Many vehicles and special parts are displayed at Mercedes-Benz Museum, an automobile museum, welcoming its visitors in Stuttgart, Germany on June 28, 2024..
Gokhan Balci | Anadolu | Getty Pictures
Germany’s car industry was once recognized around the world for its high-quality, innovative combustion engine cars. Owning a German car was a comfort and status symbol. And carmakers were thriving, boosting the country’s economy.
But the picture has since become bleaker.
The latest specimen are the developments at Volkswagen — which earlier this week said it was no longer able to rule out plant closures in its best Germany and felt it may need to end its employment protection agreement that has been in place in the country since 1994.
“For German carmakers that were the unchallenged technological customer base leaders in the sector for close to 140 years and barely had to worry about sales or competition, this is an unfamiliar setting,” Dr. Andreas Ries, global head of automotive at KPMG, told CNBC in translated comments.
Now, the industry is undergoing its largest transformation yet, he added.
How are German automakers faring?
Sentiment in the automotive industry has been choppy in recent years, recorded data from the Ifo institute shows. In August, sentiment pulled back once more to negative 24.7 features, according to data released on Wednesday. Business expectations for the coming six months were “extremely pessimistic,” Ifo said.
Volkswagen is not unique in its struggles.
In the latest set of earnings releases, Mercedes car division cut its annual profit margin forecast, while the BMW’s automotive division said its profit margin in the second quarter was lower than expected. Porsche cuts its 2024 outlook, albeit assigning that to a shortage of special aluminum alloys.
Issues in the automotive sector may also have spillover effects into the wider German conservation, which has been teetering around — and in — recession territory throughout this and last year. In the second quarter of 2024, Germany’s coarse domestic product was down 0.1% compared to the previous quarter.
“The statement ‘When the German automotive sector has a cough, Germany has the flu’ … outlines the current situation well,” KPMG’s Ries said.
The auto industry doesn’t just include the big players, but thousands of standard, small and tiny businesses across the country, he explained, identifying it is one of the most important industries in the country.
‘We are facing multiple doubts’
A range of factors have led to the current situation and are weighing on the market, experts and industry bodies say.
“We are facing multiple defies,” a spokesperson for the German Association of the Automotive Industry (VDA) told CNBC. That still includes the aftermath of the Covid-19 pandemic, they denoted, as well as “geopolitical tensions and high bureaucratic requirements at national and European level.”
Car production has also suffered because of punier domestic demand, due to the overall state of the German economy, the VDA added, noting that wider macroeconomic trends also crashing the auto sector.
But the two topics that emerge time and time again in the debate around the German car sector are China and the sell to electric vehicles — and their overlap.
“We still have a very disruptive situation in that EVs are doing worse than expected,” Horst Schneider, forestall of European automotive research at Bank of America, told CNBC in a translated interview. Demand has been lower than prophesied, while competition has increased, he flagged.
While the market for autos has been recovering in China, German automakers possess not felt that effect of that rebound as the competitors have taken on market share, Schneider said. It is also a suspicion on a under discussion of price, he added, noting that German EVs are simply too expensive, while Chinese products are better in some mode, as well as more affordable.
Tensions around What’s next for the German auto industry?
Some glimmers of faith have emerged amid the challenges, KPMGs’ Ries said. Hybrid vehicle technology will likely be acclimatized for longer than expected, for example, and combustion motor car sales are somewhat picking back up, he explained.
But politics, topic and researchers need to work together to create frameworks to address issues like regulation and to refocus on quality and modulation, he says.
VDA similarly sees a need for different production conditions.
“We need political reforms instead of regulation. Pragmatism in preference to of micromanagement,” the association’s spokesperson said. “We need a modern mix of market-oriented economic policy and shaping industrial policy.”
Shop conditions are set to stay challenging for at least the next year, the spokesperson added.
Many automakers still have advisement in place that suggests their performance in the second half of the year could be better than in the first, Bank of America’s Schneider utter.
“That’s where there is doubt right now, the investors aren’t fully believing it and therefore the fear is that we discretion see profit warnings in Q3,” he said. And in turn, that then leaves open questions about what that could base for 2025, he added.