Once revered globally, Germany's car brands now represent one of its primary burdens on an increasingly fragile economy.

New cars of various makes await export at Duisburg Harbor Car Terminal on August 7, 2024, Ina Fassbender/AFP | Getty ImagesGermany was long known for producing top-quality combustion engine cars that stood the test of time and innovation. Unfortunately, its car industry now faces unprecedented declines compared to earlier incarnations. Owning a German car was often seen as both luxurious and symbolic of status. Carmakers were flourishing, helping boost Germany’s economy. Since then, however, things have darkened significantly; Volkswagen recently made headlines when they announced they could no longer rule out plant closures in their native Germany and that an employment protection agreement that had been in effect since 1994 may need to end as a result of that development. “For German carmakers that were technological market leaders for nearly 140 years without much concern over sales or competition, this is a novel situation,” according to KPMG’s global automotive head Andreas Ries. Now however, Ries noted, their industry was experiencing its greatest transformation yet and how German automakers faring. Historical data from Ifo shows sentiment issues within this sector has fluctuated significantly throughout time. According to data released Wednesday, August sentiment had once again fallen, reaching negative 24.7 points. Volkswagen’s business expectations for the next six months were “extremely pessimistic,” According to Ifo. Volkswagen is not alone in their struggles; Mercedes car division recently reduced their annual profit margin forecast while BMW Automotive segment reported lower-than-anticipated profit margins in Q2. Porsche reduced its 2024 outlook due to a shortage of special aluminum alloys. But issues in the automotive sector may also have spillover effects into Germany’s wider economy which has been on edge of recession for much of 2018. Germany experienced a 0.1% reduction in gross domestic product year-on-year during the second quarter of 2024 compared with its performance from the prior period. “‘When the German automotive sector has an illness, Germany catches it,” according to KPMG’s Ries, is an accurate description of current events. He noted how not only big names in this sector exist; thousands of medium, small and tiny enterprises make up what he considers one of Germany’s key industries. “We Are Facing Multiple Challenges”Experts and industry bodies point out that various factors have led to the current state of play on the market and weigh heavily upon it, experts and industry bodies concurring that “We Are Facing Multiple Challenges”, according to one spokesperson of German Association of Automotive Industry VDA’s remarks to CNBC. According to them, this situation includes both the aftermath of Covid-19 pandemic as well as “geopolitical tensions and high bureaucratic requirements at national and European levels”. “Car production has suffered due to weak domestic demand as the overall state of German economy weakens, noted VDA, noting macroeconomic trends also impact auto sector performance. China and EVs continue to be central topics in German car sector discussion – and their intersection is often raised.” Horst Schneider, head of European automotive research at Bank of America told CNBC in a translated interview: EVs were still performing below expectations. Schneider noted that demand has been lower than anticipated while competition has intensified in China’s auto market recovery; German carmakers, however, haven’t felt its impact yet because competitors have taken away market share from German producers, according to him. Pricing issues also remain an obstacle, according to Prof. Hoff: German electric vehicles are too costly, while Chinese products tend to be better in some regards and more cost effective. Furthermore, tensions over trade tariffs between Europe and China continue to weigh on market conditions. “German producers are very vulnerable to trade politics; previously around 40% or 50% of their earnings came from China’s market, which now appears to be contracting significantly. At the same time, there’s an increasing percentage of electric vehicles (EVs) which are less profitable than combustion motor cars,” explained Schneider, noting this had created a “double issue. “”If China earnings were still as robust, you might have no trouble managing EV profitability issues,” he noted. However, as Chinese earrings have softened and margins have shrunk considerably over time,” there is now general earnings pressure and margins are decreasing.” Additionally, Germany’s discontinuing of an EV subsidy program had its effect as well. The VDA stated. Planned tax cuts to promote electric vehicle (EV) adoption are being put forward as plans emerge to promote their adoption by German auto manufacturers, says KPMGs’ Ries. Amid its many difficulties and setbacks have arisen some bright rays of optimism; but still more work must be done. Hybrid car technology will likely remain relevant longer than anticipated and combustion car sales have seen some signs of improvement, according to VDA president Thomas Krenn. He noted the necessity for collaboration among politics, business and researchers when creating frameworks to address regulation concerns as well as to refocus quality control efforts and regulation oversight. VDA sees different production conditions necessary. Political reforms rather than regulation; pragmatic approaches rather than micromanagement” was the response from an association spokesperson. Furthermore, “we require an innovative blend of market-oriented economic policy and shaping industrial policy for optimal development” was their advice. “Market conditions will remain challenging over the coming year, according to Bank of America spokesperson Schneider. Many automakers still have guidance in place that suggests their performance in the second half could outstrip that of first, according to Bank of America spokesperson Schneider. There remains some skepticism from investors as profit warnings may happen by Q3, which leaves open questions for 2025 according to him.