Surprising study reveals: Why German industry is not actually dying

From car manufacturer to systems provider: This is how the German economy is currently reinventing itself

Deindustrialization – the term is haunting the nation like a specter. With tens of thousands of jobs cut at Volkswagen and Bosch and factories relocating, the gloomiest predictions for Germany's economic future seem to be coming true. But the deafening noise of the automotive crisis masks a far more complex reality. A comprehensive joint analysis by leading economic research institutes (ifo, IW, and Bertelsmann Foundation) now reveals that German industry is not dying; it is undergoing an unprecedented, radical structural transformation. While traditional goods production is shrinking, companies continue to generate stable value through new, hybrid business models. Moreover, 76 percent of industrial value creation is attributable to future-proof sectors, where pharmaceuticals and defense are currently experiencing genuine growth booms. This detailed assessment shows why the pronouncements of Germany's demise are premature, but also why the country is perpetuating a dangerous investment and bureaucracy problem.

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This will now decide the future of German industry

The debate surrounding Germany as an industrial location has oscillated between alarmism and glossing over the situation for years. At times, the country is said to be undergoing a "creeping deindustrialization," while at others, the Federation of German Industries (BDI) declares that Germany is in free fall. Simultaneously, Volkswagen announces plans to cut 35,000 jobs by 2030, and Bosch intends to eliminate 13,000 positions, primarily at German locations within its Mobility division. But what lies behind the noise of the headlines? Three renowned research institutions – the ifo Institute, the German Economic Institute (IW), and the Bertelsmann Foundation – have jointly undertaken an assessment of German industry. Their findings, published in the Frankfurter Allgemeine Zeitung in March 2026, paint a picture that warrants neither all-clear nor disaster warnings, but makes one thing clear: the reality is considerably more nuanced than the specter of deindustrialization that dominates the media discourse.

Between production slump and value creation stability

The most obvious finding is alarming: Industrial production in Germany has declined by around 15 percent since its peak in early 2018. The Federation of German Industries (BDI) calculated a production drop of 4.8 percent for 2024 alone, followed by a further decline of two percent in 2025 – the fourth consecutive year of decline. Compared to other EU countries, German industry has performed significantly worse than the average of its European neighbors since 2019. Anyone who stops at this point inevitably concludes that Germany's industrial base is systematically eroding.

However, the ifo Institute's analysis draws a crucial dividing line that is often overlooked in public discourse: the difference between production volume and value added. While the production index declined by 13 percent between 2018 and 2024, the broader gross value added fell by only 3 percent during the same period. This discrepancy is not a statistical artifact, but rather an expression of a fundamental shift in the business model of German industry: companies are producing fewer physical goods domestically, while generating relatively stable or even increasing value contributions through services, software, research, and licensing revenues. Simply looking at the production index, therefore, falls short of capturing the structural picture.

From manufacturer to system integrator – the new business model

The ifo Institute describes this process as the emergence of hybrid business models: Industrial companies are increasingly combining their physical products with product-related services, partially relocating actual manufacturing abroad, and concentrating their domestic activities on product development, engineering services, and service offerings. This trend is particularly pronounced in the automotive and mechanical engineering industries, where research and development as well as product-related services are steadily gaining in importance, while traditional manufacturing capacities are increasingly being outsourced.

This is not a sign of weakness, but rather reflects a development that successful industrialized nations like Switzerland or the Netherlands have already undergone. A company like a machine manufacturer that no longer simply delivers a milling machine, but also offers a digital maintenance system, operator training, process optimization data, and lifecycle management – ​​produces less in the traditional sense, but creates far more value. The fact that statistics primarily based on physical goods production do not fully capture this shift is a measurement problem, not an economic failure.

Nevertheless, it would be naive to interpret this finding as a sign of relief. Outsourcing manufacturing abroad poses medium- and long-term risks to innovation capacity: those who cease production lose, over generations, the production knowledge that is a prerequisite for the next product innovation. This warning is regularly voiced in economic debates, even if the immediate decline in added value has so far remained moderate.

The surprising key result – 76 percent on a safe course

The most surprising and significant finding of the joint research study is that 76 percent of the gross value added in the manufacturing sector is attributable to industries whose products have seen steadily increasing demand over the past five years. In other words, the vast majority of German industry operates in so-called future-proof sectors – from pharmaceuticals and semiconductor manufacturing to specialized mechanical engineering. Only a comparatively small portion of industrial value added comes from segments suffering from a sustained decline in demand.

This figure warrants context. The frequently cited sectors in crisis – especially traditional automotive production for combustion engines – exemplify a vocal, but not dominant, segment of German industry. When the automotive industry alone loses approximately 112,000 jobs between 2019 and 2025, garnering more media attention than almost any other sector, it's easy to get the impression that this crisis is affecting the entire industry. The study results empirically refute this generalization.

Oliver Falck, an economist at the ifo Institute, succinctly summarized the core message: He doesn't want to bet on the future without German industry. This isn't wishful thinking, but rather the sober assessment of a researcher who knows the data. It means: Germany has industrial substance – the question is whether the framework conditions will allow it to mobilize this substance in the coming years.

The automotive crisis – a special case, not a blueprint

With around 716,000 employees, the automotive industry remains one of Germany's largest and most important industrial sectors. It is undergoing a transformation process accelerated by several simultaneous shocks: the technological transition to electromobility, the loss of market share to Chinese manufacturers like BYD, the structural decline in passenger car demand in traditional sales markets, and the US tariff policy under President Donald Trump, who has imposed a 15 percent import tariff on most EU goods since 2025.

Volkswagen initially planned to cut up to 50,000 jobs, but revised the figure to around 35,000 by 2030 after negotiations with the works council. Bosch announced the elimination of 13,000 jobs in its Mobility division, with a particular focus on locations in Baden-Württemberg such as Feuerbach, Schwieberdingen, Bühl, and Homburg. German automobile exports to the USA fell by 9.4 percent to €135.8 billion in the first eleven months of 2025; cars and car parts alone saw a decline of around 17 percent in export value.

However, anyone who equates the automotive crisis with a general industrial crisis is making a fundamental mistake. The sector is suffering from a combination of self-inflicted strategic missteps – clinging to combustion engines for too long and investing too late in electric vehicle architectures – and external shocks from geopolitics and trade policy. This combination is unique and not representative of the overall picture of German industry.

Growth poles in the shadow of crisis news

While the automotive industry is shrinking, other sectors are growing strongly. The pharmaceutical industry stands out as a particularly robust counter-example: its employment rose slightly by 0.2 percent in 2025 and is projected to increase by 1.1 percent in 2026, investments are growing against the general trend by 2.7 percent (2025) and 3.0 percent (2026), and production increased by 3.2 percent in 2025. The pharmaceutical industry is thus defying the economic headwinds and underscoring its role as a key sector for Germany's industrial base.

Even more dramatic is the growth trajectory of the German arms industry. With the historic Bundestag resolution of March 18, 2025, which suspended the debt brake for defense spending exceeding one percent of GDP, and Chancellor Friedrich Merz's goal of building the Bundeswehr into the strongest conventional army in Europe, the sector has been subject to structurally altered conditions. The German arms industry employs 105,000 people and already generates a revenue of €31 billion – with a strong upward trend. An analysis by EY and DekaBank assumes that European defense investments could secure or create up to 360,000 industrial jobs in Germany alone. The share price of Rheinmetall, Germany's largest arms company, rose from around €59 in 2020 to between €1,700 and €1,800 in June 2025.

The mechanical engineering sector also presents a mixed picture: Despite a 1.8 percent decline in exports (3.3 percent adjusted for inflation) in 2025 and plummeting exports to the USA (-8.0 percent) and China (-8.2 percent), the industry still maintains a total export volume of €198.5 billion. Business within the EU single market remains comparatively stable. Growth impulses are coming from medical technology, energy technology, and specialized solutions for industrial automation and digitalization.

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Structural change as a megatrend – the five major D

The ifo Institute describes the current state of the German economy as undergoing profound structural change, driven by five simultaneously occurring megatrends: decarbonization, digitalization, demographic change, deglobalization, and China's changing role in the global economy. No other industrialized country is more affected by this combination than Germany, because the manufacturing sector has an unusually high overall economic significance and because demographic change is particularly pronounced.

Decarbonization is forcing energy-intensive industries to transform their production processes. Germany continues to be among the countries with the highest industrial energy prices worldwide. In 2023, industrial electricity tariffs in the EU were 158 percent higher than in the USA. Even though prices have fallen since the extreme year of 2022 (up to €235 per MWh), they remain structurally high by international standards at around €80 per MWh. This represents a significant competitive disadvantage for energy-intensive processes in chemicals, metal processing, and glass production.

Digitalization offers both opportunities and risks. Opportunities arise where Germany combines its strengths in system integration, mechanical engineering, and metrology with software-based solutions. Risks lie in the fact that the platform economy and software value creation tend to remain concentrated in American or Chinese ecosystems, while German companies often remain in the second tier as hardware suppliers.

Demographic change, in turn, exacerbates a structural bottleneck in the medium term: Although the economic downturn has temporarily alleviated the skills shortage – in March 2025, for the first time since the COVID-19 pandemic, there were more qualified unemployed people than job vacancies – the long-term demographic pressure remains unchanged. Some experts predict a deficit of 700,000 skilled workers for 2027. When the economy picks up, this structural shortage will once again become painfully apparent.

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The investment dilemma – too little, too hesitant

A key finding of the study by the Bertelsmann Foundation in cooperation with the German Economic Institute (IW) is that investment activity in German industry is continuing to decline. Only about half of the companies plan maintenance or replacement investments by the end of 2026 – roughly 15 percentage points less than in previous surveys. For new investments in expansion, research, and development, only a quarter of companies plan to become active. At the same time, the investment requirement by 2030 amounts to approximately €1.4 trillion, which industry and the government would have to raise to secure competitiveness and meet climate targets.

This reluctance to invest is not a sign of a lack of funds in every individual case, but rather an expression of deep uncertainty about the business environment. Companies that do not know how energy prices, bureaucratic burdens, tax rates, and trade policies will develop over the next five years tend to adopt a wait-and-see approach. According to a survey by the Chambers of Industry and Commerce (IHK), 34 percent of industrial companies are investing less in their core business processes, over 18 percent are postponing investments in climate protection measures, and more than 20 percent are cutting back on research and innovation.

This is a dangerous spiral: a lack of investment today means lower productivity and innovation tomorrow. If this structural weakness in investment – ​​which has been low in Germany for decades compared to other countries – becomes entrenched, it will ultimately jeopardize precisely those future-proof sectors that are currently demonstrating strength. The situation is not dramatic in the short term, but it is structurally worrying.

The bureaucracy problem – an underestimated cost factor

Few issues dominate the debate on business location as persistently as excessive bureaucracy. On average, medium-sized companies spend around 7 percent of their working time on bureaucratic processes, which equates to approximately 32 hours per month per company – totaling 1.5 billion working hours per year in the roughly 3.8 million medium-sized businesses alone. The German Council of Economic Experts' 2025 report attests to only a very slight decrease in the bureaucracy cost index since 2012. Planning and approval procedures that take months in other countries regularly stretch over years in Germany.

The new German government under Friedrich Merz set itself the goal in its 2025 coalition agreement of reducing bureaucratic costs for businesses by 25 percent during this legislative period, which corresponds to approximately 16 billion euros. The 2026 Annual Economic Report reaffirms that targeted reform measures to reduce bureaucracy and accelerate planning and approval processes should increase productivity and create a more innovation-friendly environment. The extent to which these commitments are actually implemented will be one of the crucial economic policy questions of the coming years.

Trade policy as a wild card

Hardly any external factor is currently burdening German industry as much as the changed US trade policy under President Donald Trump. Since August 2025, US tariffs of 15 percent have applied to most goods from the European Union. Exports to the US fell by 9.4 percent to €135.8 billion in the first eleven months of 2025, while imports from the US simultaneously rose by 22 percent to €86.9 billion – a balance that corresponded exactly to Trump's political goal of reducing the American trade surplus. Trade with China also shrank by ten percent in 2025 to €81 billion.

For export-oriented sectors like German mechanical engineering, these downturns are painful, but not life-threatening. Mechanical engineering exports to the US fell by 8.0 percent in 2025 to just under €25.2 billion, reinforcing the focus on the EU single market as a stabilizing force. The pharmaceutical industry, on the other hand, was able to maintain stable export figures to the US despite the tariff environment and even achieved an increase of 0.7 percent. This demonstrates that sector-specific resilience and price inelasticity of demand – people don't buy fewer medications simply because of a 15 percent price difference – are crucial differentiating factors.

In the spring of 2026, a partial easing of tensions became apparent: The EU and the US agreed on the initial key points of a trade agreement, which Chancellor Merz expressly welcomed. Whether this agreement will hold and lead to a lasting normalization of transatlantic trade remains uncertain, given the unpredictability of US trade policy. For German industry, planning certainty in foreign trade is a location factor of paramount importance.

The overall picture – structural break, not decline

The nuanced picture painted by the three research institutes can be summarized in one central thesis: Germany is not experiencing a gradual decline of its industrial base, but rather a profound structural break. The difference is fundamental. A decline means that the industrial base crumbles and loses value. A structural break means that the structure is reorganized – that old strengths lose weight, while new ones emerge or are strengthened.

The automotive industry is losing jobs and market share because a century-old technological paradigm – the combustion engine – is being replaced by a new one. At the same time, new growth centers are emerging in the defense industry, the pharmaceutical industry, energy technology, and, to some extent, mechanical engineering. The question is not whether Germany will have an industry, but what kind of industry Germany will have – and whether the economic policy framework will support or hinder this transition.

The investment deficit, high energy prices, bureaucratic burdens, and the demographic shortage of skilled workers are real obstacles. They alone do not justify the dire rhetoric, but they do require decisive action. The 76 percent figure, which shows that the majority of industrial value creation lies in growing segments, is a sign of strength – but a strength that cannot be taken for granted if investments fail to materialize and location conditions do not improve.

Six areas of action for Germany's industrial future

Oliver Falck from the ifo Institute and Daniel Schraad-Tischler from the Bertelsmann Foundation published concrete recommendations in December 2025 on how Germany can secure its industrial competitiveness. These recommendations can be summarized as six priority areas for action:

• Permanently reduce energy prices through an energy price cap for large industrial consumers, the accelerated expansion of renewable energies and the improvement of the grid infrastructure to make industrial electricity prices internationally competitive.
• Substantially reduce bureaucracy through the consistent implementation of the goal from the coalition agreement (a 25 percent cost reduction), the digitization of state approval processes and the shortening of planning procedures following the example of Scandinavian countries.
• Investment incentives should be created through immediate tax depreciation for investments in future technologies, the reduction of the comparatively high corporate tax burden in international competition, and the mobilization of the state's special fund for infrastructure investments.
• Maximize the potential of skilled workers through a pragmatic immigration policy for qualified professionals, increasing the labor force participation of women and older workers, and aligning the education system early with the skills requirements of future industries.
• Strengthen technological sovereignty in key areas, particularly in semiconductor manufacturing, quantum technology, battery technology and AI-based production control, in order to reduce strategic dependencies.
• Diversify foreign trade risks by developing new sales markets in Southeast Asia, India and Latin America, and by strengthening the EU internal market as an anchor of stability against external trade policy shocks.

The decisive decade

Germany faces a crucial economic decade. The foundation is there: three-quarters of industrial value creation is concentrated in growing segments, a defense industry boasts historically unprecedented growth prospects, a pharmaceutical industry is investing against the trend, and a mechanical engineering sector maintains an export volume of nearly €200 billion despite significant headwinds. As the ifo Institute put it: The German economy is undergoing profound structural change, characterized by decarbonization, digitalization, demographic shifts, and geopolitical upheavals – and it is only slowly and costly adapting through innovation and new business models.

Slow and costly – that's the crucial diagnosis. The potential for transformation is undeniable, but the speed of transformation is insufficient. If Germany succeeds in lowering investment barriers, stabilizing energy prices, reducing bureaucracy, and aligning the education system with the needs of the next industrial generation, then Oliver Falck's prediction – that the bet on the future cannot be made without German industry – is a sound position. If not, then the structural break could still turn into a gradual decline. The decision will not be made on factory floors, but in the parliaments and ministries of the coming years.

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