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The move to electric is depriving the country’s most important industry of its competitive advantage.

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This article is part of the Killing the Combustion Engine special report, presented by SQM.

STUTTGART, Germany — Germany’s industrial soul is preserved on the top floor of a glass and steel box building at the gates of Porsche headquarters. 

Visitors stand at the top of a long series of white ramps. Bathed in fluorescent light surrounded by speakers, they close their eyes and press a button to experience what is known as Laufkultur, the baritone growl of what is arguably Germany’s greatest invention: the internal combustion engine. 

Before long, this museum to Germany’s industrial glory might be all that’s left of a tradition that began in this provincial capital more than a century ago.  

Regulators in the European Union and parts of the United States are closing in on rules that will replace the valves, pistons and exhausts that make a Porsche a Porsche with battery cells and lines of software code. But unlike with the combustion engine, those are technologies where Germany’s auto industry isn’t a world-beating pacesetter, but an also-ran, trailing Silicon Valley’s Tesla and a host of competing Chinese carmakers now heading for Europe. With the age of the driverless car fast approaching, competitors from the tech world, including the likes of Apple, are lurking in the shadows.

Since the dawn of the automobile, Germany’s prowess in producing the combustion engine set German-made cars apart from the competition; in recent decades, the engine has also been one of the only major vehicle components still produced inside the country. 

But as the industry goes electric, that leadership position becomes as irrelevant as the skills of an Italian master tailor in the face of fast fashion mass-produced in overseas factories. In the modern age of mobility, it’s the battery and software that offers the added value, not the engine.

The race to lead the electric revolution isn’t over, but it’s already far from clear if the likes of Mercedes, Volkswagen, BMW, Bosch — or indeed Porsche — will be able to keep pace. For the first time in the industry’s history, the prospect of Germany’s most storied brands suffering the fate of faded American powerhouses like Pontiac or Oldsmobile no longer seems like an impossibility. 

German carmakers are racing to adapt, with Mercedes, BMW and Volkswagen all committing to rapid electrification programs and multi-billion battery investment deals. But their ability to manage the transition is far from a sure thing. The latest example — a mega IPO for a slice of Porsche shares later this month to raise funds for investments in e-mobility and software by its parent company VW — comes just as the carmaker's new leadership reconsiders its single-minded electric push.

The story of how Germany’s car industry ended up here is one of lost opportunity, resistance to change and obsession with past engineering triumphs. Even as the pride of Germany’s auto heritage helped drive innovation for decades, it fired another impulse — hubris.  

For years, German engineers and CEOs talked down the prospects of alternatives to the engine, focusing instead on fine-tuning their heritage technology. While that strategy kept record profits flowing, the industry’s short-sightedness also sowed the seeds for its looming crisis. 

What’s at stake is not just the future of Germany’s most prized invention — but the stability of the country’s economy and a sector that's one of Europe’s largest employers.  

Germany’s car executives know all about fallen champions. 

VW, despite the Dieselgate emissions-cheating scandal and rampant competition, remains one of the largest carmakers in the world. While it might be difficult to imagine the company could one day disappear, history is littered with examples of once-dominant brands that swiftly fell into irrelevance.  

From railroads to steamships, consumer technology and local newspapers — innovation disrupts all kinds of industries. It isn’t impossible that the Porsche 911, which is owned by the VW Group, could one day go the way of the steam engine. 

Executives from all three of Germany's major carmakers have at one time or another in the last decade sought out academics to teach them about the perils of transformation.  

But even when corporate bosses can spot the dangers, it can still be difficult for them to transition in time. Just ask the maker of Nokia's 3210 mobile phone, a once dominant piece of consumer tech made near irrelevant by the advent of Apple’s iPhone. 

"Nokia is probably a good example of how such a change can take place,” Herbert Diess, who stepped down as VW’s CEO last month, said back in 2020. “If you're not fast enough, you won't survive.” 

When companies start to fail, they first do so internally — well before the competition delivers the killer blow. The problem at Nokia wasn’t just the advent of the smartphone. It also was its own management's failure to think ahead, relying on revenue from its existing products and making it too complex for people to try new things, all of which made the Finnish giant complacent.

“Apple was blowing on a house of cards,” said Yves Doz, a professor of strategic management at Swiss business school INSEAD, who wrote a book on Nokia’s decline. “It wasn’t that they didn’t see the change coming, it was that they were paralyzed in the face of it.”

German carmakers face the same challenge, he said, in that they know they need to make the transformation to more connected, cleaner cars, but they are grappling with how to do it in practice given they sit atop an 800,000-strong national workforce built around structures that produce and deliver petrol and diesel engines.

“One of the biggest barriers to change is nostalgia,” said Doz. “It works in political terms but also in corporate terms too … Carmaking is such a big part of the German industrial fabric.”

For the engineers and business-school graduates at the top of BMW, Volkswagen and Mercedes, the trouble began in the 1990s when rivals in Asia were already developing alternative technologies that could reduce car emissions. 

“The Asian companies have more of a long-term approach,” said one industry executive who used to work at a German carmaker. “That’s why Toyota was investing for 15 years in hybrid models before that paid off and they made a killing [with the Prius]. The Germans just asked, Why should they stop making money on combustion engines?”

The answer to that question is regulators, who started to introduce emission standards to curb the environmental impact of a growing global car fleet. But even then, rather than develop technologies that could deliver zero emissions, Germany’s car industry instead focused on diesel and building small cars that could cut their overall fleet emission averages. 

In 2008, Daimler, now Mercedes-Benz, invested $50 million in Tesla to secure technology it could use to avoid having to develop clean cars itself. But according to Elon Musk, Tesla’s CEO, the company’s interest in the technology wasn’t deeply rooted. 

“They needed some sustainable energy cars to make the regulators happy,” Musk told interviewers earlier this year. “At the time, it was what’s the least amount of money we can spend to get the regulator monkeys off our back … Daimler was not willing to place, at that time, a big bet of electric vehicles.”  

Remarkably, BMW launched an all-electric model, the i3, only in 2013. And in the next year, Daimler sold its stake in Tesla for $780 million. The industry had not yet considered that e-mobility would be a sustainable industry worthy of significant investment.

“The Germans did not have the stamina to stomach the loss-making process,” said one executive.

That strategic choice has played out badly. In 2021, Tesla sold the most all-electric cars of any brand in Germany with its Model 3, beating the local competition hands down even before it opened a new car plant in the forests east of Berlin.

It took one of the world’s largest-ever corporate scandals for the Germans to start to clean up their act, albeit slowly. 

For decades, the German auto industry’s response to rising concerns about climate change had been incremental innovations in engine technology, with diesel cars pitched as the best chance to reduce CO2 emissions. Confidence in German engineering persuaded the industry that it could manage the coming transition by hitting ever-stiffer emission targets.  

VW, under its CEO Ferdinand Piëch, a grandson of Porsche’s founder and an engineer obsessed with optimizing the internal combustion engine, led the industry’s charge to diesel. VW's “Clean Diesel” campaign became a rallying cry for the entire German industry, helping push the technology into skeptical markets such as the U.S.  

Even then-Chancellor Angela Merkel took up the diesel cause, arguing that the efficiency of fuel outweighed concerns over the dangerous particles it released into the air. The strategy worked. Germany’s diesel cars weren’t just selling at home, but around the world.  

Then in 2015, disaster hit. It turned out that VW had cheated on its emission systems, using software to make the engines appear cleaner than they were. The subsequent scandal involved around 11 million vehicles, and the carmaker was forced to pay upward of €30 billion in settlements and compensation to motorists and governments around the world.

"Essentially VW destroyed diesel for everyone," said Matthias Schmidt, a Berlin-based analyst.  

Dieselgate, as the scandal became known, soon engulfed other carmakers, exposing malpractice not just inside Volkswagen engineering labs but across the entire industry. It also critically undermined the industry’s heft in political talks amid fierce discussion over endemic levels of particulate air pollution in German cities caused by noxious diesel fumes.

“The mistakes, namely Dieselgate, made it very difficult for political leaders to trust us and then to be seen with leaders of the industry,” said Matthias Wissmann, a former transport minister in the 1990s who then spent a decade as the German industry's chief lobbyist until 2018.

The scandal also took its toll on German influence in Brussels. In 2013, Merkel was able to thwart EU efforts to set stringent 2020 vehicle fuel efficiency standards by arguing it would negatively impact Germany's flagship industry. Arguments like that one got far less traction in the latest rounds of negotiations over far-tougher standards for 2025 and 2030 — or in the current debate over ending sales of new gasoline and diesel cars from 2035.

By 2019, the German chancellor was warning that Germany’s majors had fallen behind in what was becoming the industry standard for clean car technology.  

“The fact that we in Germany, for instance, but also in Europe, aren’t able to this very day to produce battery cells ourselves is certainly a major problem for Europe’s future as a car manufacturing base,” Merkel told an audience at that year’s World Economic Forum in Davos. 

If there's one place exposed to the ravages of the coming electrical transition, it's Stuttgart, Germany's motor city.

Walk through the city and you're never too far from Mercedes' three-pointed star, the crest of Porsche or red Bosch lettering on the side of an office complex.

Ravaged by World War II, this city of 600,000 wrapped in the hills of the Neckar Valley was rebuilt for motorists in the postwar era. The capital of Baden-Württemberg, one of Germany’s wealthiest states, Stuttgart is bisected by multi-lane highways and hillside avenues offering views back across the cityscape. Downtown, the Motor Presse Stuttgart media house is still illuminated by night, and everything from the Swabian city’s sports teams to its stadium and concert venues are sponsored by car industry patrons.  

The city's trains and trams are full of workers heading to suburban car plants in satellite towns or suburbs such as Sindelfingen, Untertürkheim or Porsche’s plant at Zuffenhausen where factory towers dominate the skyline. 

“Stuttgart, and Baden-Württemberg, are more dependent on the transformation of the automotive industry than almost any other region or state,” said Nicole Hoffmeister-Kraut, the region's economy minister. 

It was here in the late 1800s that a primitive version of the combustion engine was first invented, and since then the automotive industry has been good to its hometown, accounting today for more than half of all manufacturing locally. Some 120,000 people around the city are directly employed by the auto industry, said Hoffmeister-Kraut.

The city is also home to many component firms that aren't household names like Mahle, Eberspächer, Mann+Hummel and Vector Informatik, as well as more than 400 smaller firms supplying them with parts and services — all of which are at risk in a shift to EVs.

While bigger suppliers such as Bosch have already pivoted to battery technology, software and microchips, many others haven’t. “Especially in the Stuttgart area, there are many suppliers who have stayed with the combustion engine,” said Ferdinand Dudenhöffer, a professor at the Center Automotive Research in Duisburg. “Those were real misjudgments."  

The danger is in the complexity of the combustion engine and the relative simplicity of the battery-powered motor, which requires many fewer components and needs much less maintenance. A government study says the electrification shift could kill up to 31,000 of the city's jobs by 2030, even when accounting for new ones created by clean mobility industries.  

While Stuttgart’s carmakers are trying to go electric — Porsche has pledged that 80 percent of its sales will be electric by 2030, and Mercedes plans to do the same wherever it’s possible — ditching the engine sucks jobs out of Stuttgart and sends them elsewhere.

While plans are afoot to package batteries in Stuttgart and build a limited number of cells at Mercedes’ sprawling Untertürkheim site, the majority of the company's cells will come from Chinese producers setting up shop in other parts of Germany or elsewhere in Europe. The Chinese battery manufacturer CATL is building a site near the German city of Erfurt and another in Hungary, while Svolt, based in Changzhou, is building one battery factory in the Saarland and another outside Berlin. BMW has touted a new battery design that aims at boosting range and efficiency, but it will be Chinese companies that produce them in Europe.

“Stuttgart is no longer a safe haven for the German auto industry,” said one carmaker executive speaking on condition of anonymity. “The glory days will be over sooner rather than later.”  

Complicating efforts to adapt is a reluctance in Germany to completely cut ties with the combustion engine.

"Anyone can build an electric car, the internal combustion engine is high culture," Ulf Poschardt, the editor-in-chief of the German daily Welt, wrote in June, assailing the EU's efforts to kill the engine. (Welt is owned by Axel Springer, which also owns POLITICO.)

That emotional connection to the oil-greased engine runs deep in the ranks of every German carmaker, where generations of engineers have known nothing else. For example, when in-house engineers at Mercedes were asked a few years ago to produce a hybrid coupé running on a four-cylinder engine alongside an electric motor, rather than a powerful eight-cylinder engine, some left the room in protest.  

“Losing half of the cylinders, that was hard for the petrolheads,” said a former engineer who recounted the story.

Parts of the industry, wary of the impact on jobs and their competitive edge, argue that the industry can again innovate its way out of trouble and save the technology that has made it distinct.  

As the European Union zeroes in on legislation that will mandate a zero-emissions standard by 2035, effectively banning sales of engine-installed cars, Germany is arguing that there will still be a global market for combustion engines well into the 2040s. 

The answer it’s proposing is synthetic fuels — manufactured using captured CO2 and hydrogen. The adoption of these so-called e-fuels could keep combustion engines running without fossil fuels — in theory without producing additional emissions. Yet they are expensive to produce and do not exist on a commercial scale today.

As the final draft of the engine-ban works its way through the Brussels machinery, German Finance Minister Christian Lindner has tried to demand a carve-out for e-fuels. "I know that Germany will be a leading market for electric technology," Lindner told POLITICO. "On the other hand, I know that with synthetic fuels, which will one day be much more economical than today, internal combustion engines will be more climate-friendly than they are today."

The problem is that Germany is the only EU country seriously pushing e-fuels as a credible option.

The tension between the industry’s past and the competing visions for its future was on display one late August evening, as VW's outgoing CEO Diess gathered with a close group of friends and colleagues on the terrace of the Mondo Italiano restaurant on the edge of the company's sprawling Wolfsburg factory headquarters. 

His time at the top, he conceded, hadn't been easy, according to one of the attendees. “What people on the outside don’t understand is how complicated it is with us,” he said, referring to the events that had led to his ouster.  

Under Diess, VW had pledged to spend much of the €73 billion investment in future technologies on EVs by 2025 and develop six battery plants in Europe to produce bespoke units for its cars. But in spearheading the transition, he had also roiled labor unions with his insistence that VW needed to be more agile and shed jobs quicker.  

In short, he wanted VW — a company with legacy costs and around 660,000 employees worldwide — to act more like Tesla, a company launched in 2003 not 1937, and with a fraction of its workforce. 

Diess' battle with the unions had come to a head over the previous year, and this summer — even as EU legislators prepared to seal the deal on an engine ban — he was finally shown the door. In his place, the company’s shareholders installed Oliver Blume, until then the CEO of group unit Porsche. 

Blume is distinctive for two things. As head of Porsche, he was the only top German car executive to lobby openly in favor of e-fuels. He’s also close to Lindner, so much so that the two were embroiled in a scandal over corporate access to politicians — in which Blume is alleged to have lobbied the finance minister for the inclusion of e-fuels in the German government program. On Blume's first day in the top job at VW, the company announced plans to shift its strategy from Diess' single-minded focus on electric cars, to developing both batteries and e-fuels as two routes to go green.

The apparent change of tack at the very top of Germany’s largest car company is the clearest indication yet that — despite pressure from the EU, the massive new investments and the looming, Nokia-sized risks — the German car industry isn’t yet totally sold on the electric future. 

“Nobody wants to celebrate a funeral just yet for the combustion engine,” said Jens Gieseke, a German conservative MEP who has been pushing e-fuels as part of the EU’s engine-ban legislation. 

The danger, for the industry, is that the funeral it will be attending instead will be its own.

Matthew Karnitschnig and Laurenz Gehrke contributed reporting to this article.

This article is part of the Killing the Combustion Engine special report, presented by SQM and was produced with full editorial independence by POLITICO reporters and editors. Learn more about editorial content presented by outside advertisers.

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