German Auto Industry at a Crossroads - Production Slump and the Search for Growth - Could Brazil be the accelerator pedal it needs?
Preface
iMB.Solutions has been working on project missions in the automotive industry for over two decades now. Initially it was projects in Brazil, later project missions were added in Argentina and in recent years mainly in Mexico. Overall, the automotive industry and its suppliers account for around 25% of all projects in the last two decades. On average, we have worked on 1 to 2 projects per year in this industrial sector.
We have already worked successfully on various missions in Brazil, Argentina and Mexico for a long-standing European client in the automotive supplier industry. A few weeks ago, against the current background of the geo-economic situation, the client approached us to integrate us into their global project as a sparring partner for strategic scenario generation. Depending on which scenarios are subsequently suitable for implementation, we will also provide strong support for this second part. The focus is on the scenarios to bring more value creation back to the regions and to give Brazil a high priority with regard to the Americas region. The operations of our clients in Mexico are not to be extended, but smartly integrated.
In the summary of the overall picture, very interesting lines and facts emerged, which will be presented in an aggregated form in this blog. Care was taken to ensure that no sensitive information about our client was used and that no direct conclusions could be drawn. The text was agreed with our client before publication.
The Historic Monocle
Over the past decade, Germany's automotive industry has experienced a paradoxical shift. While production levels have fallen by approximately 27%, the total workforce in the sector has grown by 7%. This divergence highlights significant challenges in productivity and innovation, raising concerns about the industry's ability to adapt to global trends and maintain its competitive edge.
Domestic vehicle output has plunged, yet tens of thousands of workers still remain on the payroll, straining productivity. According to the Bundesbank, German car production peaked in 2017 and by 2023 was about 15% below that level. Major OEMs confirm the trend: Volkswagen sold 10.7 million cars in 2017 versus 9.2 million in 2023, while BMW and Mercedes-Benz also saw multi-year declines. Yet the industry still “directly employs 780,000 people” in manufacturing roughly 700–800K according to other estimates. The result is shrinking output per worker. In other words, falling demand and production have outpaced staffing cuts – a recipe for high unit costs. Companies are responding: recent surveys show many automakers in Germany are already planning job cuts to right-size capacity and restore profitability.
Structural Headwinds: Productivity, Innovation and Regulation
Beneath the production figures lie deeper structural challenges. Germany’s auto industry has long been a high-cost model: strict labor agreements, high wages, and expensive energy (especially since 2022) all put pressure on productivity. Analysts warn that German OEMs must “adjust their footprint” to match the lean cost bases of cheaper Asian competitors. Many manufacturers are cutting production and outsourcing components to lower-cost locations to narrow the gap. For example, BMW and VW have shifted parts production to Eastern Europe and suppliers in Asia to stay competitive. The result is that every saved percent in cost can make a difference against rivals who can undercut on price.
Innovation gaps compound the issue. German automakers remain engineering powerhouses, but they have been relatively slow to adapt digital and EV technologies. A software consultant notes that “digital transformation of German automakers has been very slow”. An industry survey even found the national digitalization index fell slightly in 2023, as companies hold back IT investments amid inflation and energy-price shocks. EU data protection, AI and other regulations can also slow adoption of new systems, according to practitioners. In short, plants in Germany are still geared around traditional manufacturing. While the country does lead in green-tech innovation – for instance, one study found German carmakers have built up substantial green patents and skilled labor for EVs – crucial infrastructure and policy support lag behind. The Bundesbank notes that in Germany, charging networks are still underdeveloped and policy signals unclear, creating uncertainty for factories and consumers .
Regulatory complexity is another drag. The industry faces a thicket of EU rules (CO₂ limits, battery mandates) and shifting targets for ICE phase-outs. Domestic policies (e.g. tax incentives) have sometimes been debated or reversed. High German energy taxes and the end of coal power by 2030 raise power costs further. Meanwhile, international trade risks loom: proposed U.S. EV tariffs or any China–Europe trade disputes would hit Germany’s export-led model. As one analyst put it, German automakers now wrestle with “high energy and labor costs” at home while Chinese competitors “arrive on the continent,” and an uncertain global trade backdrop.
Going Global - Betting on Brazil and Other Markets
With home-market demand lackluster, German OEMs are pushing harder overseas. Overseas investments can offset weak European sales, leverage cheaper production, and tap growth in emerging economies. Brazil is an illustrative focus. Latin America’s largest economy has long been an automotive hub: 2021 production hit over 2.2 million vehicles (the world’s 8th largest). Now Brazil is incentivizing green tech aggressively through its Mover program. The government has earmarked ≈R$19.3 billion (about US$4 billion) in tax incentives from 2024–2028 to encourage decarbonization efforts. In practice this means producers can get big breaks if they build hybrids and EVs locally. Automakers are responding. In 2024 alone the industry collectively pledged 70 billion reais (over US$14 billion) in new investments to Brazil, mostly for EV and hybrid projects.
German brands have announced notable plans: Volkswagen said it will commit an extra R$9 billion (US$1.8 billion) over five years to its Brazilian operations, launching 16 new models including the country’s first hybrids and an all-electric pickup. VW’s planned lineup already pushed its market share above 15% in 2023. Mercedes-Benz and BMW, by contrast, maintain smaller footprints (luxury market shares of a few percent), though Mercedes does localize some vans and trucks. Still, the green agenda is clear. VW will build a high-tech pickup in Paraná state and introduce a hybrid engine line in São Paulo plants.
Global expansion extends beyond Brazil. Germany’s OEMs have also invested heavily in Turkey, Mexico, China (where partners like FAW and SAIC build VW/Audi/MB models), and the U.S. Such moves diversify risk and access new customer segments. But they also require navigating local regulations and competition. In China, for example, German brands have underperformed: BEV sales by VW and BMW there are low, and German market share has slipped from 26% in 2019 to under 19% in 2023. In the U.S., VW’s Chattanooga and MB’s Tuscaloosa plants export SUVs globally, but still face duties and localisation rules. The key lesson: going global is unavoidable, but incumbents must tailor strategies to each region.
The Innovator’s Dilemma and EV Disruptors
German automakers are classic incumbents facing Clayton Christensen’s “innovator’s dilemma”: thriving on established technology (ICE and high-margin internal combustion models), yet at risk of being blindsided by disruptive newcomers. The clearest disruption today is electric vehicles, pioneered by Tesla and increasingly by Chinese startups.
Tesla’s model – millions of direct-to-consumer sales of sleek BEVs with software updates – forced all legacy makers to pivot. Yet Tesla’s growth is now stalling in Europe: in early 2025 Tesla’s share of EU+EV registrations plunged to just 9.6%, its lowest in years. Meanwhile, established players have clawed back market share: VW’s BEV sales were up ~180% year-on-year (nearly 20,000 units in one month), and BMW (including Mini) sold roughly 19,000 BEVs in Feb 2025. Notably, Chinese brands now collectively outsell Tesla in Europe – BYD and Polestar together shifted more EVs than Tesla in that period. This highlights a dual-threat: legacy Europeans (VW, BMW) have quickly launched competing EVs, and Chinese firms (BYD, Xpeng, NIO, Geely’s brands, etc.) are undercutting on price and expanding internationally.
BYD illustrates the point: global sales data show BYD’s EV output (≈1.78 million units in 2024) just edged above Tesla’s (≈1.77 million). Industry forecasters now project BYD will claim a 15.7% global BEV market share in 2025, surpassing Tesla for the first time. BYD’s innovations (e.g. ultra-fast charging technology) and vertical integration – plus Chinese government support – give it a cost advantage. Other Chinese players like MG (China’s SAIC) and Geely’s brands are targeting Europe’s and Latin America’s mass markets too.
For German auto leaders, the implication is stark. If they focus only on improving existing ICE models, they risk losing ground to nimble EV makers. Instead, they must treat electrification as a new growth platform, even if that cannibalizes some ICE profits. This means investing heavily in EV R&D, software (autonomous driving, connectivity), and new business models (e.g. subscriptions, over-the-air services). It also means embracing digital manufacturing: automated, data-driven plants, and AI in design and logistics. Some progress is visible – VW has launched the ID series, Daimler and BMW have new EV lineups – but Europe’s incumbents must speed up or cede more share to disruptors.
Case Study Brazil: German OEMs vs Stellantis
Our Client supplies to German Carmakers and Stellantis in Brazil - Lessons Learned
The comparison between the German automotive industry and Stellantis in Brazil highlights stark differences in strategy, innovation, and market adaptation. These differences reflect broader trends in the global automotive sector and underscore the challenges and opportunities for each player in the Brazilian market.
Brazil provides a telling comparison of strategy in action. The merged Stellantis group (Fiat Chrysler/Peugeot) dominates the market with roughly 30% share. Its brands (notably Fiat and Jeep) have long catered to Brazilian tastes – small, flexible-fuel cars from Fiat and rugged SUVs from Jeep – and Stellantis has invested heavily (R$30 billion announced for 2025–30) to introduce 40 new models including flexible-hybrids. The payoff is visible: Stellantis leads sales by a wide margin.
German firms, once also strong in Brazil, now trail. Volkswagen’s share is around 16–17%, with models like the T-Cross SUV and Nivus hatchback (shared with Brazil’s budget market) plus import lineups. To reclaim momentum, VW announced those R$9 billion upgrades – the first Brazilian-made hybrids and an electric vehicle – and it has steadily climbed to a 15.8% share in 2023. BMW and Mercedes remain niche (luxury segments), each with single-digit shares. Even so, all German OEMs are betting on the green transition in Brazil: VW is building its first EVs there, and Mercedes-Benz has launched a local EQB (electric SUV) factory.
Yet Stellantis’s Brazilian strategy – broad local manufacturing, models for every segment, and integration of digital production – still gives it an edge. German companies operating in Brazil have learned they must localize offerings and invest for the long haul, not merely export European models. The Stellantis case suggests that global scale alone is not enough; success requires deep regional roots and agility.
Market Presence and Strategic Focus
German Carmakers in Brazil:
German automakers like Volkswagen have a long-standing presence in Brazil, with deep-rooted production facilities and a focus on traditional internal combustion engine (ICE) vehicles. However, their strategies have often been reactive rather than proactive. For instance, Volkswagen has faced production halts due to supply chain issues and economic challenges, such as high inflation and interest rates, which have impacted vehicle sales. Additionally, German automakers have been slower to pivot toward electrification and alternative mobility solutions in Brazil, focusing instead on maintaining their legacy operations.
Stellantis in Brazil:
In contrast, Stellantis has adopted a forward-looking approach. With a 31.4% market share in Brazil as of 2024, Stellantis leads the market by leveraging its diverse brand portfolio and aggressive investment strategy. The company has committed €5.6 billion to South America from 2025 to 2030, focusing on launching over 40 new products, including vehicles powered by innovative "Bio-Hybrid" technologies that cater to Brazil's ethanol-based fuel infrastructure. This demonstrates Stellantis' ability to align its strategy with local market demands while also advancing decarbonization goals.
Innovation and Sustainability
German Carmakers:
German automakers in Brazil have largely focused on incremental innovations rather than disruptive technologies. Policies like Inovar-Auto and Rota 2030 have encouraged localized production but have not significantly driven technological breakthroughs. As a result, German carmakers continue to rely on their global R&D networks for innovation, with limited local autonomy for developing new technologies.
Stellantis:
Stellantis stands out for its emphasis on sustainability and open innovation in Brazil. Its SUSTAINera initiative promotes circular economy principles by offering remanufactured parts that reduce raw material usage by up to 80% and CO2 emissions by up to 40%[2]. Furthermore, Stellantis has embraced partnerships with startups through its open innovation program, fostering local technological development and aligning with its global "Dare Forward 2030" strategy.
Adaptation to Local Market Conditions
German Carmakers:
German automakers have faced challenges adapting to Brazil's unique economic conditions. High costs of production, reliance on imported components, and economic volatility have led to inefficiencies. For example, Volkswagen recently halted production at several plants due to supply chain disruptions and declining demand. This reflects a lack of agility in responding to local market dynamics.
Stellantis:
Stellantis has demonstrated greater adaptability by integrating local resources into its operations. The company's investment in biofuel-compatible hybrid technologies is a prime example of tailoring products to Brazil's ethanol-rich market. This adaptability has allowed Stellantis to maintain robust production levels and expand its market share despite economic challenges.
Investment in Future Mobility
German Carmakers:
While German automakers are global leaders in EV technology, their efforts in Brazil lag behind those of competitors like Stellantis. Limited investment in local EV infrastructure and a focus on ICE vehicles suggest a slower transition toward future mobility solutions within the region.
Stellantis:
Stellantis is actively investing in future mobility through initiatives like the development of Bio-Hybrid powertrains and fully electric models tailored for South America. These efforts position Stellantis as a leader in sustainable mobility within the region.
Strategic Takeaways for German Auto Leaders
Germany’s car industry is in the midst of a profound transformation. The data and trends above suggest several key imperatives for executives and policymakers:
Boost Productivity and Flexibility: Align costs with output. This means more automation in plants, leaner production lines, and flexible labor arrangements (e.g. upskilling, modular teams). Citing Fitch, companies are making “long-term adjustments so that the fixed cost base matches those of cheaper Asia-Pacific players”. In practice, that might mean partial offshoring of components or even whole models, or convertible factories that can quickly shift between ICE and EV lines.
Accelerate Innovation and Digitalization: Invest in R&D and software. German OEMs have strong “green patents” and talent, but they must close remaining gaps. Rapidly integrate artificial intelligence, IoT and Industry 4.0 in design, supply chains, and production. Partnering with tech firms or startups (e.g. autonomous-driving alliances) can speed this up. Also, work with the government to improve digital infrastructure and training programs, as the country’s digitalization index has stalled.
Lead the EV Transition: Treat electrification as a top priority, not a sideline. This could mean creating separate EV divisions or joint ventures (as some Chinese and Japanese firms have) to overcome internal resistance. It also implies securing battery supply – either through European co-projects or direct stakes in mines/refineries – since control of battery tech is now a bottleneck. Lobby for clear, long-term EV policy (tax credits, charging grids) so that consumers adopt new models and factories have predictable demand.
Deepen Global Diversification: Expand beyond Europe aggressively, but with smart localization. Brazil shows the value of market-specific models and local partnerships. Similar playbooks may apply in Southeast Asia, India, and Africa: for instance, producing small ICE/EV cars in India for Asia, or flexible-fuel vehicles in Latin America. At the same time, German OEMs should guard their home turf by upgrading dealerships to EV service centers and by importing high-end EVs (like Mercedes-AMG Electric, Porsche EVs) to maintain brand strength in Europe.
Monitor Competition Closely: Stay alert to disruptors. Tesla’s recent stumble in Europe doesn’t mean it’s out of the game; its brand and tech remain influential (and Tesla may recover via new models). Chinese automakers are clearly on the march globally. Strategic partnerships, joint R&D (e.g. VW–QuantumScape for batteries), or even minor equity stakes could help German firms learn from and compete with these competitors.
Final Thoughts
The decline in German automotive production coupled with workforce growth paints a picture of an industry struggling to balance tradition with transformation. The next decade will be critical for German automakers as they navigate electrification, global competition, and structural inefficiencies. To remain relevant on the world stage, Germany must prioritize innovation over complacency—transforming challenges into opportunities for sustainable growth.
The development of German carmakers in Brazil serves as a microcosm of the broader challenges facing the industry: balancing efficiency with innovation, adapting to diverse markets while maintaining global competitiveness, and addressing structural inefficiencies. While their presence in Brazil has bolstered production capabilities and market reach, it also highlights missed opportunities for driving disruptive change.
As Germany’s automotive sector navigates its own transformation amid declining domestic production and rising global competition, its experience in Brazil offers valuable insights into how strategic adaptation can help—but also where it falls short without a stronger focus on innovation and long-term vision.
The comparison between German carmakers and Stellantis in Brazil reveals two distinct approaches. German automakers rely on their legacy strengths but struggle with agility and innovation tailored to local needs. Stellantis, on the other hand, exemplifies a proactive strategy that combines sustainability, innovation, and market alignment.
For Germany’s automotive giants, the success of Stellantis in Brazil serves as both a challenge and an opportunity—a reminder that adapting to local conditions while embracing disruptive innovation is essential for maintaining relevance in an increasingly competitive global market.
In sum, Germany’s auto executives and policymakers must treat today’s downturn as a wake-up call, not a crisis to be ignored. The industry’s future leadership will depend on bold strategy and adaptation – raising productivity at home while seizing growth abroad, and embracing the technological shifts reshaping mobility. Those who navigate this transformation successfully will help Germany’s auto sector emerge not just intact, but globally resilient and innovative.
