• German factories produced 4.66 million vehicles in 2019, a 9% drop from the prior year.
  • The auto industry accounting for 5% of German GDP
  • A government body warned German automakers could lose 410,000 jobs by 2030.

Germany's once renowned automobile industry is at a crossroads and must enact dramatic changes to survive in a new world.

German auto factories produced 4.66 million vehicles in 2019, a 9% drop from the prior year, and the lowest figure since 1996, largely due to falling global demand. Moreover, German auto exports plunged by 13% to 3.5 million.

Verband der Automobilindustrie, or VDA, a lobby group for the German car industry, warned that global auto production is expected to fall to 78.9 million vehicles in 2020 from 80.1 million last year.

Interestingly, Germany’s domestic auto market expanded by 5% last year as buyers purchased 3.6 million new cars. However, VDA warned that the local market will probably shrink this year and also projected more job losses as more consumers switch to electric cars.

German automakers have already endured concerns about pollution, as exemplified by Volkswagen’s 2015 diesel scandal, and significant job cuts. In addition, the German car industry is required to spend billions of dollars to develop environmentally cleaner vehicles – due to the EU’s stringent emissions restriction rules -- and to counter the rapid emergence of electric automobiles and ride-sharing services.

The auto industry is crucial to Germany’s overall economic health, accounting for some 5% of gross domestic product (versus 3% to 3.5% in the U.S.)

"The [German] car industry faces a massive transformation," in 2020, said industry expert Stefan Bratzel of the Center for Automotive Management.

He added that the EU's carbon dioxide legislation was “the most important reason" for changes sweeping the car industry.

Ferdinand Dudenhoffer of the Center Automotive Research commented that "the fall in car production means Germany continues to lose significance in the global auto industry.”

Dudenhoffer estimated that Germany’s share of the global auto market has shrunk from 12% in 1998 to less than 6% last year.

Germany’s National Platform For The Future Of Mobility, or NPM, a body set up by the government, projected that the German auto industry could lose up to 410,000 jobs – about half of its current workforce -- by 2030 as internal combustion engine technology is phased out and more electric cars are driven.

However, VDA rejected this estimate.

“The assumption that up to 410,000 jobs could be lost in the coming years is based on an unrealistic extreme scenario,” said Kurt-Christian Scheel, VDA’s managing director.

Scheel questioned NPM’s assumption that most electric cars and batteries will come from foreign countries. “These assumptions do not apply,” Scheel added.

But VDA conceded that German auto jobs will be lost in the coming years.

VDA estimated that a total structural change in the auto industry as it transforms to electric cars would cost up to $22 billion.

“I think the federal government needs to be clear about whether it is committed to this important industry,” said Stefan Wolff of VDA.

Wolff views China as Germany’s biggest competitor in the spheres of battery and electric car production and development. “The Chinese government is investing heavily to make China number one in the automotive industry, and we have to fight it,” he added.

The competition from electric carmakers is already a reality. Tesla (TSLA) announced last November that it will build a “gigafactory” in the German town of Grunheide, where it will manufacture batteries, powertrains, and vehicles.

“There is a lot of ongoing change,” said Manfred Horstmann, vice president of technology and integration at GlobalFoundries, a U.S.-based semiconductor foundry. “The German car industry, the automotive industry, is in a transformation from combustion engines to electrical engines.”

But Horstmann believes the German car industry can catch up quickly.

However, to compete with companies like Tesla, German automakers will have to shift their production practices at great expense.

Martin Reuter, Europe-Middle East-Africa technical director for Mentor, a Siemens Business, said German automakers will have to invest in “future technologies that will enable them to recover from the decline.”

Unlike Tesla, which focuses on electronics, the big German carmakers currently deal with complex mechanical systems, mainly internal combustion engines.

“Traditional automotive companies are starting to shift to software,” said Burkhard Huhnke, vice president of automotive at Synopsys. “The problem is that the entire thinking process is different. It’s incredibly different and complex, and it’s not clear who can shift to a software and hardware stack and scale up. That is the new battle.”

Michael Lerchenmueller, design IP director at Cadence Design Systems, an electronic design automation software and engineering services firm in California, noted that “in the automotive area, we see a transition from traditional engines to electrical. Big companies are either partnering with smaller companies or [tier one companies]. It’s a dynamic situation right now. German carmakers are pragmatic. Maybe the technology is not necessarily always inside Germany, so they go to Israel, which is famous for hot startups. The collaboration is between the startups in Israel and the carmakers in Germany, which have the domain expertise and the system certification.”

Meanwhile, the German government is seeking to help workers in the auto sector.

Labor Minister Hubertus Heil said he will introduce wage subsidies for carmakers and their suppliers in order to prevent possible job losses.

The proposals require parliamentary approval.

"The car sector is undergoing a difficult transition phase and needs more flexibility to respond to a slowdown," said Carsten Schneider, deputy leader of the Social Democratic Party of Germany.

“In order for Germany to remain strong as an automotive production location and to provide employment, important value-added networks for the drive technology of the future such as batteries, power electronics, fuel cells must be maintained or built as completely as possible in Germany and its European environment,” NPM's Chairman Henning Kagermann said.