If you want to check Germany’s temperature, it’s worth looking to Stuttgart.
For decades the prosperous Swabian capital in southwest Germany, as home to Mercedes-Benz and Porsche, has considered itself the cradle of the German automotive industry.
Mercedes-Benz is based at the western suburb of Unterturkheim while Porsche is headquartered in Zuffenhausen to the north.
Both luxury car makers operate gleaming brand museums in Stuttgart but neither premises has tongues wagging like the “Pioneer Store” that popped up recently in the city’s Calwer Passage.
It is operated by BYD, a company few in Germany had even heard of a year ago. Short for Build Your Dreams, the Chinese company began building batteries in the 1990s and is now one of the world’s biggest car companies.
Its elaborate 450sq m showroom in Stuttgart is about building awareness more than market share in Germany. And 2025 is the year BYD’s dreams could start becoming a living nightmare for German car makers.
“If you want to get big in Europe, you can’t bypass Germany,” Jan Grindemann, BYD dealer in Stuttgart, told Der Spiegel magazine.
In 2024 BYD scored two firsts: it overtook Tesla to become the world’s biggest-selling electric car brand and, after 15 years, stole Volkswagen’s crown as China’s bestselling car brand.
Compounding the coup, BYD also staged a daring raid against VW in its own backyard, stealing its “official e-mobility partner” sponsorship deal with Uefa for the European Championships.
While executives smart at VW’s headquarters in Wolfsburg, managers at the Mercedes headquarters at Unterturkheim are struggling not to seem rattled.
“For the longest time our managers in China warned us that Tesla wasn’t not our biggest problem, but BYD,” said one senior Mercedes-Benz executive, requesting anonymity. “Not everyone here was paying attention.”
After an admittedly slow start in 2024, BYD has shaken up its sales network in Germany and expects a stronger push when cars begin rolling in from its new Hungary production line in 2025 – well-timed to bypass European Union import tariffs on imported Chinese vehicles.
It’s not an overstatement to call Germany’s auto industry the key to national identity and prosperity. The country’s car giants employ 7 per cent of the total workforce and contribute about 5 per cent of Germany’s annual tax take.
If the car industry is inseparable from the German economy, BYD’s rise – and its German rivals’ slow shift in 2024 from complacency to concern – recalls the answer of an Ernest Hemingway character about how he went bankrupt: “Gradually, then suddenly.”
Amid a blizzard of gloomy economic reports in December, one made for particularly grim reading.
Sounding more like a meteorologist than a central bank, the Bundesbank ended the year warning of an “economy struggling with persistent headwinds”.
Its December 2024 report said that – after -0.1 and -0.2 shrinkage last year and this – Europe’s largest economy may, at best, tip into minimal growth in 2025-2026 of 0.2 and 0.6 per cent respectively.
Bundesbank president Joachim Nagel’s diagnosis of German ills was brutally honest: deep structural problems hitting exports and investments and, with some delay, now seeping into the labour market and weighing on private consumption.
[ Volkswagen agrees 35,000 redundancies at German plantsOpens in new window ]
All these liabilities will linger into next year and, to believe other analyses, it is no longer a cyclical issue. As all other G7 members left it in their economic dust in 2024, Germany appears to be undergoing a dangerous paradigm shift, and is in more danger than many in the country realise.
Already economically weak, it will find itself in 2025 trapped in a likely economic grudge match between China and the US in the Trump 2.0 era.
As both economic giants ramp up domestic industrial production and protectionism, they are less reliant on foreign partners like Germany.
Geopolitics strategist Claudia Schmucker suggests the old order of globalisation, which rewarded those who maximised efficiency while throttling production costs, is collapsing – and Germany with it.
“Our companies were the victors of this era,” she told Der Spiegel magazine. “But at the moment when the old order collapses and protectionism divides the global markets, we are the ones who will suffer the most.”
The challenges forecast by the Bundesbank in 2025 are nothing new for German exporters, according to the German Chambers of Industry and Commerce (DIHK). A recent study of its members found that, while a third faced barriers to their international trade a decade ago, that number has jumped now to 61 per cent.
Those barriers are making themselves felt, in particular among Germany’s car companies.
Amid sliding sales in China and the US, VW agreed a deal with unions just before Christmas to reduce its domestic workforce by 9 per cent and cut costs. While mandatory redundancies were avoided – for now at least – the unprecedented crisis at VW is unlikely to vanish overnight.
With pre-Christmas belt-tightening on other fronts, VW and Mercedes-Benz announced pay freezes for all senior management, echoing similar measures across all major German industrial giants, including Bosch, BASF and Thyssen-Krupp.
Many have ramped up investments outside of Germany, rattled by the second year of stagnation at home and uncertainty over the labour market and energy prices.
For his part, Mercedes boss Ola Källenius has promised more stick than carrot in the new year. From January 1st, all company executives, from department head up, are obliged to return to the office. He has also flagged what he sees as a worrying trend indicating that Germans may truly be the sick men and women of Europe.
“Our plants are the same all over the world, there are the same health benefits and the same working environment,” he told the Süddeutsche Zeitung daily. “Yet the sick rate in Germany is sometimes more than twice as high [as the average].”
Workers in Germany are sick, on average, for 25 days a year – five days more than before the Covid-19 pandemic. Compared with 2000, Germans are working up to 76 fewer hours per year while enjoying 31 days’ holidays.
“We have a higher proportion of employed people in Germany than in other countries, but they work less so we are not making full use of our potential, which is problematic,” said Holger Schäfer, economist with the IW economics think tank.
Another challenge is the struggle of companies here to compete with foreign rivals due to what Siegfried Russwurm, Germany’s chief industrial lobbyist, has denounced as Germany’s “toxic” energy policy.
It was madness, he said, to phase out nuclear energy and coal simultaneously as Germany had done, only to create a dependency on energy imports during Germany’s slow pivot to renewables.
[ Volkswagen woes reflect wider German malaise as election nearsOpens in new window ]
Vladimir Putin’s invasion of Ukraine expedited a second German pivot, away from Russian energy.
The three-way “traffic light” coalition of the Social Democratic Union (CDU), liberal Free Democrats (FDP) and Greens was pummelled by global tensions while creating many of its own at home.
A row over new home heating systems, for instance, ruined the government’s reputation with many voters. Meanwhile an ideological standoff over how to overcome the slump – with investment or austerity – eventually exposed, and collapsed, Berlin’s ideologically incompatible government.
Ahead of early elections on February 23rd, one of the most heated campaign issues is whether Germany will finally reform the so-called debt brake.
While fired FDP minister for finance Christian Lindner defends it as a dam against reckless deficit spending, the political consensus is shifting towards a more flexible brake, allowing debt-financed borrowing for Germany’s creaking infrastructure and other sustainable investment projects.
“The government will have to play an important role in providing public goods like infrastructure and education and to create incentives for private investments,” said Carsten Brzeski, ING bank macroeconomic analyst. “The most likely outcome after the elections is at least an infrastructure investment fund.”
Deutsche Bank, wondering if the new year will see its main rival swallowed by Italy’s UniCredit, issued an end-of-year real-estate report warning of “only sideways movement until the end of 2025″.
Irish companies operating in Germany say they are feeling the squeeze from the economic slump but, for many, business is still holding up.
Shannon-based EI Electronics, a leading manufacturer of residential fire and carbon monoxide detection products, has remained active here and its German managing director Philip Kennedy remains “bullish for the future”.
In his view Germany is experiencing a systemic crisis that is being exacerbated by cyclical elements.
“There is an awful lot happening at once and almost every aspect of the economy and society is being challenged or questioned,” he said.
One key worry is the dearth of qualified people at all levels of the economy, as older tradespeople are no longer being replaced.
A chamber of commerce (DIHK) study found that every second company that accepts trainees was unable to fill all their places in 2024, up two points on last year and setting a new record.
More than a third of member companies – from production companies to restaurants – said they had not received a single application for their jobs, leaving about 30,000 companies empty-handed.
Germany’s manufacturing and export companies are used to the ups and downs of market and other vagaries, Kennedy points out. While Germany’s shift from Russian energy was achieved in record time and has gone unrecognised, these changes were managed and made. Looking ahead to the February 2025 election and beyond, he suggests “the German consensual culture can be slow but, over time, consequent”.
“The hope would be that the new government would have one legislative period to get things moving, attain funds for real investment in the future,” he said. “If they fail to achieve this, all bets are off.”
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