Can Germany’s Car Industry Hold Back Europe’s Economic Progress?
BEHNAM GHADIMI
Founder and Managing Director of BHM Automotive - MSc. Automotive Engineering
Can Germany’s Car Industry Hold Back Europe’s Economic Progress?
The German automotive industry, a cornerstone of the country’s economy, has long been a global leader in engineering and innovation. However, the past decade has seen this powerhouse confronted with significant challenges, particularly in the aftermath of the Volkswagen Dieselgate scandal and the subsequent shift towards electrification. As the global automotive landscape rapidly changes, the question arises: Can Germany’s car industry keep pace with new competitors, especially Chinese automakers, or will it become a hindrance to Europe’s broader economic progress?
The Dieselgate Scandal: Volkswagen’s Emissions Cheating and Its Ripple Effects
In September 2015, Volkswagen (VW), the world’s second-largest automaker at the time, was embroiled in a corporate scandal of unprecedented proportions. The U.S. Environmental Protection Agency (EPA) found that VW had intentionally programmed over 11 million diesel vehicles worldwide—including approximately 500,000 in the U.S.—to cheat emissions tests. These vehicles were equipped with software, known as "defeat devices," that could detect when the car was undergoing regulatory testing and alter its performance to meet legal emissions limits.
The true emissions levels, however, were up to 40 times higher than the legal limits during normal driving conditions. This stark difference led to a massive public outcry and revealed the lengths to which VW had gone to promote diesel engines as an environmentally friendly alternative to gasoline.
Financial Fallout: The scandal led to severe financial penalties for Volkswagen. The company has paid more than $30 billion in fines, penalties, and compensation worldwide, with over $14.7 billion specifically allocated to U.S. settlements alone—the largest automotive scandal settlement in history. On top of this, the company's stock price plummeted by around 40% in the immediate aftermath, wiping out billions in market capitalization.
Bosch’s Role in Dieselgate: A key player involved in the development of the defeat devices was Robert Bosch GmbH, one of the largest suppliers of automotive components globally. Court evidence indicated that Bosch had supplied the engine control software used by VW and was aware that it would be used to manipulate emissions tests. Although Bosch denied direct involvement, in 2020, the company agreed to pay $327.5 million in a settlement with U.S. car owners and dealers who claimed that Bosch had aided VW in its deception.
Wider Industry Impact: Dieselgate had repercussions well beyond Volkswagen. Sales of diesel cars in Europe—a market where they once accounted for over 50% of new car sales—plummeted to around 27% by 2020. Consumer trust in diesel technology evaporated, prompting many automakers to hasten their shift toward electric vehicles (EVs) and hybrid technology.
The Rise of Electric Vehicles: A Statistical Overview
In the wake of Dieselgate, the automotive industry has seen a dramatic shift towards electrification. Electric vehicles (EVs) are now seen as the future of mobility, with global EV sales increasing exponentially over the past few years. According to the International Energy Agency (IEA), EV sales reached over 10 million units globally in 2022, up from just 1.3 million in 2015, when Dieselgate occurred.
German automakers, historically leaders in internal combustion engine (ICE) technology, have been playing catch-up in the electric vehicle race. While companies like Volkswagen, BMW, and Mercedes-Benz have made significant strides in EV development, they still lag behind Chinese automakers such as BYD and NIO, who have rapidly scaled up production and now dominate the global EV market.
In 2022, Chinese automakers captured around 60% of the global EV market, while German automakers held just 10%. This disparity is particularly concerning for Germany, given the country’s reliance on its automotive sector as an economic driver. As the world moves towards greener technologies, Germany’s traditional focus on diesel and gasoline engines could leave its carmakers at a competitive disadvantage.
Economic Implications of Electrification
The transition to electric vehicles poses significant economic risks for Germany. The automotive industry is a critical component of the German economy, accounting for around 5% of the country’s GDP and employing over 800,000 people. The industry also supports a vast network of suppliers and ancillary businesses, making it a vital part of the broader European economy.
However, electrification threatens to disrupt this well-established ecosystem. Electric vehicles have fewer moving parts than their ICE counterparts, requiring less labor to manufacture. This has led to fears of widespread job losses in the automotive sector. According to a study by the German Institute for Economic Research, up to 400,000 jobs could be lost in Germany’s automotive industry by 2030 due to the shift towards electrification.
Volkswagen, one of Germany’s flagship automakers, has already felt the impact. In 2023, the company announced the closure of several manufacturing plants in Germany, citing the need to cut costs and focus on EV production. While this shift towards electrification is necessary for the company’s long-term survival, it also highlights the potential harm to Germany’s industrial base as traditional manufacturing jobs disappear.
The Role of German Automotive Industry in Germany’s Economy
Germany’s automotive industry is not just a significant employer; it is also a major contributor to the country’s export economy. In 2021, automotive exports accounted for over 15% of Germany’s total exports, making the sector a key pillar of the country’s economic strength. The industry’s success has also driven innovation in other sectors, including advanced manufacturing, robotics, and materials science.
However, as Chinese automakers continue to gain ground in the global EV market, Germany’s dominance in the automotive industry is under threat. Chinese manufacturers benefit from economies of scale, government subsidies, and a massive domestic market, allowing them to produce EVs at lower costs than their German counterparts. This competitive advantage could erode Germany’s market share, both in Europe and globally.
The loss of automotive leadership could have far-reaching consequences for Germany’s economy. A decline in automotive exports would weaken Germany’s trade balance, while job losses in the sector could lead to higher unemployment and lower consumer spending. Given the size of the automotive industry’s contribution to Germany’s GDP, a prolonged downturn in the sector could push the country into a recession.
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Regional Impacts: Effects on Neighboring Economies
Germany’s automotive industry is deeply interconnected with the economies of neighboring European countries, particularly in Eastern Europe and Turkey. These countries are key suppliers of automotive parts and components, and many German carmakers have established manufacturing plants in these regions to take advantage of lower labor costs.
Turkey, in particular, is heavily reliant on its automotive exports to Germany. In 2022, the Turkish automotive industry exported over $8 billion worth of vehicles and parts to Germany, making it the largest destination for Turkish automotive exports. A downturn in Germany’s automotive sector could have serious repercussions for Turkey’s economy, leading to job losses and a decline in industrial production.
Similarly, Eastern European countries such as Poland, the Czech Republic, and Hungary, which are home to numerous German-owned automotive plants, could also suffer from a decline in German car production. These countries have become integral parts of Germany’s automotive supply chain, and any disruption in the sector would ripple across the region.
Could Germany’s Economy Fail If Its Automakers Lose the EV Race?
The prospect of Germany’s automotive industry losing its competitive edge to Chinese automakers raises a critical question: Could Germany’s economy fail if its carmakers cannot keep up? While it is unlikely that the entire economy would collapse, the consequences could still be severe.
As mentioned earlier, the automotive industry is a major driver of Germany’s economy. If the country’s automakers are unable to compete in the global EV market, it could lead to significant job losses, reduced exports, and lower economic growth. According to the German Institute for Economic Research, a 10% decline in automotive exports could reduce Germany’s GDP by up to 1.5%.
Moreover, the ripple effects would extend beyond Germany’s borders. Countries that are closely tied to Germany’s automotive supply chain, such as Turkey and those in Eastern Europe, would also feel the impact. In Turkey, for example, a slowdown in automotive exports could exacerbate the country’s existing economic challenges, including high inflation and currency depreciation.
What If Volkswagen and Bosch Had Focused on Electrification Instead of Cheating on Emissions?
The Dieselgate scandal exposed Volkswagen’s deliberate decision to deceive regulators instead of investing in greener technologies. But what if the company, along with Bosch, had chosen a different path? If Volkswagen and Bosch had focused on electrification in the early 2010s, they could have positioned themselves as leaders in the emerging EV market, rather than being forced to catch up years later.
By investing in EV technology earlier, Volkswagen could have avoided the billions in fines and legal settlements it faced due to Dieselgate, and instead channeled those resources into research and development. Bosch, as a key supplier, could have also benefitted from earlier investments in EV components and systems. Furthermore, both companies could have enhanced their reputations as environmentally responsible players, gaining a competitive edge over rivals who were slower to adopt electrification.
Conclusion
Germany’s automotive industry is at a crossroads. Once a global leader in internal combustion engines, the country now faces fierce competition from Chinese automakers in the electric vehicle space. The transition to electrification is not only a technological shift but also an economic one, with the potential to reshape the German economy and its role within Europe.
As the world moves towards greener technologies, the German automotive industry must adapt or risk being left behind. The ripple effects of a failure to compete could have dire consequences for Germany’s economy, from job losses to a reduction in exports. It is a test of resilience for one of the country’s most important sectors, and the outcome will likely shape the future of both Germany and Europe’s economic landscape.
Author: Behnam GHADIMI, MSc. Automotive Engineering
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