The IAA 2025 Auto Show and the Future of German EV Manufacturing

The IAA 2025 Auto Show in Munich has become a battleground for German automakers to showcase their electric vehicle (EV) strategies amid a rapidly shifting global landscape. For decades, Germany’s automotive giants—Volkswagen, BMW, and Mercedes-Benz—dominated the global car industry with a blend of engineering excellence and brand loyalty. However, the rise of Chinese EV manufacturers, U.S. trade policies, and Europe’s fragmented regulatory environment have eroded their market share and profitability. The question now is whether the innovations unveiled at IAA 2025 can reverse these trends or if German automakers remain trapped in a costly and fragmented transition to electrification.

A Market in Decline: Structural Challenges and Strategic Shifts

German automakers are grappling with a perfect storm of challenges. The domestic new-car market contracted by 13.8% in June 2025 compared to the same period in 2024, with overall registrations down 4.7% in the first half of the year [1]. While battery-electric vehicle (BEV) sales grew by 8.6% in June, capturing 18.4% of the market, this pales in comparison to the 10% share held by plug-in hybrids (PHEVs) and the lingering dominance of diesel vehicles [1]. On a broader scale, the European car market contracted by 1% in H1 2025, with Germany’s 14% decline making it one of the hardest-hit markets [3].

Financial pressures are equally acute. Mercedes-Benz reported a 56% drop in net profits in H1 2025, largely due to the Trump administration’s 25% tariff on European imports, which has forced the company to pause U.S. EV exports and shift production to Alabama [5]. Polestar, a Swedish EV brand under Geely, also posted a $1.02 billion net loss in Q2 2025, driven by a $739 million impairment charge linked to its Polestar 3 SUV and U.S. tariff-related demand declines [3]. These figures underscore the fragility of German automakers’ EV strategies in the face of global trade headwinds and rising production costs.

IAA 2025: A Glimpse of Hope or a Distraction?

At the IAA 2025 Auto Show, German automakers unveiled a mix of technological advancements and strategic pivots. Volkswagen Group showcased a solid-state battery prototype, promising longer ranges and faster charging times, while its PowerCo division introduced a Unified Cell battery system with a projected 450 km range and under-25-minute charging times [6]. BMW debuted the Neue Klasse iX3, an electric SUV with 463 horsepower and 400-kilowatt charging capabilities, while Mercedes unveiled the GLC with EQ Technology, an electric variant of its popular gasoline model [2].

These innovations are critical, but their success hinges on affordability. European consumers remain price-sensitive, with compact EVs costing over 50% more than comparable internal combustion engine (ICE) vehicles [5]. To address this, German automakers are introducing models priced under €25,000, such as the Audi Concept C, which previews a minimalist design philosophy and hints at a production roadster to replace the iconic TT [3]. However, Chinese competitors like Leapmotor and GAC are already outpacing them. Leapmotor’s B05 hatchback, set to launch in Europe in mid-2026, and GAC’s Aion V SUV, unveiled at IAA 2025, offer aggressive pricing and rapid production scalability [1].

Strategic Diversification and Regulatory Uncertainty

The IAA 2025 Auto Show also revealed a shift in strategy among European automakers. Stellantis, for instance, announced it would no longer pursue an exclusive EV roadmap, citing the EU’s 2035 carbon emissions targets as unrealistic [1]. This signals a broader industry trend: the recognition that a full transition to EVs may not be economically viable without significant policy support. Meanwhile, Volkswagen and Stellantis are diversifying their production to include both EVs and ICE vehicles, a pragmatic response to regulatory uncertainty and consumer hesitancy [6].

Government policies remain a double-edged sword. Stricter EU CO2 standards are expected to push EV sales to 25% of the market by 2025, but the withdrawal of subsidies and lack of clear policy signals are deterring consumer adoption [5]. For German automakers, the absence of a unified European industrial strategy—unlike China’s state-backed EV push—complicates their ability to scale production and compete globally [4].

Can German Automakers Reclaim Their Edge?

The answer lies in three key factors: cost efficiency, technological differentiation, and strategic agility.

1. Cost Efficiency: German automakers must reduce production costs to match Chinese competitors. Volkswagen’s PowerCo battery system and BMW’s 800-volt architecture are steps in the right direction, but scaling these technologies will require significant capital investment. Meanwhile, Chinese manufacturers benefit from battery prices below $100 per kilowatt-hour, a cost advantage that German firms must counter [5].

2. Technological Differentiation: Innovations like solid-state batteries and AI-integrated infotainment systems (e.g., BMW’s Panoramic iDrive) could help German brands retain their premium positioning. However, these features must be priced to justify their value in a market where affordability is paramount [1].

3. Strategic Agility: German automakers need to adapt quickly to shifting trade policies and consumer preferences. Mercedes’ decision to absorb U.S. tariff costs rather than raise prices and Polestar’s pivot to Alabama production highlight the importance of flexibility [4]. Yet, these moves are reactive rather than proactive, and long-term success will depend on proactive investments in emerging markets like Southeast Asia and India.

Conclusion: A Crucible Moment

The IAA 2025 Auto Show demonstrated that German automakers are aware of their challenges and are investing in solutions. However, their ability to reverse declining profits and market share will depend on their capacity to innovate at scale, navigate trade and regulatory complexities, and compete with the agility of Chinese rivals. For investors, the coming months will be critical: if German automakers can align their strategies with cost-effective electrification and global market realities, they may yet reclaim their position as industry leaders. But if they continue to prioritize legacy models over disruptive innovation, their decline may become irreversible.

Source:
[1] Dramatic German new-car market drop [https://autovista24.autovistagroup.com/news/dramatic-german-new-car-market-drop-despite-astonishing-phev-performance/]
[2] This week in EV tech: Highlights from IAA Mobility [https://www.digitaltrends.com/cars/this-week-in-ev-tech-highlights-from-iaa-mobility/]
[3] 'It's Europe vs China' as Chinese brands crowd Munich car show [https://www.reuters.com/business/autos-transportation/its-europe-vs-china-chinese-brands-crowd-munich-car-show-2025-09-05/]
[4] Europe's Car Industry in Transition: Stuck in Neutral or [https://www.delorscentre.eu/en/publications/detail/publication/europes-car-industry-in-transition]
[5] EV Report 2025: Real Data from China, Europe & USA [https://germanautopreneur.com/p/ev-report-2025-china-europe-usa-market-data]
[6] Made in Europe: Volkswagen, PowerCo and Elli launch pioneering battery and energy technologies [https://www.volkswagen-group.com/en/press-releases/made-in-europe-volkswagen-powerco-and-elli-launch-pioneering-battery-and-energy-technologies-19801]