The German Crisis Begins with the Car

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According to figures published mid-February by EY, 142,400 jobs have disappeared in the German automotive sector since 2019. The recent layoff announcements by Volkswagen or BMW are fueling deep concerns in a country that built its post-war pride and prosperity on its industrial strength and its flagship product: the automobile.

These job cuts reflect a sector losing ground abroad, against a backdrop of tightened conditions in the United States and China, and a loss of competitiveness stemming notably from hesitation about the transition from a combustion-powered vehicle to an electric vehicle. This hesitation stems from fears that a transition too rapid toward this new technology could irreversibly jeopardize a sector that acts as a true economic catalyst—providing jobs, tax revenue, technological innovation, and regional dynamism.

The sector today is entangled with Germany’s political transformations and the continent’s geopolitical shifts. Because of its systemic dimension, it has become a key parameter for Berlin, which must factor it into responses to Chinese subsidy policy, American tariff policy, and the negotiation of trade agreements.

The Automotive Sector, Mirror and Symbol of the German Economic Model

At the heart of Germany’s postwar “miracle,” the automobile embodies the country’s economic and social success. The triple strategy—globalization, integration into the European single market, and specialization in the premium segment—secured its success in past decades. But today manufacturers are hitting their limits as electrification progresses, confronted by Chinese competition and the tariff policy of Donald Trump. This is reflected in social plans that extreme parties know how to exploit. Moreover, the transformation of Germany’s industrial fabric toward strengthening the defense industry—at times using the “strategic reserve” of the automotive sector—raises questions about pacifist convictions long held by the country.

In Germany, the automotive sector employs more than 732,000 people directly (465,000 at manufacturers and 267,000 at suppliers). It is regionally anchored in Lower Saxony (home to the largest German builder Volkswagen), Bavaria (home to premium maker BMW), and Baden-Württemberg (with the premium brand Porsche and the world’s leading supplier, Bosch). This ecosystem radiates through the economy, generating indirect employment in sectors as varied as chemicals, textiles, steel, and information and communications technologies. When the sector is healthy, these branches tend to benefit from a multiplier effect; when it falters, they are likely to be affected as well.

As German Chancellor Friedrich Merz stated at the Munich Auto Show in September 2025: “No other sector is as closely tied to Germany’s image and reputation as an industrial and technological hub as the automotive industry.” It indeed embodies German engineering, with the internal combustion engine at the core of its operation. Once a symbol of the postwar economic miracle, the car has become a cornerstone of German identity and pride since the 1960s, when the Volkswagen Beetle became the mass-market car par excellence. Soon, with the Kombi, it came to symbolize freedom, a notion even seized upon by the hippies of the West Coast of the United States. This transformation risks obscuring the dark past of the company, which during World War II produced vehicles to support the Nazi war effort.

Volkswagen, headquartered in Wolfsburg, is Germany’s leading company by turnover. It also embodies the spirit of social dialogue: the Land of Lower Saxony holds 20% of the group’s voting rights, a feature provided by the “Volkswagen Law,” which the region uses to defend jobs and production sites. The powerful works council (Betriebsrat), a stronghold of the IG Metall union, operates under the principle of “codetermination,” granting it wide latitude to defend jobs and secure highly favorable working conditions (a typical VW worker earns about €56,000 per year, roughly 10% more than in the rest of the automotive sector). After World War II, the company also relied on immigrant labor, many of whom remained in Wolfsburg and whose families work for the group, as in the case of Daniela Cavallo, head of the group’s Works Council since 2022, whose father, originally from Calabria, already worked in the plant. A job at Volkswagen historically meant lifetime employment, strong purchasing power, and social advancement. The company thus symbolizes not only economic success but also social achievement.

The country’s economic performance and that of the automotive firms are closely linked, as shown by the two oil shocks, the 2008 financial crisis, and the coronavirus pandemic. In 2010, German automakers entered a “golden decade,” the result of a subtle balance between internationalizing the production chain and maintaining a high-value manufacturing base in Germany, anchored in the European single market. They also fully benefited from access to foreign markets, notably the United States, toward which many German brands export a large number of cars, as well as to China, where they established a presence. VW was a pioneer in China, entering through a joint venture with the state-owned SAIC as early as 1985.

In 2025, out of 13 million cars produced by German manufacturers, 4 million were made in Germany, of which 76% were exported. 69% of German-brand cars were produced abroad, versus 31% in Germany. That same year, the automotive sector was the leading export good, generating a trade surplus of €106 billion on total exports of €201 billion.

Like the Economy, an Automotive Sector Facing Difficulties

German carmakers now face a double challenge: Chinese competition, which encompasses the difficult transition to electric vehicles, and American tariffs. 

In December 2024, the Volkswagen group announced a historic social plan: 35,000 jobs would be cut by 2030, nearly a third of the workforce. The plan envisaged 15,000 job cuts at Audi and Porsche. BMW also announced 8,000 layoffs. In July 2026, Oliver Blume, the CEO of Volkswagen Group, also mentioned job cuts of about 100,000 positions worldwide, in addition to the already announced reductions. The reasons given are overcapacity and high labor costs.

Factories such as Emden, Hanover, or the Audi plant in Neckarsulm could be affected, as could the Zwickau plant in Saxony. Yet since 2018, Volkswagen had invested €1.2 billion in that plant to produce electric vehicles as part of its electrification strategy, and the inauguration was celebrated in the presence of Chancellor Angela Merkel. The decision to part with the plant signals an admission of failure and a lack of clarity in the overall strategy. The far-right party Alternative for Germany (AfD), which does not shy away from displaying climate skepticism, has not hesitated to criticize Volkswagen’s choices and to instrumentalize the “impression that East German factories are considered sacrificial sites compared to Wolfsburg in the west.” The ties between the group and local politics are not insignificant, and it is easy to criticize Lower Saxony’s minister-president, who sits on the group’s supervisory board, for potentially prioritizing the preservation of activity and know-how in his land.

The Saxony region, home to the Zwickau plant, is fertile ground for the AfD. In addition to VW— which has built a Polo, Golf, and Passat there—Audi also has a plant in the region, and many suppliers are present and at risk from these upheavals. Moreover, automotive plants are increasingly targeted by defense industry players, drawing sharp criticism in eastern Germany where skepticism about supporting Ukraine and “the fear of becoming a co-belligerent if Berlin sends too many heavy weapons to Kyiv” are significant. This is a topic seized upon by parties like the AfD or Die Linke, on the left of the political spectrum.

Another plant seeking a buyer is Osnabrück, in western Germany, where vehicle production must cease in 2027. It could also be acquired by a defense-sector company, which has sparked a petition entitled “No Transition to a War Economy.” The same criticisms arise from a potential acquisition of Volkswagen plants by the Israeli weapons group Rafael. However, due to tensions between Israel and Qatar, the Qatari sovereign wealth fund, a shareholder in Volkswagen, could oppose such a takeover.

China, the Major Technological Challenge for the German Automotive Industry

China represents the world’s largest automotive market, with nearly 30 million passenger vehicles sold in 2025, accounting for 50% of global passenger car sales, and a production of 35 million vehicles in the same year, or about 36% of world production. China has also built a lead in technology through its five-year plans. This holistic strategy, which combines industrial policy, trade policy, purchase incentives, and the development of battery supply chains, cannot be ignored by German manufacturers. In 2025, 50% of cars sold in China were new energy vehicles, a rise of 42.8 percentage points from 2017 to 2025. Moreover, China accounted for 70% of global EV production in 2024, and about 80% of the battery cells used for this type of vehicle originate in China.

This centrality directly answers European demand, as member states aim to cut their CO2 emissions by 55% by 2030 and achieve carbon neutrality by 2050. The gradual adoption of electric vehicles is a key factor in reaching this objective, and any global player wishing to play a role must now rely on a strong presence in China. Oliver Zipse (former BMW CEO) recently stated in the German business daily Handelsblatt that “Those who turn their backs on the immense market and the innovation potential of China waste substantial opportunities for global growth and economic success.”

German automakers are paying the price for their hesitations. The gap is widening especially in comparison with new players with more agile business models. Volkswagen, BMW, and Mercedes, champions of internal combustion, were not sufficiently prepared for the electrification and digital turn. Newcomers like BYD (initially a battery producer) and startups such as Nio, Xpeng, and Li Auto have been created about a decade ago. Competition is fierce, with enormous pressure on innovation and prices.

Since 2009, China has sought to compensate for its dependence on Western countries in the automotive sector and its lag in building combustion vehicles by massively investing in electric research and manufacturing. To achieve this “technological shortcut,” the development of the industry relies on strong vertical integration, which includes control over almost all battery components and extends to research and development. China has also become the leader in the extraction and processing of critical minerals necessary for cathodes. This is all the more important since the battery accounts for 30 to 35% of the added value of an electric vehicle. Thus, BYD uses 80% of its own components, and Leapmotor would manufacture between 60 and 70% of its own components in-house. German manufacturers have maintained their activities in China up to now, but faced with this competition, they are seeing about a one-third loss of market share in the 2022–2025 period.

A Chinese Trade Offensive

The acceleration of Chinese car exports is as notable as the development of a domestic electric vehicle industry. Beijing now has factories capable of producing 55 million cars per year—roughly 65% of global demand. Exports rose from 990,000 cars in 2020 to 7 million in 2025, aided by weak domestic demand and by an undervalued renminbi.

With the US market closing to Chinese imports, Europe, seeing its margins shrink in the Chinese market, is in a particularly vulnerable position.

However, Chinese automakers have faced, since 2024, anti-dumping duties, the implementation of which Germany initially opposed, preferring a negotiated solution with Beijing. Berlin is motivated by two elements: to prevent its automotive manufacturers with operations in China from being heavily affected as well, and to prevent possible retaliation given that 70% of jobs in the German auto industry depend on exports.

China can nonetheless bypass these tariffs by exporting its hybrids, which are at least for the moment exempt from anti-dumping duties, or by building plants on European soil. This is what BYD plans in Hungary with a passenger car manufacturing plant in Szeged by the end of 2026. An European R&D hub for BYD should also open near Budapest. The battery maker CATL is increasingly present in Europe, notably in Thuringia where it established a research center in 2023 and plans to open a Gigafactory in Debrecen, Hungary. Similarly, Stellantis has allied with CATL for a Gigafactory in Zaragoza, with production due to begin by the end of 2026. The company also announced it would host Leapmotor products at its Madrid and Zaragoza plants, while Dongfeng models would be assembled at Rennes. The Chinese automaker Great Wall Motor is looking to establish itself in Europe by 2029, considering a site in Hungary or Spain. One can also mention the Chery assembly site in Spain, which should begin production in 2026.

With Donald Trump, Is the German Automakers’ “Globalization Strategy” Dead?

In 2025, VW accounted for 8% of its sales in the United States, Mercedes 14%, and BMW 17%. For German manufacturers, the United States remains the leading export market (10% in 2025). In 2025, German cars sold in the United States generated €20 billion in value. The manufacturers also produce locally: in 2024, the local production share of VW/Audi/Porsche for all cars sold in the United States was 20%, that of BMW 48%, and that of Mercedes 35%.

German automakers and American politicians have converging interests. BMW and Volkswagen employ tens of thousands in the United States, make significant investments, and contribute to the country’s economic dynamism. Moreover, these companies export more cars from the United States than American brands Ford or General Motors, positively contributing to the trade balance.

Germany’s trade surplus with the United States reached €52 billion in 2025 (of which €24 billion stemmed from trade in passenger cars and vehicle components).

In 2018, under Donald Trump’s first presidency, Jean-Claude Juncker, then President of the European Commission, managed to avoid EU-wide tariffs on the European automotive sector by promising to buy soybeans. Eight years later, the Turnberry agreement imposed a 15% tariff on European exports, not sparing the automotive sector. These measures add to sector-specific duties that apply to certain spare parts, aimed at ensuring that a larger share of the value added in the manufacturing of a car comes from the United States (55% of the value added of cars sold by BMW in the United States comes from the EU, compared with 39% for Mercedes and 36% for Volkswagen). The German manufacturers are thus forced to revise their strategies, especially as they face volatility, since these measures can be revised at the whim of the American president. On May 1, 2026, Donald Trump threatened to raise the duties applicable to imports of vehicles from the Union to 25%. Even if this has not yet materialized, between 2024 and 2025, German automotive exports to the United States fell by 20%.

A New Strategy to Face Trumpist Protectionism and Chinese Competition

Donald Trump thus reinforces a trend toward regionalization, according to which cars are increasingly manufactured where they are sold, particularly for premium brands, for whom the United States constitutes an important market. Audi plans to build a production plant in the United States, from which it would export to other parts of the world. A similar move would not be viable for Porsche. Even the export of parts and modules to be assembled on site (the “completely knocked-down” approach) would not be economically justified. Porsche’s strategy now aims to obtain exemptions from rules applicable to imports from Europe. Volkswagen has also sought exemptions regarding tariffs on its exports to the United States, proportional to the sums invested in the American industry. Oliver Blume, head of Porsche and Volkswagen, has indeed tried to persuade the U.S. president by announcing investments, notably through the construction of a plant for Audi and the new electric pickup brand Scout. The Bavarian-based company BMW has also announced the construction of a battery and assembly plant for six electric models in South Carolina. Likewise, Stuttgart-based Mercedes-Benz is considering relocating part of its production from Europe to the United States.

At the same time, German manufacturers are affected by other protectionist measures from the American president aimed in particular at China. From his first term, Donald Trump imposed tariffs on certain Chinese-origin products, which prompted countermeasures from China on vehicles imported from the United States. In 2017, German manufacturers exported 150,000 cars from Germany to China. Now, a US law seeks to ban the production, import, sale, and delivery of vehicles by automakers controlled by “foreign adversaries,” including China. In practice, those targeted are companies with at least 15% of their capital owned by an entity from such a country. Mercedes’ capital is held by Chinese entities at more than 19%. Moreover, Trump has maintained—and intends to strengthen—the Biden-era restrictions on the use of Chinese software and hardware in vehicles with integrated Internet connectivity. This constrains potential collaborations with Chinese automakers for vehicles destined for the American market. Even though German manufacturers plan to expand their presence in the United States, they do not intend to abandon Chinese technology. Therefore, rather than investing solely in the United States, producers such as Volkswagen and Mercedes, as well as suppliers like Bosch or ZF Friedrichshafen, have announced billions in research, development, and production in China.

Germany is also seeking to diversify toward other global markets. This is notably the case in Latin America, which is why it defended the conclusion of the EU-Mercosur agreement. Another potential outlet is India, with which the Union signed a trade deal in 2026. The country is the third-largest automotive market in the world after China and the United States, and the fastest-growing. There is also a desire to strengthen ties with Canada, both countries being affected by Donald Trump’s tariff policy. In February 2026, Germany’s Minister for Economic Affairs, Katarina Reiche, and her Canadian counterpart, Mélanie Joly, signed an agreement for joint work on the development of electric mobility and hydrogen.

Some analysts already speak of a “twilight of the German automotive industry” suffering from a “phantom pain.” Can the sector recover? The answer will depend on its ability to reconnect with its strengths—whether brand prestige or its global industrial presence—and to rely on an industrial policy in which the state supports the electric transition, corrects market failures, and protects the automotive industry against unfair practices to rebalance competition. The specter of the Rust Belt in the United States, particularly Detroit, is not an inevitability.