BRUSSELS — China helped transform Germany’s automakers into global giants, delivering decades of strong sales and billions in profits. Now, it’s their biggest liability.
China’s own carmakers spent decades watching, learning and investing, and now, they make better-equipped electric cars at cheaper prices than Volkswagen, BMW and Mercedes-Benz. Meanwhile, China’s overheated car market — the world’s largest — contracted by a fifth this year, forcing local and foreign carmakers into a brutal battle for survival.
The fallout was clear this month as German carmakers reported their half-year results, with billions in losses and announcements of job cuts and factory closures across Europe.
“The environment has never been as heavy as we have faced today,” Volkswagen Group CEO Oliver Blume told investors. “When we look to the future, we have more and more risk coming.”
The industry’s troubles are yet another blow to Germany’s troubled economy and a growing political problem for Chancellor Friedrich Merz’s fragile coalition as key state elections loom this fall.
Broken dreams
Since the 1980s, China was the key to fat profits for German carmakers.
In return for gaining access to an enormous and fast-growing market, carmakers were forced by Beijing to set up joint ventures with local partners.
For decades the deal made sense — and made shareholders a lot of money.
But Chinese companies have surpassed their German rivals in technology in electric vehicles, which took off in China after the pandemic. German brands long enjoyed prestige among Chinese buyers, but they quickly shifted loyalty to local automakers with better technology and lower prices.
“They are losing big in China, and they may not be able to recover there anymore,” said Pedro Pacheco, an auto analyst with consulting firm Gartner.
The pain is increasingly being felt not in China but in Germany’s factories.
BMW announced this week it is cutting 8,000 jobs across Germany by the end of 2027 with severance packages going out to workers starting in October. Mercedes-Benz wants its workers to increase their hours from 35 a week to the full 40 — for the same pay.
And flagship automaker Volkswagen is in negotiations with unions to slash 100,000 jobs and shutter factories.
That’s serving as fuel for the far-right Alternative for Germany party, which is gaining ground in national polls and is using the automotive industry’s decline and job cuts to lambaste the government.
“Even key industrial companies such as Volkswagen, Porsche or Infineon are recording historic slumps in profits and are planning to cut hundreds of thousands of jobs in the coming years. This shows how far the deindustrialization of our business location has actually progressed,” Alice Weidel, one of the leaders of the AfD, said this week.
Merz and his coalition will get a first glimpse at how the cuts are playing out with voters in state elections this fall in the AfD’s eastern German strongholds of Saxony-Anhalt and Mecklenburg-Western Pomerania.
Poisoned chalice
While the automakers are doing well in Europe and North America, cratering sales in China are wiping out those profits and then some.
Faced with fierce competition and overcapacity at home, Chinese carmakers are exporting vehicles in record numbers. Europe is a prime destination: China now sells more cars in Europe than Germany does in China.
And European customers are happy to buy them. Sales of Chinese cars in the EU surged 63 percent in first half of this year, growing from 338,000 in 2025 to nearly 549,000 in 2026, according to the latest data from car lobby ACEA. That’s almost 10 percent of overall car sales.
While German car companies are uniquely dependent on China, even automakers with no presence there like France’s Renault are feeling the impact of rising Chinese car sales in Europe.
The surge in cheap Chinese cars with better technology is undercutting Renault and its low-priced Dacia models, said Matthias Schmidt, a European auto analyst. Dacia recorded an 8 percent decline in year-on-year sales in the first half of 2026, Renault reported on Thursday.
The European Commission is trying to help by slapping duties on made-in-China EVs following an anti-subsidy investigation, but the extra costs have done little to stop the influx. The duties do not cover plug-in hybrids, leaving a lucrative loophole for Chinese carmakers.
The shift in fortunes is prompting some European automakers to look at teaming up with Chinese companies.
French-Italian-American brand Stellantis is in a partnership with China’s Leapmotor, which saw its sales surge from just 7,701 in the first half of 2025 to 48,261 this year, according to ACEA.
Volkswagen’s Blume hinted at pursuing a similar strategy, telling investors the automaker could start producing some of its China-based models in Europe for European customers.
Olaf Lies, the premier of Lower Saxony, a key Volkswagen shareholder, said this summer that it would be a mistake for the carmaker to stand aside from China’s tech advances.
“Our goal must not be to isolate technological developments from one another,” he said.
But such a move risks damaging the German brand, warned analyst Schmidt. Those cars would essentially be Chinese with a VW logo, he said, which could entice consumers to buy the cheaper Chinese version instead.
Hunting for new markets
Europe’s automakers are also looking to save themselves by growing in emerging markets.
“North America, India and the Global South are tomorrow’s growth engines for us,” Blume said during the investor call.
Except the Chinese are already there. Across Southeast Asia and Latin America, Chinese brands dominate EV sales.
Europe’s battered carmakers are also hoping to profit from the surge in defense spending by offering their expertise in mass production.
Volkswagen is in “very advanced negotiations” with a defense company, Blume told investors, adding that he expects “a decision during this year.”
But some workers, particularly in Germany, are still wary of being associated with the arms industry.
There is also a risk of retaliation from Beijing.
Earlier this month, China put export restrictions on 14 defense and tech companies, including German defense giant Rheinmetall. While the actions were in retaliation for export restrictions placed on Chinese companies, automotive companies that dabble in defense could be at risk.
“European automakers need to tread very, very carefully because it is not just a quick win. It might seem as such, but once you get onto that chess board, you need to know how to play chess,” said Pacheco.
With his country’s biggest industry in deep trouble, Merz is trying to minimize the political backlash, warning voters in Saxony-Anhalt and Mecklenburg-Western Pomerania not to support the AfD in September’s elections.
“Take a close look; don’t let information from social media — no matter where it is coming from — be your only source. Instead, look at what the federal government is trying to accomplish,” Merz said earlier this month.
