The dark side of the car. Every country has its own problems – keep an eye on China

No one has any doubts about the disease any longer: having erupted in Europe, it is spreading to all the wealthy, satiated nations of the West. The diagnosis is far more uncertain, and as for remedies, we are proceeding by trial and error. Experts take turns at the automobile’s bedside; they may not be Pinocchio’s doctors, but like the crow, the owl and Jiminy Cricket, they too are exchanging hypotheses and prescriptions. It’s the Chinese syndrome, caused by electric cars. No, it’s the American syndrome, and the epidemic broke out because of Trump’s tariffs. Wrong, dear colleagues; it’s the Brussels syndrome, caused by the follies of the ‘green revolution’. Are they all wrong? It’s better to say they’re all a bit right, because we’re at the convergence of the three syndromes, and it is precisely their intertwining that makes the illness more serious; that is why it must be resolved as soon as possible. How – by diversifying the approach? In other words, does this mean making cars in Europe for Europeans, in the Americas for Americans, and in Asia for Asian markets? It’s a process already set in motion by Volkswagen itself: it will produce its electric cars in China; but let’s not jump to overly simplistic conclusions. The figures are staggering. There are 90 factories in Europe; at least 35 are set to close, according to Boston Consulting, which estimates a surplus of 5.4 million cars. The crisis is affecting both manufacturers and suppliers: 85 per cent of German automotive companies are experiencing a fall in orders, 57 per cent a reduction in profitability, and 98 per cent require restructuring, according to estimates by the consultancy firm Porsche Consulting. Oliver Blume, CEO of Volkswagen, has said that, once the excess capacity is factored out, the group’s production capacity falls from over 12 million to 9 million vehicles a year. There are too many plants, but above all they are too expensive and unproductive. Building and selling a car is far less profitable than it was a few years ago, even though it requires more capital. The problem is not turnover, but profitability, which has fallen to an average of 3 per cent from 7–8 per cent. In 2025, net profits fell across the board, with Elon Musk’s Tesla faring the worst (–40 per cent), followed by Toyota (–20 per cent). Even BYD is feeling the effects of this mixed climate of uncertainty and mistrust.

The fever had been smouldering for a long time before it erupted in full force. And it is no coincidence that it has hit Volkswagen particularly hard. There is an anecdote doing the rounds in the motoring world. One fine day, in the early 1990s, an influential delegation sent from Beijing arrived in Turin, knocked on the door of the building at 10 Corso Marconi – Fiat’s historic headquarters – and asked to meet the group’s top executives, starting with Gianni Agnelli himself. The former Corazzieri, traditionally employed as security guards, sized up the Chinese officials, who were still wearing so-called ‘Mao-style’ jackets, but – ever loyal to those who pay their wages – didn’t bat an eyelid. ‘The Lawyer’, who was usually punctual to a T (arriving before 8 am and leaving before 9 am), was out and about who-knows-where, so the big boss, Cesare Romiti, was happy to receive them. After the customary pleasantries, the emissaries explained that they had come to propose opening a Fiat plant in their country, recalling what had happened in the Soviet Union with Togliattigrad in 1966. Romiti thanked them and explained that Fiat would gladly have built vans to support the first of the four modernisation programmes launched by Deng Xiaoping: the agricultural one. In his view, a mass market for cars was still a long way off. Disappointed, the special envoys crossed the Alps and travelled to Wolfsburg, the factory town founded in 1938 by Hitler, known as ‘Kraft durch Freude’ (strength through joy), where they are welcomed with great fanfare by Volkswagen’s top management, who say they are willing to produce not only cars for the people, but also saloons for the new emerging class that wants cars like the Jetta – more popular in Beijing than in Europe – for travelling, but also (indeed, above all) to make a statement. Since the last decade of the last century, the Red Dragon has opened up a vast export market, and VW has come to sell around 40 per cent of its global production in China; indeed, BMW and Mercedes have also generated a significant portion of their profits thanks to Chinese demand. Fiat, which had become the market leader in Europe in 1988, is now a minor brand within the vast Stellantis conglomerate. Volkswagen has risen to the top of the world.

Germany exported technology, expertise and manufacturing capacity, whilst the Middle Kingdom offered vast and insatiable demand impossible to find elsewhere. That exchange, built with such shrewdness and determination, has now been turned on its head: the servant has become the master. Chinese companies are no longer mere customers. They are competitors. BYD has even overtaken Tesla in global sales of electric vehicles. Geely controls European brands such as Volvo. CATL dominates global battery production. Chery is establishing its industrial presence in Europe. Now it is Beijing that is making inroads not only into the rest of Asia, but also into the Americas and Europe. This shift has become unstoppable since the pandemic and is being driven by electric cars. The shockwave rocking Germany – spreading from the economy to politics – lies at the heart of this crisis. There is no single cause: some markets, such as the European one, are now saturated; disaffection with combustion engines is growing, particularly among new buyers – starting with the youngest, who, especially in Europe, use cars but prefer not to own them. Manufacturers had hoped to offset the fall in domestic demand with Asian markets. However, that outlet has begun to close. The Chinese car market, which accounts for 30 per cent of the global market and 75 per cent of the electric vehicle market, has stopped absorbing German cars. Volkswagen has fallen from its all-time high in 2019 of 4.2 million cars sold to 2.7 million in 2025. This decline is due to competition from domestic manufacturers, particularly BYD, Geely and SAIC Motor. Last year, Chinese brands increased their domestic sales by 16.8 per cent compared with the previous year, exceeding a 70 per cent market share; by contrast, German brands saw a 7.7 per cent decline. And it doesn’t end there. Between April and June, BMW recorded a 4.9 per cent fall in global deliveries to 590,962 vehicles, with a 30.2 per cent drop in China, only partially offset by growth of 11.9 per cent in the United States and 7.6 per cent in Europe (excluding Germany). Mercedes-Benz fared even worse, with 417,800 cars, 8 per cent down on the same period in 2025, with China down 30 per cent compared with a 10 per cent increase in the US and a 4 per cent rise in Europe. The most significant decline was seen at Volkswagen (including the Audi brand): the group ended the quarter with global deliveries down by 8.6 per cent, with a 36.6 per cent slump in the Chinese market, whilst North America (+7.7 per cent) and Western Europe (+1.8 per cent) held their ground.

All this is reminiscent of what has already happened with Japan, which became the undisputed leader in car manufacturing by changing both the way cars are produced (the Toyota system has rendered the Ford-style assembly line obsolete, offering a significant advantage in quality, not just in productivity and costs) and the product itself, with that blend of electric and combustion power now the prevailing system in the automotive sector. The Europeans and Americans also reacted to Japan with protectionism, but it didn’t work; the market prevailed, and customers bought Toyota pick-ups and Corollas en masse, followed by the hybrid Priuses. The group, which has always remained in the hands of the Toyoda family, retains its global leadership, but for how long? China has already taken up the baton, becoming the country that churns out the most cars. So those who speak of the ‘Chinese syndrome’ are right. Yet this is only part of the truth; what is happening goes beyond Asian competitive prowess. Industry historians draw parallels with what happened – without going too far back in time – in the mining, steel, household appliances, basic chemicals and shipbuilding sectors, and not just in traditional industries. Take personal computers, for example: IBM was the first to pull out, selling its business to the Chinese firm Lenovo. Now something similar is happening in the smartphone sector. Western (European and American) cars are technologically behind. The combustion-engine car remains competitive, but it appears to be a relic of a past which, whilst slow to die out, is destined to disappear. Electronic and digital components account for 20–25 per cent of a car with an internal combustion engine, 35–45 per cent in hybrids, and 70 per cent or more in electric vehicles. Without a move further up the value chain, this manufacturing sector too is destined for decline.

For the first time since the 1990s, Germany no longer appears to be the industrial model that the rest of the world seeks to emulate. Instead, it finds itself up against competitors who have learnt from, adapted and, in some cases, improved upon parts of that system. It is human, all too human, to harbour a sense of Schadenfreude. The Germans have long taught the world how to manufacture in order to excel; now they are forced to admit that their system worked under certain conditions that have since changed, starting with two former competitive advantages: the cost of Russian gas and the Chinese market. Blume has proposed a drastic remedy for Volkswagen: the closure of four plants, resulting in 100,000–120,000 redundancies by 2030; the Audi plant in Brussels is also at risk, and the one in Dresden is to be shut down. The supervisory board, which also includes employee representatives, rejected the plan by 12 votes to 7. Apart from the Porsche family, which owns 53 per cent, the state of Lower Saxony and the Qatari fund are the second and third largest shareholders respectively. We shall see how this standoff plays out.

Volkswagen’s success has not always been a bed of roses, but the company has come to be identified with the German model; now, the social market economy too has reached a crossroads between the social and the market. Following the collapse of Nazism, the company founded by Hitler seemed destined to disappear had it not been for an Englishman, Ivan Hirst, and Ferry Porsche, son of the engineer Ferdinand, to whom the Führer had entrusted the task of building a car for the people, and who was imprisoned in France after the defeat. Whilst retaining a key role within the family, the heir devoted himself to luxury cars; mass-market vehicles were the domain of Ferdinand Piëch, the husband of his sister Louise. This division of labour lasted until Ferry’s death in 1998; then, at the turn of the new millennium, tensions began to arise, until in 2005 Wolfgang Porsche, Ferry’s son, launched a takeover bid for the group and came to own 74 per cent of the shares, only to be overwhelmed by debt. The 2008 financial crisis and the enormous debt accumulated as a result of the takeover attempt then led to a reversal of fortunes: in 2009, Porsche was forced to abandon the takeover bid, and it was ultimately Volkswagen that absorbed its automotive business.

From 2012 onwards, an increasingly integrated group began to take shape and peace was made amongst the heirs. With a solid majority in the hands of the Porsche-Piëch family, the financial turmoil and instability came to an end – until 2015, when Dieselgate broke out (many diesel engine emissions tests had been rigged), a scandal that cost billions and led to a collapse in the company’s reputation. As crises give rise to change, the group began to focus on China – no longer merely as a sales market, but as a genuine lifeline. It worked a treat until the pandemic struck.

Volkswagen remains a formidable social safety net (it currently employs almost 300,000 workers in Germany, 40 per cent of the group’s workforce) and one of the pillars of the social market economy – that ‘third way’ which entrusts the state with a central role not only as a guarantor but also as an active participant, alongside the dual governance structure featuring a supervisory board separate from the management board. The supervisory board comprises not only shareholders but also representatives from politics, regional government and central government, mostly via KfW, the public reconstruction bank. Added to this, in varying degrees of strength, is co-determination (Mitbestimmung), which reserves seats on the board for both the single trade union and the direct representatives of the employees. The state and the trade union ensured consensus when things were running smoothly and managed dissent during times of crisis, but today they may become two burdens that limit innovation and hinder restructuring. This has sparked a tense debate that could even lead to a new ownership structure, perhaps through an industrial-financial deal that further dilutes the state’s influence on the supervisory board. In short, the model needs to be fundamentally rethought, just as the Trump bombshell is exploding.

Last February’s Supreme Court ruling clipped the claws of Trumpian protectionism and brought some relief, but the US president continues with his ‘beautiful tariffs’. On Friday 1 May, he announced that he would raise customs duties on cars and lorries from the EU to 25 per cent, up from the 15 per cent previously agreed, citing Brussels’ failure to comply with the trade agreement reached last summer. According to the Kiel Institute for the World Economy (IfW), the increase in tariffs on the automotive sector could cost Germany nearly 15 billion euros in terms of total output. Tariffs of 25 per cent could impose an additional annual burden of around 2.5 billion euros on German car manufacturing. Although the new offensive is directed against the European Union, Germany actually appears to be the main target, as Ferdinand Dudenhöffer, director of the CAR (Centre for Automotive Research), points out. “Given that exports by foreign manufacturers to the United States are negligible, Trump’s new tariff threats can also be interpreted as the start of an economic war against Germany.” Whilst the direct impact affects German manufacturers, the more structural impact concerns the European supply chain as a whole, starting with Italian components. Has the American industry really benefited from this? The American market is more closed than the European or Asian markets, but fifteen months after ‘Liberation Day’ on 1 April 2025, there is no sign of any significant positive impact from the tariffs, neither on manufacturing employment nor on the trade balance. On the other hand, there has been a substantial upward pressure on prices, whilst the so-called ‘repatriation boom’ has not materialised, apart from a few symbolic examples in the automotive sector. Let’s wait and see; perhaps it is still too early. The Federal Reserve Bank of New York estimates that 90 per cent of the economic burden caused by the tariffs has fallen on businesses and consumers, in varying proportions. The Yale Budget Lab estimates that this has led to a price rise in essential consumer goods of between 46 and 86 per cent. The trade deficit has grown by $77.6 billion. Few sectors of the domestic economy have benefited (steel, for example), whilst small and medium-sized enterprises unable to absorb the costs have suffered heavy losses. There has also been a sharp slump (–44 per cent) in electronics production and microprocessors. Increasingly, the US real economy is being driven by investment in data centres and energy infrastructure, which are siphoning off a large proportion of capital, and there is no sign of a repatriation boom, writes IoT Analytics.

The automotive crisis has already had a negative impact on German industrial production, which has been falling for four years, whilst gross domestic product is growing only slightly (0.6 per cent this year and 0.7 per cent next year). The economic interdependence with the Italian economy is extremely close and a cause for concern. In 2025, Italy exported goods worth €72.2 billion to Germany and imported goods worth €85.5 billion, resulting in a trade deficit of approximately €13.4 billion. The main goods exported are metals and metal products, worth 10.8 billion (including car components), followed by machinery and industrial equipment, worth 9.7 billion; these are followed by transport equipment, food, fashion and chemicals. The impact on the components sector, however, has not yet been felt (between 2020 and 2025, exports rose from 4 to 5 billion euros) because Italian firms have partly made up for the loss of German suppliers who have gone out of business; in short, there has been a shake-out in the supply chain. As the crisis worsens, the effects will no longer be marginal, but widespread and massive. The real question, however, is not whether Volkswagen, BMW and Mercedes will manage to weather this phase. The question is whether Europe will manage to retain control of the production capacity, technologies and supply chains that have underpinned its industrial prosperity. In short, the challenge facing the German car industry is not about the future of three companies, but about Europe’s industrial future.

Much of the debate centres on tariffs, batteries and incentives, yet one of the most underestimated factors is energy. Manufacturing batteries requires enormous amounts of electricity. Powering a gigafactory entails energy costs that directly affect the product’s ultimate competitiveness. For years, German industry has benefited from an energy system that ensured competitiveness and predictability. Today, the cost of energy has become a strategic industrial variable, and this variable affects everything: batteries, industrial chemistry and, of course, components. The real question in the coming years may no longer be where to build cars, but where it will be economically viable to build batteries: Chinese exports have increased sevenfold between 2020 and 2025.

The backlash against the green transition feels old and stale. The European Commission mandated that CO₂ emissions from cars manufactured in the EU must be reduced by 55 per cent by 2030 and phased out by 2035, when production of cars with internal combustion engines was due to cease. The European car industry was not ready and was slow to react. When it did react, it found a market already dominated by cheaper and more digitally advanced Chinese cars. The entire automotive lobby has mobilised to ask Brussels to extend the deadlines, if not to backtrack altogether. In Italy, Confindustria, backed by the government, is calling for a suspension and a review of the ETS (CO₂ emission allowance) market. Resisting, resisting, resisting is pointless and misguided. EU tariffs on electric cars, since their introduction, have reduced the share of vehicles produced in China (including those by Western carmakers) by five percentage points, but they have not halted the expansion of Chinese brands. Many manufacturers are gradually shifting part of their production to Europe, yet imports of Chinese cars continue: they cost less (on average 21 per cent) and perform well.

Oliver Blume and Antonio Filosa, the CEO of Stellantis – which in turn aims to cut production in Europe by 17 per cent (not in Italy, where the crackdown has largely already taken place) – have appealed to the European Commission in a jointly signed open letter calling for action. The idea of making Europe a stronghold for the internal combustion engine is a losing one; the Japanese example is there to prove it. Moreover, it slows down technological development and thus exacerbates the crisis in the automotive sector and, with it, in European manufacturing. In reality, what is needed is to launch a genuine industrial plan. The most effective precedent was the steel industry plan implemented in the 1980s (drafted by Commissioner Davignon), which envisaged a drastic reduction in basic steel production, including the closure of old, unproductive steelworks, to make way for special steels with higher added value. This paved the way for Indian, Korean, Chinese and Algerian companies, but the steel industry has not abandoned Europe; it has instead focused on the high end of the value chain. Naturally, things are even more complex today.

The old guard is holding out and sending out unclear messages. “For the car industry, the transition to electric vehicles will be driven by the market, regardless of European regulations. The digitalisation of cars and the application of artificial intelligence to driving will redefine the industry, requiring radically new skills in design departments,” emphasises Josef Nierling, managing director of Porsche Consulting Italia. The pace of change calls for caution; for example, batteries now last much longer than they did a year ago, so European car manufacturers find themselves having to balance complex and risky choices between electrification, autonomous driving and digital mobility platforms. Meanwhile, “the drive towards automation and artificial intelligence opens up new opportunities for efficiency and innovation, but also requires a thorough review of skills”. What can Europe do? Not chase after China, but forge its own path, explains Nierling. For example, autonomous driving (on which the Politecnico di Milano and Autostrade per l’Italia are working) and, more generally, artificial intelligence applied to manufacturing. There are already companies making headway: Bosch in products and Siemens in factories, among the German firms; together with others, they could become the pillars of a European hub, with technological and industrial agreements, involving polytechnics and production chains. Here, governments have an important role to play, leaving it to private companies to innovate, invest and produce. It is already a daunting task to support and facilitate restructuring whilst minimising its social costs; getting into the car-making business would be disastrous. Nor is the solution to build missiles and tanks in disused factories – a backward-looking choice dictated by political, rather than economic or industrial, priorities. Of course, there are dual-use technologies – think of sensors; civilian and military applications do intersect, but they do not cancel each other out. So far, in Brussels, Berlin, Rome and Paris, people have been squabbling over which palliative measure is the least painful, even if it is the least effective; instead of tackling head-on, with all the tools available to the state and the market, the underlying problem: the major restructuring of a mature sector. Is the industry that changed the world in the second half of the twentieth century about to die? Perhaps, but to paraphrase Collodi’s doctors, it might well be reborn to a new life if it were to follow the advice of Jiminy Cricket: it needs a bitter medicine, and simply replacing the engine with a battery will not be enough.