The car industry is rarely out of the news, often under gloomy headlines related to tariffs, falling sales, low uptake of electric vehicles (EVs) and workers’ strikes. While the crisis in the sector affects all global brands, German companies have been especially badly hit. Volkswagen has been reducing its production capacity, Mercedes-Benz has issued a profit warning and announced a cost-cutting programme and BMW’s value has dropped substantially over the past year. There are several reasons for German carmakers’ troubles.

These include changes in regulations, the emergence of new competitors, high energy prices, Covid disruption in both the market and the supply chain and the bottleneck created by the shortage of microchips. Also, while China was a booming market for many European and North American manufacturers, over recent years it has become a formidable competitor with its domestic brands capturing market share both locally and globally. Meanwhile, German brands’ market share in China has dropped from 25 per cent to 15 per cent in just five years.

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All this hurts not only the German economy, but also its national pride, given the role that the automotive industry has played in shaping the country’s sense of identity. These troubles come against a backdrop of changing consumer preferences. I have researched and worked with several legacy car manufacturers and believe that they have underestimated recent important shifts in users’ needs and behaviour.

The key question is this: is the current innovation trajectory of traditional German automakers going to anticipate – or even just address – consumers’ evolving needs? If we look at their performance over the last few years, I would say no. The Benz Patent Motor Car, launched in 1886 in Mannheim, Germany, is considered to be the first mass-produced car. It had three wheels and a 0.75 horsepower single cylinder engine. Over the following decades, a series of iconic German models, such as the VW Beetle and the Porsche 911, contributed to making the automobile one of the most defining consumer products of the 20th century.

The fundamental premise of their success was that the car promised speed, power and independence. BMW’s slogan, “sheer driving pleasure”, expressed the view that their customers would be drivers aspiring to buy an expensive but rewarding engineering wonder. Is this still the case today? While cars are still an object of desire and brand identification for some consumers, the aspects that attract many buyers are changing.

Rather than speed or power, they appear to be far more interested in what the car can offer over and above the driving experience. This means features like the digital interface and the sound system, and the wider considerations of nondrivers’ needs, such as how to entertain children in the back seat. Importantly, these increasingly sophisticated digital features are developed by specialist firms and rarely by the carmakers themselves.

Moreover, the automotive industry as a whole is moving towards a new paradigm, one where vehicles are increasingly autonomous and where hybrids and EVs will dominate. Several considerable inventions in the 20th century were pioneered by German firms. The Mercedes-Benz 260 D, for example, was the first mass-produced passenger car with a diesel engine. The future, however, seems to be in the hands of innovative challengers.

These include Chinese firm BYD, which overtook Tesla to become the largest electric vehicle manufacturer in 2024, as well as ventures from technology companies like California-based Waymo (Google’s former self-driving car project) with its successful robotaxis. While German car companies are still competitive, their approach to innovation has mainly been to “push” incrementally improved products to customers. In doing so, they are essentially offering them more of the same. This strategy can be effective in stable markets, but it is proving less successful in dynamic contexts where user experience has to be the focal point.

This does not mean that companies should simply provide whatever customers say they want. But uncovering so-called “hidden needs” requires a shift towards exploration, experimentation and “pulling” from users. This effectively means prioritising the needs and preferences of users when developing products and services – something tech companies are doing with their increasingly sophisticated in-car products. This is an approach that also demands openness, ability to cope with ambiguity, dismantling the “iron cages” that stifle brands’ creativity, and a certain degree of humility.

These are qualities that seem to be missing in traditional automakers. Which companies are going to lead? Those that incrementally improve existing products to appeal to buyers who want to own and drive a car? Or those that target customers who want to experience an increasingly autonomous vehicle where they interact with others (physically or digitally) and are not interested in driving? German automakers risk a sharp decline – from industry leaders to struggling laggards. A fundamental shift in mindset is the only way forward.

(The writer is Professor of Business Performance and Innovation, Warwick Business School, University of Warwick. This article was published on www.theconversation.com)