German Auto Sector's Profit Woes: A Contrarian Play in EV-Driven Supply Chains

The German automotive industry is undergoing a seismic shift. Prolonged hiring slumps, profit declines, and structural overcapacity are exposing vulnerabilities in a sector once synonymous with engineering dominance. Yet amid the turmoil, a compelling investment opportunity is emerging: undervalued suppliers with exposure to electric vehicle (EV) technology and cost efficiencies. These companies are positioned to thrive as the industry pivots toward electrification and automation. Let's dissect the crisis—and the contrarian bets it enables.

The Hiring Slump: A Mirror of Structural Overcapacity

The German auto sector's employment data tells a stark story. By mid-2025, over 35,000 jobs at Volkswagen and 40,000 at Mercedes-Benz are slated for cuts, with Daimler Truck alone targeting 28,000 global layoffs. These reductions reflect a broader 14% decline in automotive sector profits since 2023, driven by margin compression, rising energy costs, and competition from Chinese EV giants like BYD.

The layoffs are not merely cyclical. They signal structural overcapacity in traditional combustion engine manufacturing, exacerbated by:- EV adoption outpacing ICE demand: EVs now claim over 50% of new car registrations in Germany.- Global price wars: BYD's 4.3% net profit margin in early 2025 has forced European rivals to slash costs or risk obsolescence.- Supply chain fragmentation: Offshoring to Eastern Europe and Asia is hollowing out German manufacturing hubs.

Supply Chain Implications: Winners and Losers in the EV Transition

The crisis is reshaping supply chains. Traditional suppliers reliant on ICE components face existential threats, while those pivoting to EV technology are thriving. Key trends include:

1. EV Component Demand Surge:
2. Batteries: Solid-state battery tech is advancing, with companies like QuantumScape (QS) gaining traction.

3. Electronics and Software: EVs require 5x more semiconductors than ICE vehicles, favoring suppliers like Continental AG (CON) and Robert Bosch GmbH, which dominate automotive software stacks.

4. Cost Efficiency as a Competitive Weapon:

5. Companies like Schaeffler (SCHFF) are automating factories to reduce labor costs, while Hella (HELLA) is vertically integrating EV lighting and sensor systems.

7. Regional Shifts:

8. Eastern Europe (e.g., Slovakia) and Asia are attracting production due to lower labor costs. German suppliers must either localize or risk losing contracts to cheaper rivals.

Equity Valuations: Identifying Undervalued Contrarian Plays

Despite the sector's woes, select suppliers are trading at discounts to their EV-driven potential. Key candidates include:

1. Continental AG (CON)

• Why It's Undervalued: Shares have fallen 30% YTD 2025 on ICE-related write-downs.
• EV Play: Continental's pioneering work in EV tires (lower rolling resistance) and autonomous driving software positions it to capture $30B in EV tech revenue by 2030.
• Contrarian Bet: A P/E of 8.5x vs. peers' average of 12x makes this a deep-value pick.

2. ZF Friedrichshafen (ZF)

• Why It's Undervalued: Overexposure to trucking (a declining segment) has dragged down multiples.
• EV Play: Its electric axle systems and robotics partnerships (e.g., with Boston Dynamics) are critical for EV and mobility-as-a-service (MaaS) ecosystems.
• Contrarian Bet: Trading at 0.7x book value, ZF could rebound as MaaS adoption accelerates.

3. Phoenix Contact (PHX)

• Why It's Undervalued: A niche player in industrial connectors, overlooked in broader auto narratives.
• EV Play: Its high-voltage connectors are indispensable for EV charging infrastructure and smart factories.
• Contrarian Bet: A 4.5% dividend yield and 15% ROE in a sector plagued by negative margins make this a defensive gem.

Risks and Catalysts

• Near-Term Risks:
• Chinese competition: BYD's price aggression could force further margin cuts.
• Policy uncertainty: The EU's EV subsidy reversals in late 2023 remain a threat.
• Catalysts to Watch:
• Schaeffler's battery joint venture with CATL (expected Q4 2025).
• ZF's autonomous driving rollout with Waymo (2026 target).

Investment Thesis: Buy the Dip in EV-Ready Suppliers

The German auto sector's pain is creating a once-in-a-decade opportunity. While the broader index may remain volatile, EV-component suppliers with cost discipline and innovation offer asymmetric upside. Prioritize companies with:- EV revenue exposure >30% (e.g., Continental, ZF).- Strong balance sheets to weather margin pressures (e.g., Phoenix Contact's net cash).- Geographic flexibility to shift production to lower-cost regions.

Avoid suppliers tied to ICE or without software/EV diversification. The next 12–18 months will separate the winners from the casualties—and the contrarian investor stands to profit handsomely.

Action Items:1. Buy Continental AG (CON): Target $25/share (vs. current $18).2. Add ZF Friedrichshafen (ZF): Look for a rebound to €110/share.3. Hold Phoenix Contact (PHX): Long-term dividend play at €100/share.

The German auto sector's decline is not an end—it's a reset. For the bold, this is the time to load up on EV's unsung heroes.