Germany's auto industry slowdown symbolizes country's economic slump

Germany's economy is in the slow lane.

After two straight years of economic decline, the country's central bank revised its economic growth forecast for this year down, from 1.1 percent to just 0.2 percent. 

 Driving down growth is the country's struggling automotive sector. Amid increased energy costs, rising competition from Chinese manufacturers and low investment in infrastructure, the car industry is driving on balding tires.

"The [automotive industry] share of GDP is 20-30 percent – but these are under-estimates, because they do not include all the dependencies, the services sector etc," economics professor Stephan Thomsen tells CGTN. "But the demand has decreased for these cars and so we have this decline in their contribution to the GDP."

The country's largest automaker, Volkswagen, is suffering the most with debt well over $200 billion.  

At the end of 2024, for the first time in its history, Volkswagen considered closing at least three of its plants in Germany until bitter negotiations resulted in a deal that will still see the auto giant slash 35,000 jobs by 2030 to drastically reduce costs.

Pivot to electric

German automotive companies have been somewhat left trailing by the speed of Chinese manufacturers' pivot to electric, says Thomsen: "Volkswagen, for example, is producing nine million cars, but only about 700 to one million electric or hybrid cars, so the vast majority are still these combustion engine cars."

An increasing number of people are buying EVs, with nearly 14 million registered in 2023, a 35 percent increase from 2022. At the same time, soaring energy prices and an EU ban on the sale of new petrol and diesel cars from 2035 are hitting the home of automotive manufacturing hard.

With manufacturing costs on average higher than other EU nations, Thomsen says Germany is a very costly location to produce cars, "so this production will move onto neighboring states with better cost ratios. But this will be a very hard transition, because from the mindset, we are still an auto nation."

Early on in the drive towards greener mobility, the German government initiated various federal measures to promote the production of electric vehicles. However, the COVID pandemic, war in Ukraine and the subsequent hike in energy prices all weighed heavily on the federal budget, so in 2024 most subsidies were stopped.

Yet with the threat of Volkswagen closures and the lead-up to snap federal elections, politicians are trying to bring back that support in an effort to revive the country's stagnant economy.

German Chancellor Olaf Scholz has called for Europe-wide sales incentives for electric cars. His Social Democratic party also supports the introduction of a transformation fund to help promote German EVs through tax breaks.

Meanwhile, the Christian Democrats plan to reduce electricity prices by lowering grid charges and are considering lifting the 2035 ban on fossil fuel cars.

Opportunity or stability?

Yet according to automotive industry professor Frank Schwope, "it is important that politics provide stable framework conditions. You simply need a clear guideline for electro-mobility today and not for combustion engines tomorrow."

That includes import and export trade regulations too, says Thomsen.

"When you export 75 percent of your cars, it's a question how to keep markets open, how to keep free trade agreements," he says. "I think this is something the next government needs to be very clear about, to make good negotiations about the free trade agreements with the biggest markets – and the biggest markets are in Asia."

For decades, industry drove Germany's economy into becoming one of the largest in the world. Yet in this age of new technology and competition, the country's next government must be extremely pragmatic and innovative to avoid being left in the dust.