German Auto Suppliers Are Dying. Some Found a Way Out

Welcome to Issue #105 of The German Autopreneur.

Recently, I was in Vietnam.

More and more German auto suppliers are expanding into Vietnam. The reason is simple: Great food. But more importantly: Well-trained workers. Low costs. And most crucial: Moving production out of China to reduce risk.

A fellow entrepreneur invited me to speak at a business summit there. My topic: The automotive market. Specifically focused on German suppliers. Where they stand. Where the market is heading. What this means for mid-sized companies.

The central question: You're the CEO of a traditional German supplier. Order books look terrible. What do you do?

For everyone who wasn't there, here's my answer. Spoiler: It's not about transformation. It's about returning to what made these companies successful in the first place.

The Situation

German auto suppliers are the backbone of Europe's largest industry. Thousands of specialized, family-owned manufacturers. What Germans call the Mittelstand. Hundreds of thousands of jobs. World market leaders in their niches.

And they're in their worst crisis in decades.

European suppliers have cut over 100,000 jobs in the past two years.

Bosch makes only half the profit it used to. Over 20,000 automotive jobs will be eliminated by 2030. ZF sits on over €10 billion in debt. Continental is dismantling itself.

One in four companies in the industry expects a wave of insolvencies within the next 12 to 24 months.

Why?

1. Many suppliers are directly tied to combustion engines. They make parts electric cars don't need. Injection systems. Exhaust components. Transmission parts. Result: Their addressable market shrinks year by year.

2. Pressure from China keeps growing. Chinese parts are 20-30% cheaper. At comparable quality. Transmission part imports from China have tripled in recent years.

3. Plus: New automakers have much higher vertical integration. BYD produces 70-75% in-house. They need fewer suppliers.

The result: European suppliers have EBIT margins of 3.6%. In China, it's 5.7%.

At the same time, these companies should be investing heavily. In new products. New markets. Their transformation.

But that's becoming harder. 40% of the world's largest suppliers now have credit ratings so poor that banks barely lend them money for transformation. And cash flow is shrinking too. A vicious cycle.

I analyzed supplier problems in detail in last summer's newsletter.

Today, we look at how they get out.

The Key Insight

We constantly talk about transformation. About how these companies must completely reinvent themselves.

I think that's too narrow.

German suppliers have built competencies over decades that are still needed.

It's not always about complete reinvention. It's about using existing strengths strategically. In core business or in new markets.

Maybe it's less about transforming. More about transferring.

I see two paths.

Scenario 1: Last Man Standing

The big picture: The combustion market is shrinking. Electric mobility is growing.

If your business model depends on combustion engines, your addressable market shrinks.

The question: How do you respond?

The obvious answer: Expand into other markets. We'll talk about that later.

But there's another strategy. Consolidate. Defend your niche. Grow in a shrinking market.

According to KPMG, 63.9% of all vehicle subsystems are powertrain-agnostic. Over half of all parts are needed regardless of the powertrain. Chassis springs. Seating systems. Brakes. Door systems.

These markets aren't shrinking. They're just shifting.

This strategy has three advantages:

1. Cash cow. The technology is mature. No massive investments in new development needed. Margins stay stable.

2. Pricing power. Competitors leave the market. Whoever remains gains market share and negotiating power.

3. Aftermarket. Over one billion combustion vehicles are on the road today. They need spare parts. For decades to come. Schaeffler achieves EBIT margins over 15% in the spare parts business. Four times more than new business. A huge market that won't disappear quickly.

This includes active consolidation. Buying competitors.

According to Roland Berger, the most successful suppliers make three times more acquisitions than weak ones. If you want to grow in a shrinking market, you buy your competitors.

By 2030, an estimated 20-30% of smaller suppliers will disappear through bankruptcy or acquisition. Whoever's still standing wins.

And there's another dimension: New customers.

The global auto market isn't shrinking. It holds steady at around 90 million vehicles per year. What's shrinking is Germany's share.

So why not supply the new winners?

Brose produces over 25 million door and closure systems annually in China. For major Chinese manufacturers. ZF supplies steer-by-wire systems to NIO.

BYD is building its plant in Hungary. And working with European suppliers there.

But let's be real: this won't happen by itself. BYD has 70-75% vertical integration. Chinese suppliers have 20-30% cost advantages.

And new manufacturers operate on completely different timelines. European development cycles run about 48 months. Chinese manufacturers launch new models in 18-24 months.

If you want to supply these customers, you must adapt to their speed.

This door is only slightly open.

Scenario 2: New Markets

So: Scenario 1 is defending core business. Dominating niches. Getting stronger while others give up.

But that's not enough for everyone. Some suppliers need new markets.

But not just any markets. Markets where existing competencies give a head start. An unfair advantage.

You want a new market where you have an advantage over any startup with the same capital.

What markets are these? Let's look at two examples: Defense and robotics.

Defense

Europe's defense spending rose from €218 billion in 2021 to €343 billion in 2024. +57% in three years.

Germany plans to double spending to about €162 billion by 2029. For a country that has historically been one of NATO's most reluctant defense spenders, this is a seismic shift. The EU wants to mobilize hundreds of billions more by 2030.

In 2024 alone, over €100 billion flowed into new equipment and development.

Conservatively estimated, 30-40% lands with suppliers.

But the interesting part isn't just volumes. It's margins.

Rheinmetall achieves 19% EBIT margins in defense. Automotive is only 4%.

Why? Many defense contracts run as cost-plus models. The client reimburses costs and pays a guaranteed margin on top. The exact opposite of automotive price pressure.

And the competency overlap is real. If you can manufacture precision parts for cars, you can do it for defense technology. Same machines. Similar quality requirements.

Plus: Europe's biggest defense contractors are at capacity. Rheinmetall. Franco-German tank builder KNDS. Defense electronics maker Hensoldt. All booked solid for years. They must outsource. And they're looking for suppliers with free capacity.

And the automotive industry has exactly that right now.

Schaeffler is partnering with European defense AI startup Helsing on drone components. The goal? €1 billion in defense revenue within five years. Deutz supplies engines for military vehicles and is expanding into drone propulsion. Mid-sized companies are signing their first defense contracts. Even talent is moving across. Rheinmetall actively offers Continental employees the chance to switch.

But there are hurdles. Security clearances take months. Procurement cycles run 2-5 years. And you often need special certifications.

The most realistic entry for mid-sized companies: As Tier-2 suppliers under major defense contractors.

This is all just beginning. But given the geopolitical situation, the market will likely stay lucrative long-term.

Robotics

But defense isn't the only option. I wrote extensively about humanoid robots in Issue 100.

Short version: A humanoid robot's supply chain significantly overlaps with a car's. Motors. Transmissions. Sensors. Control electronics. Precision mechanics. Goldman Sachs estimates the market at $38 billion by 2035. According to McKinsey, 40-60% of costs go to drives and mechanics.

That's exactly what auto suppliers do best.

And this market is gaining momentum. Automakers like Tesla, Hyundai, and Xpeng are developing their own humanoid robots. Meanwhile, dedicated robotics companies like Figure and Neura Robotics are emerging. Many analysts expect the robotics market to become larger than automotive.

This is an opportunity for suppliers. All these players need someone who can mass-produce high-precision components. Some suppliers already see this. Schaeffler, for example, is betting big on humanoid robots.

The advantage over defense: Shorter cycles. No security clearances. No multi-year procurement processes.

The disadvantage: The market is still early. Volumes are small so far.

But those who start now build an edge. When the market scales, it needs suppliers. That's the opportunity.

What About Software?

There's another trend we must address.

The software-defined vehicle. Manufacturers increasingly expect their suppliers to deliver software. Not just metal parts. But software. Or complete hardware-software systems.

Sounds like an opportunity? Probably not.

Traditional hardware suppliers have no unfair advantage here. On the contrary. They have a structural disadvantage.

Their organization and culture usually aren't designed for software development. They don't have the right competencies, resources, and talent.

And there are almost no examples of traditional industrial companies successfully becoming software companies. The playbook simply doesn't exist.

So software isn't another path. But it's a reality you need to understand. The market is shifting. But real opportunities for traditional suppliers lie elsewhere.

My Take

Back to the Vietnam question: You're the CEO of a traditional German supplier. Order books look terrible. What do you do?

Yes, the situation is serious. But this isn't the end of the world. It's entrepreneurship.

What we're seeing is fundamentally simple: The market is changing. And as an entrepreneur, you must make strategic decisions. Where does my market stand? Where is it going? Where do I stand? And where do I want to go?

Nothing new. Entrepreneurs have been doing this for centuries.

It only feels dramatic because the automotive industry was extremely stable for decades. Predictable cycles. Reliable customers. Growing markets. Many companies simply aren't used to making such fundamental decisions anymore.

But that's exactly what's needed now.

Do I stay in my niche and bet on coming out stronger? Or do I enter a new business field?

It doesn't have to be either-or. You can do both simultaneously. Secure core business AND open new markets. But consciously. As a strategic bet.

What doesn't work: Waiting.

And almost as important as the right strategy: Start learning again.

This industry was successful for so long that many forgot how to be curious. To learn from other industries, countries, companies.

In China, we see speed and efficiency we rarely achieve in Europe. You can laugh it off and make excuses for why it "won't work here." Or you simply fly there. Let them show you how they do it. And bring the lessons back to Europe.

That's the real difference between those who survive. And those who don't.

Not transformation. But the willingness to be entrepreneurs again.

🔗 al1 | ane1 | de1 | ftia1 | gs1 | hb1 | mck1 | rb1 | re1 | sp1 | sp2 | ts1

That's all for today.

Feel free to reply to this email with your thoughts.

Until next week,
Philipp

PS: If you find value here, share it with someone who should read it too.

I’m Philipp Raasch.
Ex-Mercedes. Now I help 80,000+ automotive professionals make sense of the industry's biggest transformation.