German Carmakers Shift Production as China Profits Fade and Costs Bite

What happened this week

Germany's top automakers are speeding up a redesign of their production footprint as China's profit cushion shrinks and domestic costs stay high. Volkswagen said Wednesday it will scrap a large advanced-manufacturing project at its Wolfsburg headquarters and review where it puts money across its German factories. The move includes dropping a planned upgrade to production tech at HQ - covering large scale die casting - a decision that drew resistance from powerful labor representatives.

In Berlin, Mercedes-Benz CEO Ola Källenius told a Sueddeutsche Zeitung forum that talks with workers on longer hours without additional pay need to deliver. "We can't hide anymore," he said, adding that without a significant boost in competitiveness there will be "clearly less industrial activity in this country in 10 years time."

China focus and sales signals

Källenius said Mercedes-Benz is shifting to a "100% China for China" strategy after deciding its previous model no longer works given catering sales. That means moving away from engineering vehicles like the C-Class and E-Class in Germany and then adapting them for Chinese buyers.

Volkswagen has struck new partnerships to speed development of China-only models, suggesting the first glimmers of improving momentum in the world's largest auto market. In China, the brand's sales of battery and hybrid cars climbed to a record last month, aided by models such as the ID. Era 5S sedan. VW expects further growth this year and is targeting a spot among China's 10 best-selling electric car brands next year.

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Supply chain strain and industry warnings

As Chinese rivals intensify competition, German automakers are being pushed to build more locally in China just as weaker earnings force deeper cuts at home. ZF Friedrichshafen has reduced working hours at many German facilities while it restructures for shrinking demand. To avoid layoffs, some employees are currently scheduled for no more than 30 hours per week, CEO Mathias Miedreich said at the Automobilwoche conference on Wednesday in Berlin. The company plans to shed about 14,000 positions this decade.

The broader industrial base in Europe is feeling the squeeze. "The European playbook is not working, and if nothing changes, total production in Europe will be divided by two," Renault CEO Francois Provost said in Berlin. "We are losing jobs and our industry, it's really urgent now."

What this means for your portfolio

The bottom line: China no longer bankrolls high-cost production in Germany, so manufacturing is shifting, and suppliers are cutting to fit. For your portfolio, watch which automakers localize fastest for China, which suppliers restructure ahead of the curve, and how German capacity trims flow through to margins and cash generation.

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