The crisis in the German automotive industry is growing due to low demand and the impact of China.

The German automotive industry, once seen as the backbone of the German economy and a symbol of technological innovation, is facing structural, technological, and geopolitical challenges, while declining sales in China and insufficient demand for electric vehicles are deepening the crisis in the sector.

German automotive manufacturers are under serious pressure to reduce costs and maintain competitiveness in light of weak demand from China and Europe while battling the high costs of transitioning to electric vehicles.

VOLKSWAGEN IN THE SPOTLIGHT WITH LAYOFFS

As groundbreaking technologies in the automotive industry have emerged from China and the US in recent years, the increasing competition from Chinese manufacturers and Volkswagen's historic layoff and factory closure plans have intensified discussions in the European public sphere.

Volkswagen's decision deepens the crisis faced by the German automotive industry, as the sector is losing its competitiveness in the country due to high tax rates, rising electricity prices, and extensive bureaucracy.

The weakness of the automotive industry raises concerns among German officials, as it is expected to continue slowing down the growth rate of the economy.

While there are calls for political will to keep added value and employment in the automotive sector in Germany, German politicians are notably unable to maneuver regarding disputes over car tariffs with China, high electricity prices, and EU environmental regulations.

THE IMPORTANCE OF THE GERMAN AUTOMOTIVE SECTOR FOR GERMANY

The crisis in the German automotive industry arises from a complex interaction of overlooked trends, structural problems, and geopolitical risks, as the automotive industry once formed the backbone of the German economy.

The sector accounts for 5% of the total value added in Germany and provides 3% of employment. In terms of revenue, it is by far the largest industrial sector.

German automotive manufacturers exported goods worth €272.6 billion last year, which corresponds to 17.3% of total exports.

As of June 2024, approximately 773,000 people are employed in the German automotive sector, excluding suppliers, with employment in the sector decreasing by 0.8% compared to 2023.

About 14% of those employed in the industry work in the automotive sector, making it the second-largest industrial sector in terms of workforce, after mechanical engineering, which has 952,000 employees.

Meanwhile, the US, with a share of about 13%, is the most important market for German car exports, followed by the UK and China.

GERMAN ECONOMY STRUGGLING TO GROW

In Germany, where structural problems are also slowing down the economy, the once highly successful business model titled "Import cheap energy and intermediate goods, process them, and export them at a high price with the 'Made in Germany' perception" is no longer working.

Recent crises such as the COVID-19 pandemic, supply chain disruptions, and the Russia-Ukraine War have exposed the weaknesses of the German economy, while the country faces various issues in overcoming geopolitical problems, climate change, a stagnant economy, and demographic challenges.

It is noted that Germany is still "crushed under its own bureaucracy, rules, and procedures."

THE BACKBONE OF THE GERMAN ECONOMY: AUTOMOTIVE EXPORTS

The German economy is "squeezed by very little investment, too much bureaucracy, and excessively high location costs," losing ground in Europe and internationally amid internal and external political turmoil. Historically, the German growth model, which relied on globalization and cheap energy inputs to raise wages and living standards, is facing structural challenges and geopolitical risks.

As protectionism increases in global trade and the Russia-Ukraine War raises energy costs, Germany's real GDP growth has been among the lowest in the G7 since the COVID-19 pandemic. Challenges such as dependence on trade with the US and China, high energy prices, insufficient investment spending, and worsening demographic conditions are present in the economy.

The export-dependent German industry, which accounts for nearly 30% of the country's GDP, is negatively affected by the global economic slowdown, increasing competition from China, and high energy prices following the Russia-Ukraine War.

The country's economy, which contracted by 0.3% in the second quarter, managed to avoid technical recession by recording a growth of 0.2% in the third quarter.

The government expects a contraction of 0.2% in the economy this year. If the economy shrinks again this year, it will be the only country among the G7 economies to contract, as it did in 2023.

POLITICAL CRISIS DEEPENING ECONOMIC CRISIS

The coalition government formed by the Social Democratic Party (SPD), the Greens, and the Free Democratic Party (FDP) in the country collapsed on November 6 due to recent debates over climate goals, defeats in state elections, and economic difficulties. The country will hold early elections for the first time in nearly 20 years, with the election date planned for February 23.

Meanwhile, Trump, who will be sworn in again as President of the United States in January, announced that if he wins the election, he will significantly increase tariffs to reduce the trade deficit and support domestic production.

Analysts note that Trump's potential implementation of a more protectionist policy through tariffs on EU imports is not a good sign for the export-dependent German economy. The US is the largest buyer of German goods, accounting for about 10% of Germany's exports.

WHILE CHINESE COMPANIES INVEST EARLY IN ELECTRIC MOBILITY, GERMAN COMPANIES REMAIN HESITANT

The German automotive industry has long hesitated to invest in electric mobility, remaining reliant on traditional internal combustion engines, while Chinese companies like Tesla and BYD have made early investments in electric mobility.

Experts state that German automotive manufacturers, focusing on exporting successful internal combustion engine models, have underestimated the need for transformation and missed the transition to electric mobility.

The transition to electric vehicles is a challenging process for the automotive sector due to various regulations and raw material supply issues in the country and the European Union (EU). The sector is struggling with rising costs while making significant investments in battery technology, which is dominated by Asian manufacturers.

NEW ADDITIONS TO THE ARMY OF UNEMPLOYED

According to a study conducted by the National Automotive Platform (NPM) of the German government, the country's transition from internal combustion engines to electric vehicles will also come at a high cost.

With the transition to electric vehicles, it is expected that 410,000 people will become unemployed in the country by 2030.

The main reason for the job losses is that electric motors require fewer parts compared to petrol engines, leading to a reduced need for workers in production.

While at least 1,200 parts are assembled in an internal combustion engine, production can be done with approximately 200 parts in an electric motor. The decrease in automobile production and the number of parts used affects many automobile parts suppliers and leads to layoffs.

It is also stated that the German automotive industry is lagging behind in the production of battery cells, which constitutes a significant part of the added value in electric vehicle production.

THE CRISIS IN THE AUTOMOTIVE SECTOR IS ALSO AFFECTING SUPPLIERS

The deep crisis faced by automotive manufacturers in Germany is negatively impacting suppliers, especially in spare parts.

As suppliers face declining orders and rising costs, many are planning layoffs or restructuring to meet the requirements of electric mobility.

In recent months, news has emerged in the media about thousands of workers being laid off at Volkswagen, Ford, ZF WABCO, and Continental.

The German automotive and industrial supplier Schaeffler announced on November 5 that it would lay off 4,700 people in Europe, including 2,800 in Germany.

On November 23, Bosch, one of the major suppliers in the automotive sector, announced that it would lay off 5,500 people worldwide, including 3,800 in Germany, in its automotive division. Bosch also announced that it would implement short-time work in its production facilities.

Automobile parts supplier Johann Vitz GmbH has also entered a restructuring process by filing for bankruptcy after 106 years of history.

CONTINUED EMPLOYMENT LOSS IS EXPECTED

The German Automobile Association (VDA) estimates that the transition to electric vehicles will cost the German automotive industry an additional 140,000 jobs over the next decade.

The employment structure in the sector is facing a profound transformation due to "demographics and decarbonization," and this transformation is expected to lead to the loss of approximately 190,000 jobs by 2035.

According to a study commissioned by the VDA, the labor supply in the sector is expected to decrease by 6.3% by 2035 due to demographic reasons.

The 46,000 decrease in employment observed in Germany between 2019 and 2023 is primarily due to the transition to electric vehicles, and if the downward trend continues, the number of jobs in the automotive sector is expected to decrease by approximately 190,000 by 2035.

THE CHINA EFFECT

Germany's greater dependence on China compared to other major European economies is noteworthy, as China's ability to produce more cars purchased from Germany complicates economic growth.

China is of great importance to German companies, especially German car manufacturers, in terms of both sales and growth. German companies are developing and testing the latest technologies in China for the global market. It is noted that most of the intermediate products used in German industry come from China.

German cars are in high demand in China. It is noteworthy that more than 30% of the revenues of German automotive manufacturers Volkswagen, Daimler, and BMW come from China.

EUROPEAN BRANDS ARE LOSING GROUND IN THE CHINESE MARKET

China has long been a central growth market for German car manufacturers, with brands like Mercedes, Audi, and BMW enjoying great popularity among the growing Chinese middle class.

As Chinese manufacturers significantly close the gap, BYD, Nio, and Geely are increasingly dominating the Chinese domestic market, and the market share of German manufacturers in China is now significantly declining.

In recent years, the share of Chinese manufacturers in electric vehicles sold in European countries has been rapidly increasing. Sales of low-priced and subsidized electric vehicles produced in China are outpacing their competitors.

In China, brands like BYD, SAIC, and Geely are producing vehicles alongside Tesla and various European companies.

The increasing weakness of the German industry, the technological gap being closed by Chinese companies, and even the fact that companies from the Far East are surpassing Germans in renewable energy and automotive sectors are being discussed in Germany as the "China Shock."

WEAK DEMAND FOR ELECTRIC VEHICLES

Despite German manufacturers increasing the number of electric models, demand remains below expectations.

Experts attribute this to insufficient government incentives, high purchase costs, and unsustainable charging infrastructure.

The ability of Chinese manufacturers like BYD to offer cheaper and more technologically advanced vehicles due to lower production costs is also negatively affecting German manufacturers.

SLOWDOWN IN CHINA NEGATIVELY AFFECTS SALES OF GERMAN AUTOMOTIVE MANUFACTURERS

The slowdown in China is negatively affecting the sales of German car manufacturers, forcing them to repeatedly lower their profit forecasts for this year.

Volkswagen (VW) Group, struggling with high costs, saw its net profit drop by 64% year-on-year to €1.58 billion in the July-September period.

The group's profit before special items, which was €4.894 billion in the July-September period last year, also fell by 41.7% to €2.855 billion in the third quarter of this year. The group's vehicle sales in the third quarter decreased by 8.3% compared to the same period last year, falling to 2.122 million.

MAJOR DECLINE IN PROFITS OF LARGE COMPANIES

The operating profit of Audi, a subsidiary of Volkswagen, fell by 91% year-on-year to €106 million in the third quarter of the year.

Similarly, the profit of German automotive manufacturer Mercedes-Benz decreased in the third quarter due to weak luxury car sales in China.

The company's adjusted operating profit (EBITDA) fell by 48% year-on-year to €2.517 billion in the July-September period. The company's net profit decreased by 53.8% to €1.719 billion.

The profit of another German luxury car manufacturer, BMW Group, fell by 84% year-on-year to €476 million in the July-September period due to declining sales in China and vehicle recalls.

During this period, the number of vehicle deliveries in China (including the Mini brand), which is the company's largest market, decreased by 29.8% to 147,691.

BMW reported that its sales were affected by stagnant demand in China and weak consumer demand, and it had lowered its sales forecasts for this year.

OTHER REASONS FOR THE CRISIS IN THE GERMAN AUTOMOTIVE SECTOR

Production costs in Germany remain significantly higher compared to other countries due to high energy prices and wages, making it difficult to profitably produce low-margin entry-level models under these conditions.

As the average capacity utilization of many car factories in Germany has dropped to two-thirds, this affects the efficiency of the facilities and increases fixed costs per vehicle.

THE SITUATION MAY WORSEN FURTHER

While the economic situation in Europe puts significant pressure on the automotive industry, consumers' tendency to save after high inflation, the increasing uncertain environment, and weak economic growth are causing many consumers to postpone large purchases like buying a new car.

This situation particularly affects German manufacturers whose products are expensive compared to their Asian competitors.

While international trade relations carry additional risks, it is noted that the possible punitive tariffs on cars coming from the EU with Donald Trump’s re-election in the US could worsen the situation, as well as possible new tariffs on electric cars from Europe in response from China.

PROFITS WILL CONTINUE TO DECLINE

The dependence on export markets like the US and China is further exacerbating the crisis faced by German automotive manufacturers, and it is stated that the possible punitive tariffs resulting from Donald Trump’s re-election could significantly reduce the profits of Volkswagen, BMW, and Mercedes-Benz.

This situation is expected to further increase the pressure on the sector and lead to deep employment cuts.

After the strong profits obtained during the COVID-19 pandemic, many companies are maintaining unrealistic expectations regarding their margins, while this pressure on returns is leading to excessive austerity measures that jeopardize long-term investments in research and development.