Germany’s world-leading auto industry has long been part of the nation’s global brand, symbolising its engineering prowess, flair for design and attention to detail.
The sector has also been an important economic driver. Makers of vehicles and components have traditionally accounted for about a fifth of the value added by Germany’s powerful manufacturing sector – a far bigger proportion than the German auto industry’s European rivals can manage. While Germany ranks below China, the US, Japan and India in terms of car production, it is comfortably the world’s largest exporter, and its cars are bywords for luxury and quality.
‘Persistent malaise would have a substantial spillover for finance professionals’
This makes the current troubles in the German auto sector particularly painful. Among a string of recent humiliations, Volkswagen faced industrial strikes after revealing plans for the first domestic plant closures in its 87-year history, although this threat has now abated. Northvolt, a Swedish maker of batteries for electric vehicles in which both VW and BMW had invested, filed for bankruptcy protection in the US in 2024. And shares in VW, BMW and Mercedes-Benz – the nation’s largest vehicle makers – were down 29%, 21% and 7% respectively year on year, as of 13 December. That’s in a year when the Euro Stoxx 50 index went up 10%.
Stopping the rot
The urgent question facing German executives and politicians is what has been causing this decline. More critically, can the slump be halted or even reversed?
The answers to these questions have implications well beyond the industry itself. The auto sector is an important pillar of the German economy. ‘There are a lot of highly paid jobs in this industry, not just directly for auto-workers,’ says Andrew Kenningham, chief European economist at Capital Economics. ‘The sector is a major employer of accounting, finance and consulting professionals, so a persistent malaise in autos would have a substantial spillover into these areas – not to mention metals and plastics.’
For a bit of context, salaries in the auto sector are around 23% higher than for the economy overall, according to data from Destatis and Capital Economics. If one-off payments are included, the gap widens to 45%.
Headwinds
Stopping the rot won’t be easy, according to Franziska Palmas, a senior European economist at Capital Economics and author of the recent report The slow agony of Germany’s auto industry. According to Palmas, the industry faces several major headwinds. First, demand for vehicles in Europe – which represents 70% of German sales – continues to weaken. ‘We think sales will never regain their previous peak as the population will shrink, income per capita will grow slowly, and the lifespan of cars will rise,’ she argues.
Second, the transition to electric vehicles (EVs) has been problematic for German manufacturers. Although Germany has shifted around a third of its production to EVs, it is not an area where VW, BMW or Mercedes Benz have a strong competitive position. Germany’s lead has been in the mastery of the internal combustion engine and exquisite design. In an age of EVs, leadership in battery technology, electronics and software will be the critical determinants of success. And in these technologies, China’s car makers have secured the inside track.
‘Electric vehicles made by China are cheaper and more advanced’
‘EVs made by China are cheaper and more technologically advanced than those made by German brands,’ argues Palmas. ‘German car makers are unlikely to catch up any time soon. Their expertise lies in the mechanical engineering crucial for internal combustion engine production rather than the electronic and software engineering needed for EVs.’
Third, the global trade environment looks set to become more hostile. Newly elected US president Donald Trump has said he wants ‘German car companies to become American car companies’ and has threatened ‘very substantial tariffs’ on vehicles not made in the US.
Contraction
Taken together, these forces look likely to contribute to a 20% fall in German auto output over the coming decade, according to Capital Economics. If that forecast proves correct, the contraction of German auto production would likely shrink the range of professional opportunities not just for auto engineers but also for the accountants and consultants the industry relies on, although financial professionals also have a potential role to play in identifying solutions or helping manage the transition.
One obvious priority – cutting costs to fit the less rosy demand outlook – is encountering political resistance. German chancellor Olaf Scholz has said of VW’s planned plant closures that ‘wrong management decisions from the past must not be at the expense of employees’. Trade union opposition to staffing reductions has also been vigorous.
Easing the pressure
Financial professionals will be at the heart of efforts to eke out efficiencies, evaluate debt levels and manage cashflow.
In extreme cases, they are being called on to address unsustainable debt burdens. There was news in November that German auto parts supplier Webasto, which specialises in sun roofs and heating systems, was facing a restructuring of more than €1bn of obligations. Another large parts maker, Schaeffler, recently announced that earnings before interest and tax fell 45% in the third quarter compared with the prior year, and that it would be axing 4,700 jobs.
German manufacturers need to source parts more efficiently
Under such straitened conditions, effective supply chain management will become all the more important – another key concern for finance departments. To ease downward pressure on profits and close the price gap with Chinese rivals, German vehicle makers will have to become more efficient at sourcing materials and components, which will be no easy task. And despite pushback from unions and the government, more production of German-branded cars may end up shifting to European countries with lower wages and electricity costs, such as Hungary.
Finally, German automakers will have to determine how much to invest in new technologies. Here too, finance professionals will be crucial in developing budgets for research and development, as well as ensuring projects are delivered on time and within budget.
While the challenging outlook for the German auto industry could be bad news for the nation’s accountants and financial professionals over the coming decade, in the near term it could well keep them busier than ever.
