German automobiles have long been regarded as world-renowned symbols of prestige, performance, and engineering. Brands like Mercedes-Benz, Volkswagen, and BMW shaped the ideal of a high-end automobile for many years. However, the same companies that used to rule the world are currently facing a period of extreme uncertainty.
The question is no longer whether German automakers can maintain their dominance in the face of supply chain disruptions, EV growth pains, and declining market share in China; rather, it is whether they can adjust quickly enough to stay competitive.
Here’s a detailed look at what has gone wrong and what the German auto industry can still achieve.
German Automobile Manufacturers: From World Leaders to World Pressures
The big three—Volkswagen Group, Mercedes-Benz, and BMW—were once thought to be unbeatable, but they are now frantically trying to protect their territory in a rapidly changing global market.
The headlines of late have not been particularly joyous:
Volkswagen is struggling to sell EVs, reducing production in Europe, and shelving plans for new factories.
In the face of diminishing sales, Mercedes-Benz announced a cost-cutting plan and issued a profit warning in early 2024.
Investor apprehension over BMW’s transition plan is reflected in the company’s sharp decline in market value over the last 12 months.
The issues do not exist in isolation. Economically, technologically, and even culturally, German automakers are under pressure.
Why the Decline?
Several intersecting issues are fueling this crisis.
1. Changes in Regulation
German automakers are being forced to make the shift more quickly than they are prepared for by the EU’s tougher emissions standards and the impending ban on internal combustion engine (ICE) vehicles by 2035. Effectively electrifying legacy platforms is challenging, and expanding new EV platforms has proven costly and time-consuming.
2. China: From Cash Cow to Rival
China used to be the most profitable market for German automakers. No longer. Domestic Chinese EV companies such as XPeng, NIO, and BYD have transformed from startup underdogs to market leaders. China used to account for up to 40% of Volkswagen’s worldwide profits, but in just five years, the market share of German brands in that country dropped from 25% to 15%.
3. Chaos in the supply chain and chip shortages.
COVID-19 The global shortage of semiconductors and 19 disruptions had a significant impact on the German industry. German OEMs had little room for error because just-in-time manufacturing was a fundamental part of their business processes. The outcome included production halts, delayed models, and irate customers.
4. Rising Energy Prices
The Russia-Ukraine conflict, rising demand, and the switch to renewable energy sources have all contributed to a recent sharp increase in Germany’s energy prices. As other nations, such as the United States and China, increase their subsidies for EV production, the situation has increased the cost of domestic manufacturing.
5. Old Thinking, New Technology
Historically, the reputation of the German automotive industry has been based on engineering prowess rather than software innovation. In a world where consumers demand seamless software, frequent updates, and intelligent connectivity, this has become a significant concern. Tesla, Hyundai, and even more recent Chinese brands, in contrast, provide more sophisticated infotainment, OTA updates, and integrated ecosystems.
Is It a Rough Patch or a Fall from Grace?
Even though things appear dire, they are not necessarily irreparable. German automakers continue to have a strong global presence, substantial R&D resources, and brand equity. But whether they make a resurgence or regress to a secondary position will depend on their actions over the next three years.
What Should German Automakers Do to Get Back on Track?
1. Adopt EVs in their entirety, not just luxury models.
German automakers have so far focused on luxury EVs (such as the Mercedes EQS, BMW i7, and Audi e-tron GT), but they are deficient in high-volume, reasonably priced models. Tesla and BYD are consuming the mass market share in the meantime. Although they have shown promise, VW’s ID.3 and ID.4 still fall short of expectations.
They must create reasonably priced EVs that can compete in China, the EU, and the US without sacrificing quality or brand identity if they want to remain relevant.
2. Improve the software. The gap
One of Germany’s greatest weaknesses is still its software. Internal strife and delays have plagued Volkswagen’s Cariad division, which was supposed to spearhead the company’s digital transformation. Though they have made some strides, Tesla, BYD, and even Polestar have more technological integration than Mercedes and BMW.
They must rethink automobile design around software, not just hardware, partner where needed, and hire tech talent.
3. Reconsider the Footprints of Manufacturing
Automobile manufacturing is costly in Germany. German automakers must reevaluate where and how they build EVs in light of China’s rapid production scaling and the United States’ generous incentives through the Inflation Reduction Act. Remaining competitive will require more local production in key markets (such as Southeast Asia and North America).
4. Make Use of Tradition, But Don’t Hold on to It
With phrases like “ultimate driving machine,” “Das Auto,” and “progress through technology,” German automakers are masters of heritage branding. That message is still relevant today. However, they need to change to appeal to younger consumers, many of whom are more interested in sustainability and connectivity than in tradition.
Engine tuning is no longer the only way to achieve the emotional pitch. It must focus on user experience, technological innovation, and environmental responsibility.
What Comes Next? Predicting the Future
Despite the current downturn, the German auto industry remains viable. However, the industry is currently facing a pivotal moment.
The most likely short-term outcomes are more consolidation, production reductions, and perhaps even the spinoff of legacy divisions or underperforming units (think VW’s combustion-focused operations or struggling sub-brands).
In the long run, anticipate seeing:
An increased emphasis on EVs under €30,000.
More cooperation with tech companies (perhaps more joint ventures with U.S. or Chinese companies)
Increased spending on autonomous vehicles, AI, and in-car experiences
Leaner, smaller manufacturing firms with regional production centers
A change in leadership perspectives as younger, tech-savvy executives assume control
Concluding Remarks: Change or Retreat?
Is the heyday of German automobiles over? Perhaps. However, that does not imply that the future must be bleak.
The current automotive industry was shaped in part by German automakers, and they have the means to influence future developments. However, the heyday of depending on historical prestige, superior engineering, and a devoted worldwide fan base is over.
These days, the focus is on software, sustainability, speed, and extreme humility. The major German automakers can maintain their leadership position in the era of electric, digital, and driverless cars if they can embrace the challenge and change swiftly.
Otherwise? The new auto giants of the world may communicate in Mandarin. They must innovate not only in technology but also in their corporate culture, prioritizing adaptability and collaboration. If they fail to do so, they risk ceding ground to emerging players who are already redefining the automotive landscape.
