[Analysis] The disruption of the German car industry

Dear WIMM Reader,

This week is a long week with 5 posts:

Volkswagen's post-tax profit fell 44% in 2025. Porsche, once the most profitable automaker in the world by return on sales, posted an operating margin of 1.1%. The entire VW Group is cutting 50,000 jobs in Germany by 2030. Porsche's market capitalization has shed roughly €75 billion from its peak.

The new Porsche CEO, a man who previously ran McLaren, no less, walked into an analyst call in March 2026 and said his first priority was making the company "crisis-proof".

Crisis-proof. From Porsche.

This is the memo written in 2030, attempting to reconstruct the sequence. It is not a story about electric vehicles. It is not a story about China. It is a story about what happens when an entire industrial ecosystem optimizes relentlessly for the wrong stack and by the time it realizes its mistake, the window to correct has already closed.

For a century, the German automotive industry built its competitive advantage on something genuinely hard called mechanical precision. The internal combustion engine is, at peak complexity, a masterpiece of coordinated engineering. It has thousands of moving parts, each requiring tolerances measured in microns, assembled inside supply chains spanning hundreds of suppliers who took generations to cultivate. Volkswagen, BMW, and Mercedes did not merely make cars. They maintained an interlocking system of Tier 1 suppliers, engineering universities, vocational training programs, and industrial policy that formed what economists would call a highly concentrated cluster of comparative advantage.

The problem with a moat built on complexity is that it is only a moat for as long as complexity is the relevant battleground. When the battleground shifts, from mechanical to electrical, from hardware to software, the moat doesn't protect you. It traps you.

The electric vehicle is not a car with a different engine. It is a software platform that happens to move. The powertrain of a BYD Seal has fewer than 200 moving parts vs. 2.000 for an ICE (internal combustion engine) car. That’s 10x. That means also more points of failure, hence more roads to service.

The entire competitive differentiation of an EV (ie. range, charging speed, driver experience, over-the-air improvements, autonomous features) lives in software and battery chemistry. These are domains in which Germany has no structural advantage. They are domains, as it happens, in which China has spent a decade building a decisive one.

The transition from mechanical to electrical stack was not secret. It was not sudden. Tesla put the world on notice in 2012 with the Model S. Every German executive knew the shift was coming. The tragedy is not that they missed it. It is that they saw it clearly and concluded wrongly & catastrophically that their century of mechanical excellence would somehow transfer.

For 20 years, China was German automakers' most profitable geography. Volkswagen at its peak, sold roughly four million vehicles per year in China. Porsche derived enormous margins from Chinese buyers who associated Stuttgart engineering with social status and prosperity. The Chinese market was the subsidy that made the entire German automotive business model viable.

That relationship inverted faster than any industry model predicted. By 2025, Porsche's China deliveries fell 26%. The company expects a further decline of nearly a third in 2026, down to around 30,000 units:

Chinese consumers are not buying fewer Porsches because they have less money. They are buying BYD Yangwang, Huawei-partnered Aito, and Nio because those cars are, by any software-centric measure, better. They have superior infotainment, faster over-the-air updates, better integration with Chinese digital ecosystems, and comparable or superior range at a fraction of the price.

The German response was "Chinese consumers have different tastes in software". That was the single most expensive misdiagnosis in industrial history. The problem was, of course, competence. German automakers could not write competitive in-car software because they had never needed to. They had outsourced that function for a decade to tier-one suppliers who were themselves behind. The organizational DNA required to build software (which literally mean fast iteration, product management discipline, continuous deployment ) was simply absent. You cannot acquire it through acquisitions. You cannot mandate it through restructuring plans.

This requires bluntness that the industry's defenders have consistently avoided. When Volkswagen announced its CARIAD software division, the entity tasked with creating a unified software stack for all VW Group brands, it was staffed with 10.000 engineers and budgeted at billions of euros. CARIAD proceeded to delay the Porsche Macan EV and the Audi Q6 e-tron by years. It burned capital at a rate that would embarrass a mid-tier SaaS company. By 2024, Volkswagen was in emergency talks with Rivian to license software it could not build itself.

The CARIAD debacle was a systems failure. The organizational processes, incentive structures, hiring pipelines, and institutional culture that makes a great automotive manufacturer are precisely the wrong substrate for building software. The German engineering tradition prized precision, documentation, and formal sign-off processes. Software requires speed, tolerance for failure, and the willingness to ship something imperfect and iterate. These two modes of production are not merely different, but they are hostile to each other.

Meanwhile, the supply chain transition proved equally punishing. Battery cell production, the single most critical component of EV competitiveness, is dominated by CATL and BYD.

German automakers are customers of their future competitors. The most important input into their next-generation products is manufactured and controlled by the companies eating their market share. There is no tariff or industrial policy that resolves this structural dependency in less than a decade.

The final chapter of the disruption does not end in bankruptcy. It ends in something more historically significant and, in its own way, more humiliating. Unable to close the software gap organically, unable to rebuild the battery supply chain fast enough, facing continued margin compression and Chinese domestic competitors now moving aggressively into Europe, German automakers will do what every industry does when it has truly lost: they will invite the victors in as partners.

Stephan Soldanski, a union representative at Volkswagen’s Osnabrück plant, told Reuters that workers there would not oppose producing for one of Volkswagen’s China-based joint-venture partners, with one condition: it had to be under the VW logo and VW standards.

A second, related comment came from VW CEO Oliver Blume. He said that when companies invest in Europe and create jobs, that is generally positive, and that VW had discussions with its Chinese partners about their Europe expansion plans:

The logic will accelerate. A German brand that cannot write competitive software will license it from Huawei. A German automaker that cannot secure competitive battery supply will anchor its procurement to CATL. The press releases will describe these arrangements as "strategic partnerships" and "complementary capabilities". They are, in strategic terms, dependency relationships with a nation-state whose industrial policy is explicitly designed to dominate global automotive manufacturing.

The economic logic is individually rational and collectively catastrophic. Each company, facing its own survival imperative, will calculate that a profitable Volkswagen with Chinese software is preferable to an insolvent Volkswagen with German software. They will be right, in the short term. But the aggregate result will be a German automotive industry that has transferred its remaining consumer equity (= the brand prestige, the distribution, the manufacturing expertise) to serve as a delivery mechanism for Chinese technological infrastructure.

The geopolitical implications are not theoretical anymore. Automotive manufacturing represents a significant share of German GDP and a disproportionate share of German industrial employment. When that sector's critical software layer runs on Chinese code, its battery supply is managed through Chinese procurement relationships, and its fastest-growing market remains structurally dependent on Chinese regulatory approval — is a national vulnerability.

Huawei's automotive division, HarmonyOS Cockpit, is already embedded in millions of Chinese vehicles. Extending it into European-branded cars sold globally is now merely a business development call. The moment a German OEM deploys Huawei's software stack in vehicles sold in NATO member states, that conversation transforms from a corporate partnership into a security policy crisis. Brussels will object loudly. Germany will triangulate and the Chinese partners will smile and note that objections are much harder to sustain when your domestic industry depends on the relationship's continuation.

AI capability improves, companies need fewer workers, displaced workers spend less, companies invest more in AI. The German automotive disruption operates on a similar logic. Software gap widens, market share falls, margins compress, R&D budgets shrink, software gap widens further.

In a normal disruption (= Kodak, Blackberry, Nokia), incumbents resist the new technology and die slowly as nimble entrants take share. What is different here is that the new entrants are not startups operating outside the regulatory and political system. They are Chinese state-backed enterprises executing a decades-long industrial policy with explicit government support, protected home markets, subsidized capital, and the patience that democratic, shareholder-governed firms structurally cannot match.

The 25% US tariffs on imported vehicles, costing Porsche alone roughly €700 million in 2025, add further compression from the other direction. German automakers are now simultaneously losing their most profitable export market to Chinese domestic competition, being taxed on their most important remaining export market by the United States, and spending billions to retool an EV strategy that was premised on regulatory tailwinds that are now reversing.

The path Porsche is pursuing is the following: retreat upmarket, restore exclusivity, prioritize the 911 and a potential hypercar above it. This is coherent as a rump strategy for a smaller, more defensible business. Ferrari has proven that the extreme luxury segment can be durable, but Porsche is not Ferrari. It built its business on scale. The Cayenne, the Macan, the Taycan - these are premium-mass products, not bespoke objects of desire. Retreating from that segment does not make Porsche Ferrari. It makes Porsche smaller.

What no restructuring plan can address is the underlying strategic reality: the most important thing in a modern car is the software, and the most important input for an EV is the battery. Germany controls neither. It cannot acquire either at speed and the companies that do control them are not partners waiting to be courted. They are competitors who have already won the market that funded Germany's engineering century.

The canary did not just stop singing. The mine has been filling for a decade, and the executives breathing the air decided, quarter after quarter report, that the readings were within acceptable limits.

The German car industry did not fail because it lacked talent, capital, or ambition. It failed because it optimized brilliantly for a world that was ending while telling itself the new world would reward the same virtues. It won the mechanical stack so completely that it could not imagine losing the electrical one. Now, having lost it, the only move left is to invite the winners in and hope that the terms of surrender are gentler than the terms the market is already offering.

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