Germany’s Auto Sector in the Crosshairs of U.S.-China Rivalry: Strategic Alliances and Industrial Policy as Catalysts for Investment

The German automotive sector, long a pillar of the country’s industrial might, is now at a crossroads shaped by the intensifying U.S.-China rivalry. As trade barriers, technological competition, and shifting supply chains redefine global dynamics, Germany’s automakers are recalibrating their strategies through strategic alliances and industrial policy reforms. These moves present both risks and opportunities for investors, with implications that extend beyond Europe’s borders.

Strategic Alliances: Navigating Tariffs and Market Access

The imposition of U.S. tariffs on EU-made vehicles has forced German automakers to pivot toward Asia, particularly China, to mitigate financial losses and secure access to cutting-edge battery technology. A prime example is the emerging partnership between Chery, a Chinese automaker, and Volkswagen Group. Chery is negotiating to produce its vehicles at Volkswagen’s German factories, including potential sites in Dresden and Osnabrück, to bypass European tariffs on Chinese electric vehicles (EVs) [2]. This alliance allows Chery to leverage Volkswagen’s production capacity while enabling the German automaker to monetize underutilized assets. For investors, such partnerships highlight the growing trend of “localized production” as a strategy to circumvent trade barriers and access regional innovation ecosystems.

German automakers like Volkswagen and BMW are also deepening their investments in China despite declining domestic sales. Volkswagen’s EUR 2.5 billion investment in Hefei and BMW’s EUR 2.8 billion Shenyang plant upgrades underscore their commitment to localizing EV production and R&D [3]. These investments are driven by China’s dominance in EV technology and its rapidly expanding domestic market, which now accounts for nearly 40% of global EV sales [6]. However, the competitive landscape in China is fraught with challenges, as local brands like BYD and NIO dominate market share. For investors, the key question is whether German automakers can adapt their traditional luxury branding and engineering expertise to thrive in a market increasingly defined by affordability and rapid innovation.

Industrial Policy: De-Risking Without Decoupling

Chancellor Friedrich Merz’s administration has adopted a “de-risking without decoupling” strategy, aiming to reduce strategic dependencies on China while preserving economic ties. This approach is reflected in Germany’s industrial policy reforms, which prioritize system-level competitiveness over individual firm-level gains. The government is advocating for EU-wide measures such as tariffs on subsidized Chinese EVs, which could level the playing field for European automakers [4]. For instance, the European Commission’s 48% tariff on certain Chinese EV models is designed to counteract unfair subsidies, though it risks alienating Chinese partners [6].

Simultaneously, Germany is investing heavily in domestic R&D and green technology. The EUR 1 trillion defense and infrastructure spending plan includes provisions for modernizing EV charging networks and battery production facilities [1]. These initiatives align with the EU’s broader push for industrial sovereignty, particularly in sectors like semiconductors and renewable energy. For investors, Germany’s focus on R&D subsidies and infrastructure development signals a long-term commitment to maintaining its competitive edge in high-tech manufacturing.

Investment Implications: Balancing Risks and Opportunities

The German auto sector’s strategic alliances and industrial policies create a dual narrative for investors. On one hand, partnerships with Chinese firms offer access to cost-effective production and innovation, as seen in Volkswagen’s collaboration with Chery. On the other, geopolitical tensions and trade barriers introduce volatility, particularly as the U.S. and EU recalibrate their policies in response to Chinese overcapacity [5].

A critical factor for investors is the sector’s ability to navigate these dual pressures. For example, while Chinese EVs now undercut European models by up to 50% in cost, German automakers retain advantages in brand equity, engineering, and premium market segments [1]. This suggests that investments in German automakers with strong R&D pipelines and localized production strategies may outperform those relying solely on traditional combustion engine expertise.

Conclusion: A Make-or-Break Year for German Automakers

As 2025 unfolds, Germany’s auto sector faces a pivotal test of its ability to adapt to a rapidly shifting global landscape. Strategic alliances with Chinese partners and a recalibrated industrial policy framework are critical to maintaining competitiveness. For investors, the sector offers opportunities in companies that successfully balance innovation with geopolitical pragmatism. However, risks remain, particularly in overreliance on Chinese supply chains or underinvestment in domestic R&D. The coming months will likely determine whether Germany can retain its position as a global automotive leader—or cede ground to its Asian rivals.

Source:
[1] China-Germany Ties 2025: Merz's Leadership Impact on [https://www.china-briefing.com/news/china-germany-relations-2025-merz-leadership-trade-investment/]
[2] English Chery and Volkswagen A Chinese German Alliance [https://www.icartea.com/en/news/english-chery-and-volkswagen-a-chinese-german-alliance-reshaping-europe-s-auto-industry]
[3] China-Germany Ties 2025: Merz's Leadership Impact on [https://www.china-briefing.com/news/china-germany-relations-2025-merz-leadership-trade-investment/]
[4] Electric shock: The Chinese threat to Europe's industrial [https://ecfr.eu/publication/electric-shock-the-chinese-threat-to-europes-industrial-heartland/]
[5] China's growing grip on key German industries [https://www.dw.com/en/china-puts-pressure-on-german-car-chemicals-engineering-industry/a-71919309]
[6] Driving the future: Europe's test in the EV market amid [https://illuminem.com/illuminemvoices/driving-the-future-europes-test-in-the-ev-market-amid-chinese-competition]