Germany’s automotive industry, uncertain times ahead

  • Automotive industry, critical to the German economy
  • Impact of the change in emission test policy mandated by the EU Commission
  • Effects of decline in Chinese exports owing to the trade war
  • Possible impact due to the no-deal Brexit and the imposition of the US tariffs on EU cars
  • Switch in customer preferences and struggle in the home market


Germany’s all-mighty automotive industry, popularly known for its world-class offerings is showing signs of distress. The country boasts of the strong automotive industry and is home to four luxury brands; Audi, BMW, Mercedes and Porsche, which account for c. 80% of luxury car sales globally. Besides accounting for one-fifth of Germany’s exports, the industry is the biggest employer in the nation (c. 840,000). Germany’s superior research and development capabilities, highly-qualified workforce and a robust industry value chain integration attribute to world-class on-road products

However, the automotive industry in Germany is now struggling, the impact clearly reflects on the country’s GDP numbers. Its GDP (Gross Domestic Product) contracted for the first time since 2015 in the third quarter last year (2018). This contraction was attributed to sales issue in the country’s automotive industry, besides a weakening in the global economy. The former was caused due to the new emission standards mandated by the EU (WLTP-Worldwide Harmonised Light Vehicle Test Procedure and RDE-Real Driving Emissions) coupled with a decrease in exports to China as a result of the ongoing trade war between China and the US. The double shot of emission tests replaced the earlier widely criticized NEDC (The New European Driving Cycle) emission test for understating emissions, more specifically toxic nitrogen oxides. The German automotive industry is under tremendous pressure to meet the EU mandated limits for higher CO2 emission reduction targets to be met by 2030. This has disrupted both production and sales while weighing down on auto companies’ profits. In line with these stringent emission tests car makers have had to phase out older passenger models while reducing production of German cars due to homologation (safety and regulation) mandates. Although testing stations are working non-stop, many models require new emission equipment (particulate filters) thereby, creating a delay for all the existing models to be tested/certified on time.

 Additionally, as mentioned earlier, the automotive industry is grappling with a decrease in exports to China after President Trump imposed a 25% tariff on steel and aluminium among other tariffs. This directly impacted the German car exports, manufactured in the US for the Chinese market. It is estimated that imports from Germany to China fell by 37% in 2018. In addition, China’s weak economic growth expectations for the present year will further hit the German automotive industry. The country is hit by weak domestic demand, defaulting bonds and exports affected due to the US tariffs, its growth is expected to slow down to 6.3% as compared to 6.6% and 6.9% in 2018 and 2017, respectively. Furthermore, Trump’s trade war did not leave Europe unscathed. In August 2018 the US announced a 25% tariff on every imported car from the EU to much dismay of the European leaders and its automotive industry. This, however, has yet not been implemented and officials from both sides are holding discussions. But if the US decides to slap this tariff, German carmakers are bound to further take a hit. This will be a very critical situation for Germany as the country’s premium brands depend on the import market of the United States with Porsche and Audi having a significant market share in the nation.

The situation may further worsen in a no-deal Brexit (absence of negotiated trade agreement with Britain leaving the EU on March 29th, 2019), which is expected to affect approx. 100,000 automotive-related jobs both within Germany and regions wherein BMW and Volkswagen have their factories. An unfavourable no-deal Brexit could disrupt the global supply chain along with several regions in Germany (such as Wolfsburg, Dingolfing-Landau, Hans-Ulrich Brautzsch and Oliver Holtemoeller, etc.) being impacted by job losses. The German automotive industry has approx. 15,000 jobs related to trade with Britain. In case of a no deal Brexit, 10% import duties on cars/car parts will entail additional costs and will further hassle trade and thereby, increase prices of imported goods for customers. Germany would be hit the most by a no-deal Brexit situation among the EU nations due to its reliance on exports.

In addition, to the aforementioned challenges, there is a shift in the demand from consumers, from combustion engines with impressive horsepower to autonomous electric vehicles with a host of dashboard applications. Addedly, consumers are also switching from ownership of cars to alternate modes of travelling like ride-hailing. The dieselgate (Volkswagen) scandal that made headlines in 2015 still continues to impact the country, bringing in the demand to switch to cleaner electric vehicles and initiation of diesel ban in some German cities.

Further, carmakers in Germany are grappling with investments in the form of huge sums of money for building batteries, setting up of electric vehicle plants and to form mergers to thrive in the ride-sharing market, all this while competing with the US and China both of which have a significant head start as compared to Germany in these areas. It is estimated that a switch to electro mobility will cost Germany c. 114,000 jobs by 2035 (Institute for Employment Research).

Hence, given the change in consumer preferences at home for electro mobility, and an uncertain external policy including Brexit and a trade war with the US, Germany’s automotive industry seems most likely to continue to face the heat. The protectionist policies and lack of free trade world set-up are bringing uncertainties to an industry that has been heavily reliant on a robust value chain for efficient JIT manufacturing. A heavy reliance on exports is further worsening fortunes for the German automotive industry as was reflected through a decrease in automotive exports by 9% in 2018. Further, the German automotive industry will have to catch up the electrification race, the country is still devoid of a big battery manufacturer further adding to its disadvantage.

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