The engine is stuttering. Things are not going well at all for the German car industry. Manufacturers and suppliers are having to revise their business targets downwards one after the other. Jobs and entire locations are at risk. In the headlines are Volkswagen and ZF, where employees are confronting management.

That the situation is difficult for a variety of reasons is reflected in the large number of studies in which experts analyse the industry. The high level of attention is not surprising, since the automotive industry has been a flagship for the economy and Germany's export strength for decades, as an important employer and a prime example of German engineering and innovation.

Can the weakness be explained by a slump in demand, including in the premium segment, which is particularly important for German manufacturers, or is it a significant structural problem? The Chinese market, which has lost momentum, and the faltering transition to electromobility, are at the top of the list of causes.

Weak consumption in China is certainly hitting German manufacturers particularly hard. The country has been the growth market par excellence for them since the beginning of the last decade – including during the coronavirus pandemic. Landesbank Baden-Württemberg recalls that in the record setting year 2022, China accounted for more than 35% of VW, BMW and Mercedes-Benz sales. Now even the cars in the premium segment, which make the biggest contributions to earnings, are selling slowly there.

Despite the latest steps taken by the Chinese government attempting to revitalise the economy, analysts do not expect any improvement for the rest of this year at least. „There is little hope for a recovery in demand“, according to the latest industry barometer on the automotive industry published by Bankhaus Metzler. Pricing and competitive pressure in China will also not ease for the time being.

What's more, the proportion of electric vehicles in China is rising sharply – supported by government subsidies. However, German suppliers are largely missing out on this boom. On the one hand, there is a lack of product, while on the other competition in this segment has intensified with domestic manufacturers – and Tesla. The situation could become even more difficult for German companies in the coming years, as Chinese competitors are increasingly pushing into the premium segment.

However, most Chinese manufacturers are not profitable, and consolidation is on the horizon. As the state is reducing its support, companies are being forced to increase their profitability. ‘This could lead to more stable prices for electric vehicles.

The second weak point with downward potential is the sluggish development of electromobility in North America and numerous European countries, especially in Germany. This is also affecting suppliers. According to an analysis by rating agency Moody's, they are not only struggling with weaker-than-expected global car production. The delayed market launch of new models, especially EVs, is also reducing production volume, and increasing the volatility of order call-offs. This makes it more difficult to cover fixed costs, makes suppliers' production more inefficient, and planning uncertain.

A return to increased incentives from the EU and Germany for the purchase of electric cars could provide some relief, at least temporarily. Federal Minister of Economics Robert Habeck recently announced ,after an industry meeting known as the Autogipfel, that the German government would be discussing new incentives. In contrast to the previous subsidy, this should ensure long-term predictability.

A revitalisation of growth is also urgently needed due to the environmental targets and exhaust emissions requirements of the individual manufacturers. „The electric segment is currently leading a niche existence,“ notes the consultancy firm EY. „There is little sign of a mass upswing in electromobility in Germany.“ The paradigm shift has still not arrived. With a view to the emissions targets for 2030, Landesbank Baden-Württemberg is sounding the alarm: without a relaxation of the requirements, manufacturers could find themselves in financial difficulties, as fines totalling billions could be imposed.

Pessimists fear that the difficulties of Europe's car industry will worsen once Chinese competitors really get going with their expansion. But this swansong is countered by some more optimistic voices: „The efforts of Chinese manufacturers to gain a foothold in Germany have only had limited success so far,“ comments Jan Sieper, automotive expert at EY. „The growth is manageable.", and it won't work without a sales and service network. Trust and brand loyalty also need to be built up first. In addition, German companies are currently succeeding in „successfully placing new models on the market“, says Sieper.

The LBBW study refers to a threatening Detroit moment for the German automotive industry, but the authors do not believe that there will a decline like that seen in Motor City in the 1980s. New models are on the way, innovation strength remain high, and there are brand values that have been built up over generations of customers.

Though of course, the German car industry is not only struggling with weak demand. Quality problems, as in the case of Continental's brakes for BMW, are obvious – as are major structural shortcomings in the case of Volkswagen