From leaders to laggards: the German car industry’s decline

In a world where we are witnessing the death of the internal combustion engine and the meteoric rise of AI, it comes as no surprise that the car industry is changing in new and unexpected ways. For decades, the industry has been dominated by German automakers. Now, they are encountering significant financial issues. This is due to both the novel threat of US tariffs and competitive pressures from Chinese car manufacturers.

The imposition of tariffs on Chinese EVs is – for the moment – shielding the German industry by making imported cars more expensive. However, Chinese automakers are likely to start setting up European factories to circumvent these.

German automakers such as BMW and Mercedes-Benz rely heavily on the Chinese market, having gained access through accepting joint ventures with fledgling Chinese companies. But, BMW, Mercedes, Volkswagen, and Porsche are increasingly experiencing competition from the same Chinese companies that they helped develop. This is partially self-inflicted – complacency has allowed their competition to overtake them in terms of innovation and technology.

Porsche has revealed that its deliveries in China dropped by 28% last year

BMW and Mercedes-Benz issued profit warnings at the end of last year, with both attributing this primarily to Chinese competition. Mercedes lowered sales expectations by 20%, leading their shares to decrease by 8% the same day. Porsche has also been hit particularly hard in China. In fact, despite an increase in Porsche sales in other markets, the fall in sales in the Chinese market has led to a net decrease in its global sales.

This decline is due to a better software experience and an increase in AI-assisted features in Chinese cars. The rise of Chinese technological innovation has been accompanied by an emphasis on AI in vehicles, particularly EVs. It is no surprise, then, that many Chinese citizens are switching out their German vehicles for those made closer to home, prioritising more sophisticated features and AI-assisted vehicles.

The Porsche Taycan, for example, has a rival in the Xiaomi SU7. The SU7, which mimics the Taycan’s design, is superior in terms of power and braking, all while being approximately half the price. Some additional AI features include parking assistance and welcoming drivers back to their vehicles with their favourite songs.

Therefore, although the SU7 may be labelled as a rip-off Porsche, it is clear to see why the German automakers that have dominated China’s car market for years are now experiencing falling sales. Xiaomi, a leading manufacturer of Chinese phones, sold over 100,000 SU7 models in 2024, whereas Porsche has revealed that its deliveries in China dropped by 28% last year.

European shares declined from their record highs, with automakers taking the brunt of the fall, as investors reacted to President Trump’s announcement of potential tariffs

Following criticism of the company’s declining performance, Porsche’s finance chief and a top sales executive are leaving the company. Additionally, Trump’s call for higher tariffs on America’s trading partners, including Europe, will have a particularly negative impact on Porsche, who supply their American market solely with European exports.

On February 27, European shares declined from their record highs, with automakers taking the brunt of the fall, as investors reacted to President Trump’s announcement of potential tariffs on the EU. This saw Exor offloading a 4% stake in Ferrari for €3bn, leading the luxury automaker’s stock to decrease by 8%.

Despite claims by the European Commission that it will respond to and challenge “unjustified barriers to free and fair trade”, the detrimental effects of these new tariffs remain uncertain. Whilst the EU could implement similar joint venture strategies to that of China in the past, this risks violating both the principles of free trade and the rules of the European Single Market.

Thus, with the overwhelmingly strong competition from Chinese automakers, the new German government is likely to stress the importance of technological progress on EVs and implement policies to curb the strong reliance of German car manufacturers on exports.

Regardless, rapid technological innovation is necessary from German automakers for them to compete with Chinese car manufacturers and minimise the consequences of new tariffs.