Germany's Automotive Policy Uncertainty and the 2035 EU Emissions Target: Implications for EV Supply Chain Investments

Germany's automotive sector stands at a crossroads as it grapples with the implications of the EU's 2035 emissions target, which mandates a 100% reduction in CO₂ emissions from new cars and vans. This policy, intended to phase out internal combustion engines (ICEs), has sparked a fierce debate within the industry and among policymakers. While over 200 executives from the electromobility and clean tech sectors advocate for strict adherence to the 2035 zero-emission goal, major automakers like Mercedes-Benz and Schaeffler argue for a more flexible, technology-neutral approach that includes plug-in hybrids and hydrogen-powered vehicles, according to an Automotive Manufacturing Solutions report. This policy uncertainty is reverberating through the EV supply chain, reshaping investment strategies and exposing vulnerabilities in Germany's transition to sustainable mobility.

The Policy Dilemma: Rigidity vs. Flexibility

The EU's 2035 target has become a lightning rod for contention. Industry leaders such as Mercedes-Benz Chairman Ola Källenius and Schaeffler CEO Matthias Zink warn that the current framework is "unworkable" due to rising costs, overreliance on foreign supply chains, and uneven charging infrastructure across the EU; proponents, however, stress that political certainty is essential to securing Europe's competitive edge in the global clean technology race, according to a MobilityPortal article. A recent IDOS Research brief even contends that maintaining the phase-out timeline could strengthen Germany's automotive industry in the long run by fostering innovation and securing high-quality jobs.

This divide has created a vacuum of clarity for investors and supply chain stakeholders. As the European Commission faces pressure to review the 2035 target earlier than planned, companies are recalibrating their strategies to navigate the ambiguity.

Supply Chain Adjustments: Delays, Mergers, and Strategic Shifts

The uncertainty has prompted significant adjustments in Germany's EV supply chain. Volkswagen (VW) and Porsche, for instance, have postponed key electrification targets. VW delayed the production of its Trinity electric model from 2026 to 2032, while Porsche pushed back its goal of achieving an 80% EV share by 2030, a shift documented in a The Driven article. These delays reflect broader industry concerns about high investment costs, low demand, and the abrupt end to EV subsidies in 2023. Meanwhile, traditional suppliers like ZF Friedrichshafen and Schaeffler are restructuring to remain competitive. ZF spun off parts of its E-Division to address overcapacity, while Schaeffler merged with Continental and Vitesco to eliminate redundancies and counter Chinese competition, which offers components at 25% lower costs, according to a LinkedIn analysis.

Chinese EVs, now accounting for over 20% of EU sales in 2024, have further complicated the landscape. An Atlantic Council analysis notes that the EU's 45% tariffs on Chinese-made EVs aim to protect domestic industries but have also introduced volatility into supply chains. In response, German companies are prioritizing regional battery and lithium production to reduce dependency on third countries. Rock Tech Lithium, for example, has emphasized the need for a "regional battery supply chain" to secure critical materials, as noted in the MobilityPortal article.

Government Incentives and Infrastructure Gaps

To mitigate these challenges, the German government has rolled out the "Responsibility for Germany" programme, which includes special depreciation schemes for EVs, tax relief for businesses, and support for SMEs in the electromobility sector, according to the EU Alternative Fuels Observatory. These measures aim to stimulate corporate EV adoption and infrastructure development. However, gaps persist. Rural areas remain underserved, with 48% of communities lacking public charging stations, per a Trade.gov report. Additionally, the abrupt phase-out of subsidies in 2023 led to a 70% drop in new EV registrations in August 2024 compared to the same period in 2023, as reported by The Driven.

The government's extension of the EV tax exemption until 2035 was reported by CleanTechnica, and its push to install one million public charging points by 2030 is highlighted in the Trade.gov report, signaling long-term commitment. Yet, the absence of a unified roadmap has left investors wary. As one industry analyst notes, "Fluctuating subsidies and unclear regulations are eroding consumer confidence and deterring private investment," a point also raised in The Driven.

Geopolitical and Economic Risks

Beyond domestic policy, global dynamics are reshaping Germany's EV strategy. The U.S. Inflation Reduction Act (IRA), which has spurred over $65 billion in EV supply chain investments in the U.S., has prompted German firms to explore partnerships or relocate parts of their operations, according to the Atlantic Council analysis. At the same time, geopolitical tensions over critical mineral supplies-such as lithium and cobalt-have underscored the need for diversified sourcing. Germany's 63% general government debt-to-GDP ratio offers fiscal space for transformational investments, but political debates over the debt brake remain a constraint.

Conclusion: Navigating Uncertainty for Long-Term Gains

For investors, Germany's automotive policy uncertainty presents both risks and opportunities. Companies that adapt swiftly-such as those pivoting to regional supply chains, embracing hydrogen or hybrid technologies, or leveraging government incentives-are likely to outperform. Conversely, firms reliant on traditional ICE production face significant exposure to regulatory shifts and market volatility.

The coming months will be pivotal. If the EU maintains its 2035 target, Germany's EV supply chain could see a surge in investment, bolstered by its strategic focus on battery technology and regional resilience. However, any concessions to industry demands for flexibility may prolong the transition and dilute Germany's climate leadership. As one policy brief aptly states, "The path forward requires balancing ambition with pragmatism-ensuring that policy frameworks are both ambitious and achievable," a conclusion echoed in the IDOS Research brief.

For now, the automotive sector remains in a holding pattern, waiting for clarity that could redefine the future of mobility in Europe.