Introduction to the Crisis
Government support has never been more critical for the survival of the German auto industry. The sector is facing a deep crisis, with stagnating sales, mass layoffs, and a rocky transition to electric vehicles (EVs). Once dominant in engineering and brand prestige, Volkswagen, BMW, and Mercedes-Benz are now lagging behind Chinese rivals in software innovation and the introduction of EVs.
Challenges from Chinese Rivals
China’s BYD, NIO, and others are aggressively expanding into the European market, offering cheaper, tech-savvy EVs. This has dealt a significant blow to Germany’s dominant export sector. US President Donald Trump’s protectionist policies have also hurt Germany’s export sector.
Merz Backs Delay on Diesel/Petrol Ban
German Chancellor Friedrich Merz has called for a delay on the planned ban on European Union sales of vehicles with internal combustion engines from 2035. The measure, introduced in 2022, would impose heavy fines on automakers that fail to reduce carbon emissions. Merz told broadcaster NTV that the planned EU ban was "wrong," adding that "we shouldn’t ban: we should activate technologies, and that’s my goal."
Consumer Trust in EVs is Key
Craig Mailey, chief strategy officer at Cox Automotive Research House, said that Merz is undermining confidence in the EV transition by calling for a delay. "Consumers need clarity, not ambiguity, in these uncertain market conditions," Mailey said. Sander Tordoir, the chief economist at the London-based Center for European Reform (CER), said that Merz’s defense of gasoline and diesel engine cars was a "sideline" to the much larger threat to the German auto sector.
EV Subsidies Could Bolster Automakers’ Fortunes
German Finance Minister Lars Klingbeil announced the extension of a tax break on EVs to improve consumer and fleet demand. The exemption was set to expire on January 1, 2026, but would be extended until the end of 2030. Tordoir said that the obvious step is to reintroduce the subsidies for the purchase of electric vehicles that Germany cut at the end of 2023 and then coordinate these subsidies across the European Union.
The Auto Sector is Facing its Most Disruptive Year in Decades
The German auto industry’s problems have been described as a polycrisis characterized by slowing EV sales, fierce Chinese competition, escalating US tariffs, high energy and labor costs, and structural changes to electric mobility. In the first half of 2025, Mercedes-Benz’s profit fell 56% to 2.7 billion euros, Volkswagen’s operating profit fell by a third to 6.7 billion euros, while BMW’s pre-tax profit fell 29% to 4.02 billion euros.
Increase EU Demand, Tougher Response to China
Tordoir called for Berlin and Brussels to pay more attention to promoting Europe’s auto sector overall, noting that France, Italy, and Spain have also lost global export market share to China. He said that the best way out is to grow Europe’s own market, which is still very significant and has the potential to create more demand than currently. France, for example, revised its incentive system to exclude vehicles from non-EU countries, including China.
German Auto Sector Down, but Not Out
Despite the many challenges, car production in Germany is far from over. Given the right mix of policies and strategic investments, many experts believe the industry can buy the time it needs to adapt, innovate, and remain competitive in a rapidly evolving global marketplace. Tordoir believes that the European automotive industry "has caught up with some, but it’s not as if Europe doesn’t have potential to build the cars of the future."
