If you ask someone to name a German industry, they will say cars. Ask someone to name three car brands and there are good odds that Volkswagen, Mercedes-Benz, and BMW will be on that list. The country’s presence in the automotive sector is longstanding and iconic. Automotive manufacturing makes up 6% of Germany’s GDP, according to Capital Economics, and it directly employs 780,000 people, not including the millions of support jobs.
So, if the German car industry takes a downturn it is big news, and possibly a sign of things to come for the market around the entire world.
That is just what’s happened.
From 2017 to 2023, Volkswagen’s sales have fallen from 10.7 million to 9.2 million. In that same period, BMW has seen sales drop from 2.46 million to 2.25 million, while Mercedes-Benz’s figures have gone from 2.3 million to 2.04 million.
“The downturn in the fortunes of the German automotive industry reflects the economy as a whole, as manufacturing output sits at around 20% lower than the pre-pandemic peak in 2018,” says Craig Mailey, Cox Automotive’s Chief Strategy Officer. “Automotive has fallen from the early 2010s peak of 6 million to 4 million today.”
This is not remarkable in itself – automotive is hardly the only sector to feel the bite of the Covid pandemic, and Germany’s decline in new car sales is reflected in the rest of Europe. However, while most car markets saw sales gain momentum in 2024, in Germany they fell by 1%. Used car sales, at 6.5 million in 2024, were 23% lower than the 2016 peak.
“Since the turn of the 21st century, German-owned manufacturer-built cars have accounted for around 50% of sales in Germany,” Mailey points out. “This was boosted by Ford, Opel (originally GM but now Stellantis), and now Tesla who all have plants in the country.”
German manufacturers have always been major vehicle exporters, as well as manufacturing locally in international markets, but in recent years it has faced a tougher market.
“Take Volkswagen Group in China, for example, where sales fell by 9.5% between 2023 and 2024 against a market sales growth of 4.5%,” says Mailey. “In 2023 the German manufacturers' share of the Chinese market was 18.7%, well down from a peak of 26.2 % in 2019.”
But while that market performance is not completely unheard of compared to similar economies such as France and the UK, it is a bigger blow for Germany as the automotive industry forms such a critical part of its economy.
It is not just about the pandemic. The automotive industry is also at a major turning point as it faces the transition to electric vehicles.
“Manufacturing is going through a medium to long-term structural shift. If you talk to any auto-analyst they will tell you this has been coming because of market trends and the way electric cars are being produced and the competitive environment we are in,” explains Cigdem Cerit, Senior Director in the Corporate team at Fitch Ratings. “This is a time frame for European and Chinese manufacturers alike to adjust their footprint in the face of the realities of the market. The production cuts that have been announced are long-term adjustments that are taking place so that the fixed cost base matches those of cheaper APAC players who are entering the market.”
Alongside these developments, the wider economy in Germany is also facing challenges, as Eberhard Hackel, Managing Director at Fitch Ratings and head of the ABS team in EMEA, explains.
“The environment in Germany is that GDP is not growing at all,” he says.
The IMK Economic Institute forecasts minimal growth of just 0.1% for the German economy this year, following two consecutive years of contraction in 2023 and 2024.
According to Reuters, the seasonally adjusted jobless rate rose to 6.2% in January - the highest in more than four years.
Hackel added that "people are worried about the figures we see day to day at manufacturers such as VW declaring job cuts and creating uncertainty for consumers. That is reflected in figures like consumer spending or savings ratios. That is why we are not seeing car registration figures return to pre-pandemic levels.”
Car prices are still falling, following skyrocketing prices during the pandemic fuelled by semiconductor shortages and supply chain disruptions. But while prices have normalised, uncertainty is still an issue.
“The downturn is much more complicated than a series of single factors such as Covid shifts, the rise of EVs and the impact of Chinese manufacturers,” Mailey argues. “The prior success of the German economy does make it a high-cost production market and as VW Group CEO Oliver Blume referenced in an interview with Bild in November last year the ghosts of the past are haunting the conglomerate, and he blamed ‘decades-long structural problems’.”
European manufacturers’ volumes and profitability have also been impacted by factors such as consumer demand for new vehicles peaking as cost increases collide with unprecedented pressure on household budgets. Vehicle production has seen pressure from inflation, exacerbated by Russia’s invasion of Ukraine, driving up the cost of raw materials and electronics. The industry has also poured unprecedented resources into the R&D of electronics and the electrification of the power train.
“The German manufacturers have been targeted as slow to respond to the EV challenge, but so has Toyota arguably which remains the leading global manufacturer, which suggests that Germany’s reliance on the more mature markets has proved a weakness when trying to maximise ‘traditional’ ICE sales,” says Mailey.
Ultimately, electrification is disrupting the traditional manufacturer hierarchy, not just through competition from China, but across the whole market. As Mailey observes, “Germans still like their cars, but it is possible that they don’t love them as unconditionally as they used to given economic pressures. With American tariffs adding to uncertainty in the market and Chinese manufacturers gaining traction across Europe with their cost-effective offerings, there is no quick fix.”
Manufacturers are responding in several ways. Some manufacturers have announced intentions to cut back on EV investments and pivot back to ICE production, but Mailey argues this may not be enough for German manufacturers to regain their premium price positions. He points to competitors that match those manufacturers on quality and outcompete on price, while the German economy has continued to perform poorly and Europe is recovering slowly as a whole. These problems are not exclusive to German manufacturers, but they are magnified because of the importance of the sector and its heritage.
The trials of the car manufacturing sector are well-documented, but how those challenges will be reflected in the motor finance sector is another issue. Just because motorists are buying fewer German cars, does it mean they are buying fewer cars in general? Or are they buying from elsewhere?
“The volume of Chinese manufacturer sales in Germany is around 2% today, and across Europe they are still a very small part of the automotive landscape, but the fear is real,” says Mailey. “As a new car proposition, the attraction of the Chinese manufacturers is obvious with their feature-rich, competitively priced vehicles. However, as vehicles come out of their warranty periods, the need for maintenance and an effective used car infrastructure may aid the reputation of German manufacturers with their long-standing dealer networks and robust used car market.”
As well as changing who they buy their cars from, customers are also changing how they buy their cars.
“In terms of finance penetration, we are seeing a longer-term trend,” says Hackel. “Penetration rates go up when more customers buy cars and finance them. We are seeing a move from loan to lease contracts, traditionally the main financing instrument for corporates and the self-employed buying cars, but more and more customers prefer this package financing. They like knowing what they need to pay each month and may get servicing and insurance added to it in a subscription style model.”
That model is also popular among financiers and manufacturers, who see it as a useful tool for controlling the life and value of the car after it enters the market.
“Leasing is the most attractive, most widely used instrument for financing electric vehicles because it is the preferred option for auto finance companies, particularly the captives,” Hackel says. “They can control the value of the vehicle a little better. It prevents electric vehicles from suddenly appearing on the used car market, allowing financiers to give them a second cycle of leasing.”
The used market is critical because of the role it plays in whole-life cost analysis and vehicle financing.
“The captive finance houses of the manufacturers are critical to enabling sales and banks may be more cautious in financing products the market has yet to experience in significant volumes,” Mailey warns. “The captive finance house working with the manufacturer and then their dealer body to remarket cars creates an efficient lifecycle management process to help maximise volumes and residual values.”
Perhaps the problem is that the German auto market has been too successful. If everyone has a car, there is nobody to sell a car to.
“Motorisation rates in the major economies of Europe are reaching a peak level,” Mailey points out. “In Europe, we are unlikely to get to US levels, not only because of wealth, but practical considerations such as space, parking costs, congestion charging and a greater environmental conscience.”
One possibility is to diversify and grow, moving into international markets not as saturated as the US.
“Material volume growth is going to come from markets which previously haven’t been prioritised for being too remote, small, politically difficult or risky,” Mailey says. “Here vehicle financing products are going to be critical.”
However, the big German manufacturers such as Volkswagen, BMW and Mercedes-Benz, have already extended their reach globally.
“These are manufacturers with very diversified footprints. They are already there in terms of production and sales,” Cerit of Fitch Ratings tells us. “The only thing that has changed is their competition has intensified. China is becoming very competitive where German manufacturers are struggling to maintain historical levels of cashflow.”
There are still potential sources of revenue to be tapped, however.
“Their presence in emerging markets may need to shift,” Cerit suggests. “There is potential to move into markets such as India and APAC. But even that is nothing new because they have always been at saturation point. It is just the competition that is changing.”
While looking to other markets might be part of the solution, there is still potential in the domestic market, especially with the use of financial instruments such as leasing arrangements.
“Within Europe, growth is still possible in revenue if not in new car sales,” Mailey tells us. “The shift to the cars never being ‘owned’ but under mobility arrangements has been much slower to take hold than expected but the principle of supporting 'usership' rather than ownership is an important factor for manufacturers in maximising their revenue across the value chain."
The automotive industry around the world is watching Germany closely because in many ways it is their canary in the coalmine. What happens here could easily be a sign of things to come for the automotive industry as a whole.
“One challenge is clearly the move to electric vehicles, which is shared by everyone,” says Hackel.
“The regulations are still being discussed. European manufacturers have a lot of cash so they can move resources to where they are needed,” says Cerit. “They already have the platform, and they have started these investments in advance. But the large-scale manufacturing footprint necessary needs to change in response to regulations, creating unclear territory. Consumer sentiment is not necessarily helping. Five years ago, 200 billion euros was committed to aiding the transition, but we were expecting to reach 20% transition by today. We are not close to that number.”
Ultimately, however, the market performs in the future, financing will prove to be critical for its success.
“Although volumes may recover to a flat rate at best, it’s clear that funding products are critical to maintaining volumes. The company car is playing a critical role in the electrification of the vehicle parc,” says Mailey. “Financing products at a fixed monthly cost (like a lease) or a guaranteed balloon value is helping lower driving costs and encouraging the switch to electric by removing future value uncertainty. The manufacturer captives are a strong tool in the armoury against new entrants who don’t have a captive bank. The shift to 'usership' and mobility will grow, but with the new emphasis on the role of used vehicles and not just to support new vehicle sales.”
Germany, meanwhile has just come through a general election, and that is going to have consequences for the industry.
“The outcome of Germany’s election could prove pivotal for the country’s car industry and motor financing sector,” says Nigel Green, CEO of global financial advisory giant, deVere Group. “With the automotive sector accounting for nearly 7% of the DAX index and 5% of GDP, policy shifts under Friedrich Merz’s leadership [who's expected to become Germany's next chancellor) could have substantial market implications.”
Green pointed out that larger centrist parties have signalled support for the industry, raising the possibility of revisiting the combustion engine ban and reintroducing electric vehicle (EV) incentives.
“This could provide a much-needed boost to the sector, which has lagged behind its US counterparts,” Green says. “For motor financing, potential fiscal expansion and economic stimulus could lower borrowing costs and drive auto sales. A looser fiscal stance may also strengthen the euro, impacting vehicle exports. However, coalition negotiations will be crucial — any alliance with left-leaning parties could temper industry-friendly reforms. With the Stoxx 600 Automobiles index already up 9% this year, investor optimism is growing, but policy clarity will determine the sector’s trajectory.”
Ultimately, however, the motor finance sector will succeed or fail as it was always going to – based on what it can offer customers. Making funding products flexible and easy to access online is crucial, as Mailey points out.
“The German market lacks the tooling and competitiveness to support consumer needs in this area,” he says. “UK independent used car dealers operate with multiple funders and consumers can access all the tools online to value their trade-in with ease and organise the finance.”
"Germany’s auto sector faces structural shifts as sales decline" was originally created and published by Motor Finance Online, a GlobalData owned brand.
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