Running out of autobahn

When I was replacing my old car (a Jaguar XE that had, unsurprisingly, succumbed to a string of expensive technical problems) I told my father I was looking at replacing it with either a VW, an Audi or a BMW.

“You can’t buy a German car”, he told me flatly. “Not after what your grandfather went through during the war.” 

What had happened, I asked him? Well, it turned out that during the Second World War, my grandfather owned a string of seriously unreliable German cars.

This joke is funny for two reasons: first, the initial misdirection from the expected punchline and second, the longer-burn (and less funny) idea of there being poorly-made German cars. But despite their reputation for dependability and durability, the German automotive industry is under huge pressure.

This week, just 48 hours after the sale of VW’s €10bn marine engines division, chief executive Oliver Blume announced plans to shed up to 100,000 jobs.

This means the loss of almost one in six of VW’s 625,000 total jobs, and the closure of four factories. It would be the biggest restructuring in German corporate history and one of the biggest lay-off programmes in worldwide corporate history, exceeding even General Motor’s  “Christmas Massacre” in 1991.

German manufacturers, like the Detroit automakers of the 1990’s, are finding it hard to adapt to changing market conditions and increased foreign competition. VW’s share prices has almost halved since Vlume took over in September 2022. BMW, despite recently rolling out a new range of electric vehicles (EVs) and the market experiencing increased demand for them as a result of the Iran War, forecast a “significant” fall in pre-tax profits this year. Mercedes recently set a note to employees asking them to work longer hours for the same salary in a bid to cut costs. First-quarter deliveries for Audi fell by 6.1%.

For GM, Ford and Chrysler, it was competition from Japan: for the German giants, it is competition from China.

At the company’s annual meeting in Shenzhen last month, BYD Chairman Wang Chuanfu said the Chinese manufacturer expected to lead the global automotive industry within five years. Last year, BYD sold a total of 4.6 million vehicles across the globe — still significantly short of Toyota’s 10.5 million, but impressive for a company founded in 2003.

Whilst the vast majority of sales come from the domestic market, BYD’s overseas sales rose 94.7 per cent year-on-year in June to 175,349 vehicles, offsetting a slowdown in Chinese demand, where sales fell 22 per cent and extended a run of annual declines that began in May 2025. Sales in Europe have been particularly strong, climbing 270 per cent last year to almost 188,000 vehicles before more than doubling again in the first five months of this year to exceed 100,000.

Despite EU imposing tariffs of over 40 per cent, Chinese carmakers overtook their Japanese rivals in Europe’s passenger car market for the first time in May. Combined sales by BYD, SAIC, Geely, Chery and Leapmotor climbed 65 per cent year-on-year to 138,410 vehicles across 31 European countries, surpassing the 130,424 vehicles sold by Toyota, Honda, Nissan, Suzuki, Mazda and Mitsubishi, whose combined sales fell 3 per cent. Chinese brand Rivian recently raised its delivery forecast, in part drive by non-retail interest after Uber said it would invest over $1 billion in the manufacturer as under a plan to deploy 10,000 self-driving R2 SUVs in a robotaxi fleet beginning in 2028.

The primary reason Chinese automakers have gained huge amounts of ground in such short order is that offer vehicles at prices 20 to 50 per cent lower than comparable Western alternatives

The primary reason Chinese automakers have gained huge amounts of ground in such short order is that offer vehicles at prices 20 to 50 per cent lower than comparable Western alternatives. Chinese manufacturers are using overseas markets to absorb excess capacity as domestic sales come under pressure from subsidy cuts, the prolonged property slump and rising dealer inventories. The China Passenger Car Association now expects vehicle sales to fall 11 per cent this year, a sharp downgrade from its previous forecast of a 1 per cent decline.

BYD’s European adviser, Alfredo Altavilla, said Volkswagen’s planned job cuts marked the “first real wake-up call” for Europe’s automotive industry. He also criticised the EU’s response to Chinese competition as “bloody useless” and rejected calls for Chinese manufacturers to share technology through joint ventures. The EU’s attempts to shield the automotive sector has consisted of the aforementioned tariffs and the “Made in Europe” strategy. 

This will see the introduction of the Industrial Accelerator Act, which aims to privilege electric vehicles built primarily with European components in public procurement and state support schemes. However, manufacturers and the EU remain at odds over the definition of the local content threshold. The current proposal sets it at 70 per cent, while the European Automobile Manufacturers’ Association (ACEA) is advocating a different approach, under which compliance would be judged on the finished vehicle rather than the origin of individual components. This change could effectively weaken the requirement for EU-made parts by around 20 percentage points.

Chinese manufacturers are already seeking a way around this. As I wrote in April, MG have announced that Spain will host its first automotive plant in Europe, Hongqi is reportedly planning to establish an electric vehicle manufacturing base on the continent and Great Wall Motors has outlined plans for a new factory with capacity of 300,000 vehicles by 2029. Since, BYD has announced it is seeking a second European manufacturing site as it expands beyond its existing base in Hungary. Spain and France are emerging as the leading candidates, with the company reportedly considering buying an underutilised plant. They are likely to be buying from Stellantis, who now hold majority stakes in joint ventures with China as Dongfeng and Leapmotor, in order to try and increase production at facilities in Spain and France.

This is not just dumping. As I wrote in April, this is part of a very deliberate Chinese strategy to deploy domestic industry and direct investment abroad into what is sees as vital future technologies, in order to deepen foreign dependence on China’s advanced manufacturing, which Beijing views as a source of leverage in an age of geopolitical disruption. Xi Jinping has been open about this aim, making a speech in 202 in which he argued China “must tighten the international production chains’ dependence on our country, forming a powerful capability to counter and deter foreign parties from artificially cutting off supplies to China.” 

Research finds that China now leads the United States in 57 of 64 critical technology fields, including solar panels, wind power, cellular modules, rare earth processing, and “legacy” semiconductors. A Chinese-dominated European car market would add another weapon in Beijing’s arsenal. As Chatham House warns, “China has shown it is willing to use its trade and manufacturing dominance to advance its geopolitical goals. This must be a wake-up call for Western policymakers.”

What might a wake-up call look like?

There is a German answer, and a European-wide one. In his book, Kaput: The End of the German Miracle, Wolfgang Münchau puts Germany’s economic problems down to A closed, mutually dependent relationship between politicians and business became increasingly detached from geopolitical realities, focused on selling established products through established business models while gradually falling behind technologically. Münchau helpfully cites the automotive industry as a specific example, arguing that successive German governments colluded with the industry and, most damningly, continued to support it even after manufacturers installed defeat devices to deceive emissions regulators. Rather than investing in electric vehicles and emerging technologies — as China did — the German car industry, he argues, “went to criminal extremes to keep the old technology alive for a little while longer.”

VW may now become a victim of this process, rather than just a perpetrator. Efforts to cut jobs and improve competitiveness risk being hampered by the Volkswagen law, which requires any decision to relocate a production plant to secure a two-thirds majority on the 20-member supervisory board—despite the law not explicitly addressing factory closures. The State of Lower Saxony, Volkswagen’s second-largest shareholder with a 20% voting stake, holds a significant blocking position under the company’s governance rules. Decisions that would typically require a three-quarters majority at the annual general meeting instead require more than four-fifths of shareholder votes, further strengthening its influence. In practice, this framework means the 10 labour representatives on the supervisory board are able to veto major restructuring plans that affect factory operations. Any further plans to spin off parts of the business would run into the same structural constraints. The IG Metall union has already described the proposed carve-outs as an “attack on the VW law,” signalling strong resistance from labour. Olaf Lies, the premier of Lower Saxony and a member of Volkswagen’s supervisory board, has also made clear that the state would not support any moves to dilute worker influence, which he argues is an “integral part of Volkswagen’s success story.”

As Camilla Palladino writes in the FT, any adaption is going to be painful. Broadly, however, automakers have three options: repurpose existing plants for higher-margin defence-related production, pursue strategic partnerships and technology-sharing deals with Chinese manufacturers in exchange for market access and plant utilisation, or combine both approaches as a pragmatic—if imperfect—response to structural pressures.

But these are little more than short-term options in the face of the long-term problem hampering European automotive competitiveness: energy prices. Industrial electricity prices in the EU remain around twice as high as in the United States and roughly 50 per cent higher than in China, according to the International Energy Agency’s 2025 data.

Much of this gap reflects Europe’s rapid decarbonisation drive under initiatives such as the EU Green Deal and Germany’s Energiewende, which has imposed substantial costs on the electricity system. The burden has fallen most heavily on energy-intensive industries including chemicals, steel, automotive manufacturing and glass. Surveys suggest that between 37 and 51 per cent of German industrial firms are considering scaling back domestic production or relocating capacity overseas.

Europe has succeeded in cutting emissions more aggressively than most major economies, but at a significant economic cost, weakening industrial competitiveness, raising energy costs for households and businesses, and eroding its position in the global economy. The EU clearly recognise the underlying problem, having approved Germany’s industrial electricity subsidy programme for energy-intensive industries until 2028 and bringing forward the Action Plan for Affordable Energy.

The only alternative to taking action on energy is yet another round of European de-industrialisation

The only alternative to taking action on energy is yet another round of European de-industrialisation. Tarrifs have not put off consumers, and faced with stagnating incomes, and equalising the prices through taxation is likely to be highly unpopular. Made in Europe, meanwhile, looks set to see a wave of Chinese-branded, European-built vehicles flood the market. Good for jobs now, perhaps, but leaving European jobs directly dependent on the continuing co-operation of Beijing. 

The EU is capable of change. The Draghi report has seen moves towards regulatory simplification. Only a decision to lower the high energy costs driven by aggressive Net Zero policies, renewable intermittency, heavy regulations, and carbon pricing — thereby allowing European carmakers to compete on as level a field as any business in a free nation facing competition from Chinese companies can — will save das auto.