Watching one of Germany’s most renowned industries lose ground is somewhat unsettling; it wasn’t due to carelessness or ineptitude, but rather to a change that was so gradual that it seemed manageable until it wasn’t. Today, the rows of completed cars waiting in lots outside the Volkswagen headquarters in Wolfsburg feel more like inventory that no one is rushing to claim than a symbol of industrial might. Something has evolved. It is impossible to ignore the numbers.
Volkswagen saw a 36.6% year-over-year decline in sales in China during the second quarter of 2026. During that time, Mercedes-Benz and BMW both saw declines of over 30%. These are not insignificant variations. The largest auto market in the world is experiencing a slow-motion structural collapse, which German brands have spent decades cultivating with precision engineering and brand prestige.
Although they play a role, Chinese subsidies and currency manipulation are not the only reasons why this occurred. It is more profound. Combustion engine heritage, or the notion that a Mercedes or BMW carried something intangible in addition to horsepower, was the foundation for German automakers’ long-standing success in China. Young Chinese consumers no longer find that argument persuasive because they are more tech-savvy and drawn to connectivity features that European brands found difficult to match. Chinese consumers used to believe that German automobiles were just superior, as one German economist put it bluntly. They are now questioning why they should pay more for something they believe to be inferior.
China has been purposefully and, in many respects, brutally successful in promoting electric vehicles. For more than ten years, the state provided subsidies to EV manufacturers, resulting in an ecosystem of more than 100 rival brands that reduced costs and improved engineering quality. For the first time, pure electric cars surpassed combustion vehicles in sales in China by June 2026. That milestone was not reached by coincidence. It was constructed, financed, and refined into a reality.
Chinese automakers are now looking abroad as domestic demand has cooled, in part due to the reduction of those subsidies and in part because China’s overall economy is still recovering from the real estate crisis that began with Evergrande. They have their sights set firmly on Europe, and Germany in particular.
Policymakers in Europe have responded in different ways. Economists like Martin Gornig of the German Institute for Economic Research are skeptical that tariffs will solve anything, despite the fact that they have been proposed, discussed, and partially implemented. Gornig contends that imposing tariffs merely removes the competitive pressure that drives improvement, allowing European manufacturers to continue producing subpar electric vehicles. It is an ineffective form of protection. Tariffs by themselves are not a strategy, but there is a case for short-term targeted measures of the kind already allowed by OECD regulations.
Researchers in Berlin believe that Germany needs a willingness to select winners, which is more difficult to legislate. At a time when direction is crucial, German industry lacks a clear direction due to the policy of so-called “technology neutrality”—remaining purposefully indifferent about which technologies to support. Hedging is a kind of falling behind in a race this fast.
Whether Germany’s automakers can close the gap is still up in the air. BMW and Mercedes are updating their product lines for China, while Volkswagen is promoting a new line of locally produced electric cars there. However, they are attempting to catch up while their rivals are moving at twice the speed, as one industry advisor pointed out. The product pipelines are full of optimism, some of which may be justified. However, urgency-driven optimism differs from institutional habit-driven optimism.
Observing all of this, the industry is facing a version of itself that it did not anticipate. The notion that engineering excellence and brand heritage were enduring advantages helped Germany establish a reputation on a global scale. They were in combustion engines. It turns out that the competition for electric vehicles is different, with software, battery cost, and iteration speed being more important than decades of precision manufacturing tradition. China recognized this change earlier, made greater investments, and is now exporting the products at prices that European producers find nearly impossible to match without completely rethinking everything.
