If Germany stopped making cars.

If Germany stopped making cars.

The Future of Germany’s Car Industry: Is the Roof Really on Fire?

VW Headquarters

“The future of the VW brand is at stake.” When Thomas Schäfer, the boss of Volkswagen (VW), delivered this stark message to his management team, it echoed the alarm bells sounded by Stephen Elop, former CEO of Nokia, who famously compared his company to a “burning platform.” The question arises: could VW suffer a similar fate as Nokia, and what would the implications be for Germany’s biggest economy?

At first glance, an imminent implosion of the car industry seems unlikely. In 2022, VW was the world’s largest carmaker by revenue, reporting a healthy 18% increase in sales for the first half of 2023. On the surface, BMW and Mercedes-Benz also appear to be thriving. However, the concerns voiced by Schäfer and echoed by German industrialists are becoming increasingly prevalent.

Carmakers are facing multiple challenges, from rising costs and falling demand to growing competition and rapid technological transformations. Transitioning to electric vehicles and developing software are just two examples of the shifts they must navigate. As these changes unfold, the value added in the industry is expected to come from new sources. This means factories may need to shrink or cease operations altogether, posing a threat to automakers and their suppliers.

Germany’s car industry must also confront its growing China problem. While they have benefited from China’s rapid economic growth, German car companies are experiencing a reversal of fortune. Geopolitical tensions and the expansion of Chinese automakers into Europe compound this challenge. Last year, China exported more cars than Germany for the first time, indicating a shift in the global automotive landscape.

All these problems converge in Wolfsburg, where VW’s headquarters are located. Press reports suggest that orders for the company’s electric vehicles are significantly below expectations. In China, the world’s largest market for EVs, the VW brand has just a 2% market share. These issues, combined with software problems, paint a bleak picture.

The consequences of a potential demise in the car industry depend on its true size. While direct employment in carmaking in Germany accounts for only 2% of the country’s workforce, alternative measures reveal a much larger impact. German cars drive demand for manufacturing of metal and plastic components, indirectly supporting an estimated 1.6 million jobs. Furthermore, the industry drives investment and innovation, accounting for a substantial portion of manufacturing research and development and corporate patent filings.

Germany’s car industry is also intertwined with its economic and social fabric. The sector serves as an operating system for the country’s institutions, with direct and indirect implications for regional equality and industrial relations. Many cities and counties heavily rely on car industry jobs, and the industry plays a pivotal role in Germany’s model of co-determination, where workers have representation on corporate boards. A decline in the car industry could result in economic crises, alter the labor market balance, and erode Germany’s engineering reputation.

However, clinging to life support for carmakers may hinder long-term progress. The dominance of the car industry constrains Germany’s ability to adapt to a digitized world. As the industry declines, space opens up for alternative sectors to flourish, promoting entrepreneurship and innovation. Eindhoven and Espoo serve as successful examples of transition, where former industry giants gave way to thriving startup ecosystems.

While carmaking is deeply rooted in the German economy, adaptations will likely occur over time. Big suppliers may shift their focus to foreign carmakers, smaller suppliers may specialize and provide services, and Germany could focus on producing higher-margin luxury vehicles. Volkswagen might even transform into a contract manufacturer, assembling EVs for other brands.

Meanwhile, voices within the industry propose reimagining the role of carmakers in the broader context of mobility. Instead of simply producing cars with additional comfort features, these stakeholders contend that firms should strive to optimize society’s ability to move from one place to another. Volkswagen and other German automakers have always facilitated transportation, and there is no reason why they cannot continue doing so in innovative ways.

While the uncertainties surrounding Germany’s car industry are cause for concern, a complete collapse seems unlikely. The industry’s significance extends beyond immediate job numbers, permeating various aspects of the German economy. In navigating the challenges ahead, both carmakers and Germany as a whole must adapt, innovate, and embrace new possibilities as they ride into the sunset.