Germany’s position as one of the world’s leading automotive manufacturing hubs is facing mounting pressure as investment slows, jobs shift overseas, and competitiveness weakens across the sector. Industry leaders warn that without policy adjustments to address costs, regulation and innovation, the country risks a prolonged contraction of its automotive base amid intensifying global competition.
“Germany is experiencing a huge crisis as a business location,” Hildegard Müller, president, German Association of the Automotive Industry (VDA), said in Berlin on Feb. 10. She cited softening demand, high energy and labor costs, and regulatory burdens as key factors driving investment decisions away from domestic production.
A VDA survey of small and medium-sized enterprises in Germany’s automotive supply chain underscores the scale of the challenge. Conducted between Jan. 11 and Jan. 25 among 124 companies, the survey found that 72% plan to reduce investment in Germany. Of those, 28% intend to shift investment abroad, 25% plan to postpone projects and 19% expect to cancel investments entirely.
“These investment decisions are already having an impact on employment figures,” Müller said, pointing to a widening gap between domestic job cuts and employment trends abroad. According to the survey, nearly two-thirds of companies reduced their workforce in Germany last year, with 87% citing competitive disadvantages as the primary reason. Currently, 49% of surveyed firms are cutting jobs domestically, compared with just 7% reducing headcount outside Germany.
Government data released in November show employment in Germany’s automotive sector has fallen to its lowest level since 2011. The VDA warned that continued job losses could carry broader economic and social consequences, particularly in regions heavily dependent on industrial employment. “The migration of investment and employment will not be without consequences for our country’s prosperity and for its social and political stability,” Müller said.
Suppliers are among the most exposed segments. Falling orders, margin compression and the costly transition to electric drivetrains and software-defined technologies have strained balance sheets. Major automakers including Volkswagen and Mercedes-Benz, as well as suppliers such as Bosch, ZF, Continental and Aumovio, have announced tens of thousands of job cuts under restructuring programs aimed at reducing costs and preserving liquidity.
Beyond cyclical weakness, the industry faces structural headwinds. Germany entered its third consecutive year of recession in 2025, while industrial output continued to decline. More than 55,000 automotive jobs were cut during the year, including over 51,500 in the first half alone.
China has emerged as a central factor in the sector’s loss of momentum. For two decades, the Chinese market generated up to 40% of profits for some German brands. That dynamic has reversed sharply. German automakers’ combined market share in China declined from roughly 25% five years ago to 13.1% in the first half of 2025. Domestic Chinese brands now control 68.8% of the market, led by companies such as BYD and Xiaomi.
The decline is even more pronounced in electric vehicles, where German brands together hold approximately 5% market share in China. Analysts attribute the erosion to slower development cycles and weaker software integration compared with Chinese and US competitors. While rivals update vehicle software monthly and bring new models to market within 18 to 24 months, European manufacturers often require up to 48 months to complete development cycles.
Internal technology setbacks have compounded these pressures. Delays at Volkswagen’s software unit Cariad pushed back launches of key electric models, including the Porsche Macan EV and Audi Q6 e-tron. Executives acknowledge that Germany’s traditional strength in mechanical engineering has become less decisive as vehicles evolve into software-defined products.
Cost competitiveness remains another major constraint. Following the loss of inexpensive Russian gas supplies, industrial electricity prices in Germany ranged between €80 and €140 per megawatt-hour in 2025. By comparison, manufacturers in the United States and China often face effective energy costs closer to €60 to €80 per megawatt-hour, supported by subsidies and lower input prices. Combined with relatively high labor costs, the energy gap has made domestic production of batteries and electric vehicles increasingly difficult to justify.
As a result, companies are redirecting investment toward lower-cost regions, including Eastern Europe, Spain, Mexico and Asia. Volkswagen plans to cut 35,000 jobs in Germany by 2030 and reduce domestic production capacity by roughly 700,000 units. Mercedes-Benz is preparing up to 16,600 job cuts globally under a cost-saving program.
Volvo Cars reported a 68% drop in operating profit in 4Q25, citing weak demand, aggressive pricing actions, currency headwinds and the impact of US import tariffs.
The VDA has urged policymakers in Berlin and Brussels to adopt measures that restore confidence among manufacturers and suppliers. Müller criticized recent European Union proposals to support the transition to electric mobility, arguing they rely excessively on regulatory mandates. “What we need are market-driven incentives, not additional requirements that further weaken competitiveness,” she said.
Without lower operating costs, faster permitting processes and a more predictable policy framework, the association warned, Germany risks further erosion of its automotive ecosystem.
