When the Auto Industry Sneezes, Germany Catches a Cold

Alexander Privitera

AGI Non-Resident Senior Fellow

Alexander Privitera a Geoeconomics Non-Resident Senior Fellow at AGI. He is a columnist at BRINK news and professor at Marconi University. He was previously Senior Policy Advisor at the European Banking Federation and was the head of European affairs at Commerzbank AG. He focuses primarily on Germany’s European policies and their impact on relations between the United States and Europe. Previously, Mr. Privitera was the Washington-based correspondent for the leading German news channel, N24. As a journalist, over the past two decades he has been posted to Berlin, Bonn, Brussels, and Rome. Mr. Privitera was born in Rome, Italy, and holds a degree in Political Science (International Relations and Economics) from La Sapienza University in Rome.

Martin Winterkorn could never have imagined that one day he would become the symbol of the crisis that has enveloped the company he once led with an iron fist, Volkswagen. Winterkorn stands accused of knowing, thus encouraging, the widespread tampering with emissions of diesel engines that was uncovered by U.S. authorities a decade ago. It is still unclear whether he will be found guilty in court. But history has already given its verdict. It was under his watch that VW went off track. And the company has never fully recovered, remaining vulnerable to outside shocks and poor strategic decisions. VW has become the symbol of the current crisis of the German economic model, overly dependent on ‘old’ technologies, manufacturing, and exports.

At the end of 2024, VW was forced by circumstances to announce that it will dramatically cut its ambitions and even trim its footprint in its home market, Germany. The company plans to slash production of its cars by a whopping 730,000 units. Not just temporarily. By 2030, more than 35,000 jobs will be gone, the equivalent of three factories. Looking at trends in its core markets, the current CEO Oliver Blume expects at least a few more difficult years in China, the market that in the recent past provided VW with dependable profits. China now has its own successful car brands, and their EV products are often superior to what international carmakers, including VW, are capable of offering. As a result, many other global manufacturers have decided to avoid the clash with the Chinese competition by dramatically reducing or even eliminating their footprint in the biggest Asian market. VW instead plans to stay and face the stiffening competition. To make things more difficult for the Germans, China’s economy is slowing down, dampening demand for German products, and it is not clear whether additional stimulus measures offered by the Beijing government will be sufficient to address the problem. Last year VW sold almost 10 percent fewer cars in the country than in 2023. So far, nothing suggests 2025 will provide any respite.

Sticking it out in China also means staying fully engaged in the tight race to develop more dependable electric vehicles with a longer range and a much cheaper price tag, probably the two main reasons why most European as well as U.S. buyers so far have shunned the new technology. Traditional car companies are stuck in a tough spot, right in the middle of a transition in technological standards, from the internal combustion engine to electric (with all its variants, from hybrids to plug-ins, to e-vehicles with range extenders). Remaining competitive in such a no man’s land, populated with many different technologies, requires constant investment.

Politics has not helped. Forcing the acceleration of the green transition first and then abruptly cutting public subsidies aimed at supporting customers has caused a backlash among voters and car buyers, who went on a buying strike once they discovered they had to saddle higher costs. They are now watching and grumbling from the sidelines. To lure them back into the marketplace, the car lobby is trying to have the stringent European requirements watered down. If their wishes were granted, even the end date for internal combustion engine-powered cars, 2035, could end up on the chopping block. Softening regulatory requirements is an understandable goal for the car industry, but, per se, it does not eliminate the fact that slowing down the green transition risks giving international competitors an edge.

VW has become the symbol of the current crisis of the German economic model, overly dependent on ‘old’ technologies, manufacturing, and exports.

This is where trade policies kick in. Despite their current vulnerabilities, instead of calling for entry barriers to create a shield against non-European competitors, European carmakers are urging policymakers to uphold global trade. Their top managements simply doubt that their home market is strong enough to cushion any blow resulting from increased trade frictions. VW’s strategy of openness relies on the ability to preserve some form of status quo or only milder forms of trade flow disruptions between Germany/Europe and its main trading partners, the United States and China. The European car lobby even hopes the EU and the United States can strike a grand bargain that would avoid tariffs altogether and boost transatlantic trade.

Perhaps the industry is encouraged by the promises made by the leader of the current main German opposition party, Friedrich Merz of the CDU, who intends to pursue an ambitious trade pact with the United States if asked to form the new government after the February 23 election. That may prove to be very ambitious. In fact, it is difficult to imagine the new Trump administration taking him up on such an offer. For now, Trump continues to threaten trade partners, such as Canada and Mexico, with higher tariffs. Incidentally, Mexico is where VW has its biggest North American plant. Perhaps Merz believes that if some form of negotiation between Brussels and Washington were to start, at least the two sides would refrain from engaging in a trade war while they are talking. That could provide the necessary breathing space for VW and others to get back on track. It is not impossible. Nonetheless, given how dependent car markets are on frictionless global supply chains, even a bilateral U.S.-EU deal may not be sufficient to shield VW from the fallout of Washington-led trade wars elsewhere.

Not least because of geopolitics, or more specifically China, the big elephant in any room. Surely, Germany’s stance toward Beijing would become part of any future talks between the U.S. administration and Europe. Is VW, and therefore Germany, prepared to take sides, a choice that Mario Draghi, the former president of the ECB, fully expects to become the central part of any negotiation between Washington and Brussels? In other words, would VW and Germany be prepared to choose between the U.S. market and China if asked to?

To avoid answering the question, the top managements of VW and its German peers appear to rely on a Solomonic third way, a globalist corporate agenda in a post-globalization reality. But charting such a middle course successfully rests on best-case scenarios rather than darker assessments of the global environment.

The latest data confirm that things are already sufficiently bleak. In 2024, economic activity in Germany shrunk for the second year in a row. Even more troubling than the recent numbers is the fact that since 2019, the German economy has barely moved forward, while the rest of the euro area grew by almost 5 percent and the United States by 11.4 percent. Germany seems to be locked in the role of the laggard among developed economies. Its biggest manufacturers, such as VW, have become the symptom of a much larger, structural weakness. Sticking to revitalized but fundamentally old strategies no longer appears to be sufficient.

This article is excerpted from Achtung! Why the German model is malfunctioning and what to do about it, publishing in Italy in February 2025.