Germany's iconic car industry is grappling with a crisis that has led to significant upheaval. The country's leading car brands, Volkswagen, Mercedes-Benz, and BMW, long admired for their performance and innovation, are now struggling to regain their former glory.

In Wolfsburg, Lower Saxony, the vast Volkswagen factory, a symbol of Germany's post-war economic resurgence, now reflects some of the broader issues affecting the industry. The factory, capable of producing 870,000 cars annually, only managed 490,000 in 2023. This underperformance is not unique to Wolfsburg, as car factories across Germany have been operating below capacity.

The number of cars produced in Germany dropped from 5.65 million in 2017 to 4.1 million in 2023. Car manufacturing, which contributes significantly to Germany's GDP and employs around 780,000 people directly, is crucial to the nation's economy. However, sales of German-made cars have seen a decline, with Volkswagen, BMW, and Mercedes-Benz all reporting lower sales and profits in recent years.

The shift to electric vehicles has necessitated substantial investment, but the market has not grown as rapidly as anticipated. Additionally, the removal of subsidies for electric cars in late 2023 led to a 27% decrease in sales of electric vehicles in Germany, further complicating the industry's recovery.

High operating costs in Germany, including labor and energy expenses, have also posed challenges. The average monthly base salary in the German auto industry was about €5,300 in 2023, compared to €4,300 across the entire German economy. Energy prices, which soared after Russia's invasion of Ukraine, remain high and impact production costs throughout the supply chain.

To address these issues, the German car industry must focus on accelerating the transition to electric vehicles, securing government support and subsidies, managing costs, adapting to global market competition, and creating a more favorable regulatory environment.

A Very Big Shock

Last year, these pressures came to a head. At VW, which has 45% of its global staff in Germany, managers finally decided radical action was needed to bring down costs. According to Steffen Schmidt, spokesman for the IG Metall union, the announcement came as a "very big shock" to workers. The news was delivered by Daniela Cavallo, head of the VW works council, in a public meeting outside the factory gates. Thousands of employees stood in stunned silence as they learned about the drastic steps being taken.

VW's proposal was unprecedented. Union representatives, who expected to negotiate an annual pay rise, were instead asked to accept a 10% pay cut. Additionally, the company suggested the potential closure of up to three factories within Germany and the termination of a long-standing job security agreement.

Arne Meiswinkel, VW's chief negotiator, emphasized the severity of the situation, stating that Volkswagen needed to future-proof itself against rising costs and increased competition. Although the idea of closing factories was ultimately shelved due to strong opposition, the workforce agreed to limits on pay and bonuses, with VW planning to cut over 35,000 jobs by the end of the decade in a socially responsible manner.

Mercedes-Benz also embarked on a cost-cutting drive aimed at saving billions annually, while Ford announced plans to cut 2,800 jobs in Germany. These measures highlight the widespread challenges faced by the German car industry.

The Impact of China

China, once a lucrative market for German car manufacturers, is no longer delivering the growth it once did. VW, Mercedes-Benz, and BMW have all experienced declining sales in China, attributed to a slowing economy, reduced interest in foreign-branded cars, and the rise of local electric vehicle (EV) manufacturers. The combined market share of the Big Three in China has shrunk from 26.2% in 2019 to 18.7% in 2023.

Chinese brands are also making inroads into the European market, benefiting from lower operating costs and government subsidies. The European Union has responded by imposing additional tariffs on imports of Chinese-made EVs to create a more level playing field.

Trade Wars and Rising Protectionism

German car manufacturers face additional threats from rising protectionism. The potential for new tariffs on EU cars introduced by the Trump administration and the broader impact of trade wars pose significant risks to an industry heavily reliant on exports. Simon Schütz from the VDA warns that trade wars will result in losses on both sides, impacting wealth, growth, and jobs.

A High-Stakes Challenge

The German car industry's ability to revive its fortunes is crucial for manufacturers, suppliers, and the country as a whole. Dr. Ferdinand Dudenhöffer, head of the Center for Automotive Research, believes Germany needs to become more competitive in cost terms and embrace new technologies. He suggests that carmakers and suppliers may need to move their factories abroad.

Simon Schütz remains optimistic, asserting that the industry can prosper with the right government support. Union representative Steffen Schmidt emphasizes the importance of returning to Germany's traditional industrial values and investing in innovation, technology, green energy, and education.

The stakes are high for workers in car towns like Wolfsburg, Ingolstadt, Weissach, Munich, Stuttgart, and Zwickau. The future of Germany's car industry depends on its ability to adapt and innovate in the face of these unprecedented challenges.
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