Despite having produced some of the most recognisable automotive brands in the world, there is a perception that Germany is losing its competitive advantage in the car industry. Case in point — the country’s flagship marque Volkswagen lost its sales leadership in China to BYD last year. Meanwhile, Tesla handily outperformed Mercedes-Benz, BMW, and Audi in America’s luxury segment.

Not only that, the growing presence of Chinese automakers in Europe has even prompted calls for protectionism from various lawmakers in Berlin and Brussels. The German automotive industry has a turnover of over USD 450 billion, employs over 786,000 people, is the country’s foremost export sector, and is also a major contributor of soft power. Hence, if the competitiveness of the sector declines, it would eventually endanger Germany’s economic future and exacerbate the nation’s geopolitical and social problems.

But will trade barriers help German carmakers, considering that subsidies are not the only factor driving their rivals’ growth? After all, the future of the automotive value chain will be centred around software, digitalisation, and artificial intelligence (AI)—domains in which German automakers lag behind their American and Chinese counterparts.

This was best exemplified by the Wards Intelligence Software-Defined Vehicles (SDV) Rankings, in which none of the German brands made it amongst the top performers. Instead, the leading spots were taken by Tesla, Lucid, Rivian, and NIO. Mercedes-Benz was the highest-ranked German company at seventh, followed by BMW (tenth) and Volkswagen Group (eleventh). 

“All leaders are … digitally native, and adopting a software-first approach throughout their organisations,” the report stated. “This is predominantly rooted in the clean slate that these OEMs possess, enabling them to move faster and adapt more quickly to market dynamics and customer preferences. In fact, their accelerated pace allows them to shape trends and customer expectations.”

Make no mistake, German brands are investing heavily in software solutions, especially those relating to connectivity and safety, e.g., infotainment, advanced driver assistance systems (ADAS), and autonomous mobility. However, the widely reported problems at VW Group’s tech division, Cariad, underscore the steep learning curve that they face. 

Established in 2020 under then-CEO Herbert Diess to accelerate the company’s digital transformation, Cariad has often struggled to meet its goals, losing over USD 2.5 billion in 2023 and forcing VW to postpone the launch of models from Audi and Porsche. If that wasn’t enough, Diess had to step down as the group’s CEO in 2022, owing in part to Cariad’s failures.

That said, even though his successor, Oliver Blume, has restructured the subsidiary, the 56-year-old has also spearheaded VW Group’s USD 5 billion investment in Rivian in order to access the latter’s SDV know-how. While such collaborations are undoubtedly a step in the right direction for VW, critics argue they also reinforce the notion that German manufacturers have indeed fallen behind in the digital race.

Nonetheless, one must also remember that Germany’s structural deficit in digitalisation weighs on its car industry. Indeed, in the European Union’s Digital Economy and Society Index (DESI), Germany was ranked 19th in digital skills, 21st in overall internet take-up, 22nd in digital public services for businesses, and 13th in AI, cloud computing, and data analytics. Even more worryingly, only 23 percent of Germans anticipate any major progress in this domain over the next few years (as per the European Centre for Digital Competitiveness).

As yet, if German auto companies do not get on top of this quickly, they risk substantial commercial and financial losses.

According to Boston Consulting Group (BCG), SDVs represent a USD 650 billion value potential by 2030, with 90 percent of car features to be differentiated via software. Another report by Deloitte found that consumers in China and India are more interested in connected services than those in developed markets –a crucial finding as China and India together represent over a third of the world’s population and two of the three largest auto markets.

“German carmakers … got rich on the back of profits from building high-quality internal combustion engines and all the parts (gearboxes, axles, differentials, etc.) that are necessary to convey power from such engines to a car’s wheels,” said Yanis Varoufakis, former Finance Minister of Greece, in a column for Project Syndicate. “But electric vehicles are mechanically much simpler to engineer. Most of their added value comes from artificial intelligence and smart software connecting the car to the cloud …”

Needless to say, German automakers need to excel in digital technologies in the same manner they have in hardware technologies and advanced manufacturing. In fact, as the nation’s leaders in R&D (research and development) and innovation, they ought to take the lead in this regard. Ultimately, they do have the resources for it. It is just that they have been too complacent in creating the necessary environment for software-led growth. 

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