will take time, cautioned Bratzel.

"The next two to three years will be a major challenge, requiring the simultaneous tackling of many structural problems," he said, adding on a brighter note: "At least politics has now recognized Germany's 'polycrisis.'"

IfW's Dohse, by contrast, predicts the situation may worsen before improving. "I think 2025 will be a very tough year for the German auto industry, and it will also be a year when setting the right course for the future will be essential," he said.

For Dudenhöffer, much will depend on how markets in the United States and China develop. "It's of utmost importance for the industry to be present in dynamic markets. This can be China to some degree, but also the US, where Donald Trump has yet to decide, however, if he wants to go back to the 1980s era of the combustion engine," he said of the US president-elect.

Schwope thinks there's a glimmer of hope for German carmakers, as he expects currently sluggish EV sales in Germany and Europe to "gain significant momentum by 2025, or in 2026 at the latest."

This article was originally written in German.