Germany’s auto heartland Baden-Wuerttemberg hits hard economic times

By Maria Martinez

MOESSINGEN, Germany, Feb 24 (Reuters) - Dostech, a small supplier of sealant technology in Germany's industry-rich Baden-Wuerttemberg region, shifted focus in 2018 when a surge in automotive enquiries prompted it to embark on a major electric transport project.

The move initially paid off, fuelling rapid growth and enabling the company to buy the building that now houses its headquarters in Moessingen, south of Stuttgart. But it also exposed them to Germany's carmakers, which are now mired in crisis.

"This area is shaky," director and co-founder Steffen Braun told Reuters. "It is no longer as stable and it's hard to make investments." The firm has had to cut staff and auto-related revenues have fallen.

Such pressures are mirrored across Baden-Wuerttemberg, which holds an election on March 8 and where the economy has become the top concern of voters.

The state is home to Mercedes and Porsche, car brands that were for decades synonymous with German manufacturing excellence. But intense competition - particularly from China - an uneven shift to EVs and rising costs have rocked the sector.

Falling demand in the auto supply chain is squeezing hundreds of smaller manufacturers and threatening job security and municipal services.

Although Chancellor Friedrich Merz's conservative party is still likely to win the election, the economic worries and a sense of lost regional pride are providing fertile ground for the far-right AfD's narratives.

Auto Downturn and Economic Strain in Baden-Wuerttemberg

A MUCH TOUGHER WORLD FOR AN EXPORT POWERHOUSE

Once a leader, Baden-Wuerttemberg is more exposed than most to the structural change sweeping through German industry.

The state is Germany's top exporting region, accounting for 15.5% of national exports, and manufacturing accounts for 38.1% of the state's gross value added, compared with 28.5% nationwide. 

Baden-Wuerttemberg's economy shrank by 0.4% in 2024, more than the 0.2% decline in Germany as a whole and, while the country returned to modest growth last year, the state is expected to have contracted again.     

Adding to the difficulties, U.S. tariffs which have upended world trade have hit hardest in export-oriented states with a large automotive footprint, said Ifo economist Robert Lehmann. 

"Baden-Wuerttemberg is a classic example," he said.

Insolvencies and Labour-Market Stress

INSOLVENCIES AND TROUBLE IN THE LABOUR MARKET     

Signs of distress are building. 

Insolvency filings highest since 2010

Insolvency proceedings in Baden-Wuerttemberg rose for a second year to 2,445 in 2024, up 30% and the highest since 2010, according to the state statistics office. A third consecutive rise is likely.

Restructuring across the industrial belt

Cornelius Pleser, managing director of Pleser KG, a valuation and asset-disposition firm, said demand for his services has jumped in Baden-Wuerttemberg, his home state. 

"Ten years ago, there was significantly more capital in the market, and in insolvency proceedings investors or successors were often found," he said, adding that the number of companies with no viable succession is now "alarmingly high." 

A wave of restructuring has spread through Baden-Wuerttemberg's industrial belt.

Domino effect through supply chains

"There is a domino effect," said Matthias Bianchi, public affairs lead of the DMB, which represents Germany's bedrock small- and medium-sized firms. "This crisis in the lead industries slowly trickles down." 

Unemployment Up; Labour Hoarding Tempers the Rise

Unemployment in Baden-Wuerttemberg remains below the national average, but the rate climbed to 4.8% in January 2026 from 3.9% in January 2023. 

Economists say the state's unemployment has not risen more because of labour hoarding, where companies hold on to staff even as demand weakens for fear of future shortages.

Skilled staff seen as irreplaceable

"The employees I've trained here are irreplaceable. If they leave tomorrow, I can't replace them the day after—impossible," Braun from Dostech said. 

But for him, staffing still brings headaches. Once he decides to move a person into a new role, the process can become what he called an "odyssey" of paperwork, shifting contacts at the authorities and long waits for approval. 

Although the rise in unemployment is so far modest, Hanno Kempermann, economist and managing director of IW Consult, said other indicators point to a weakening labour market. Job openings in Baden-Wuerttemberg have fallen by 30% compared with 2022, he said, and companies plan to cut 14,000 automotive jobs by 2030.

Union Response: Shorter Hours to Protect Jobs

"The situation is very tense," said Barbara Resch, head of the IG Metall trade union in Baden-Wuerttemberg. "Suppliers invested a lot in electromobility and now demand isn't coming and at some point they simply run out of air financially."

The main union at companies such as Mercedes and Volkswagen, IG Metall is working to protect jobs by securing agreements for shorter working hours.

"Right now it's hitting everyone: apprenticeship positions are being reduced and highly qualified people are also at serious risk," Resch said.

An Asymmetric Economic Landscape Emerges

AN ASYMMETRIC ECONOMIC LANDSCAPE

While the automotive sector is in a deep structural crisis and export-dependent industrial companies are struggling, other parts of the economy are growing strongly, said Bianca Schmitz, founding director of the Hidden Champions Institute at ESMT Berlin.

Growth pockets: robotics and medtech

"It's an asymmetry you find here," she said, pointing to fast-growing companies in automation and robotics, medtech, and software and IT.

Heavy reliance on R&D

The state accounts for more than a quarter of Germany's total research-and-development spending, underscoring how heavily the southwest's economic model leans on innovation-intensive industry and applied research. R&D investment is about 5.7% of state GDP - almost twice the national average.

What Policymakers Can Do Now

WHAT SHOULD POLITICIANS DO?

The impact of the economic slowdown is felt not only in cities such as Stuttgart and Sindelfingen, but also in small towns and villages where an auto supplier suddenly lays off staff or stops hiring. This can put financial strain on local authorities.

Municipal services and fees under strain

"People notice when the opening hours of municipal facilities are cut and kindergarten fees go up," said Friedrich Heinemann, economist at the ZEW economic institute. "That hits home."

Five economists interviewed for this article said keeping companies alive through subsidies would be a mistake, a view echoed by Reint Gropp, president of the Halle Institute for Economic Research (IWH).

"We need to allow a process of predatory competition, where new ideas push out old ones," he told Reuters.

But if keeping companies artificially alive to preserve industry is not an option, what should the next state government do to revive the sluggish economy?

Many business owners give the same answer: invest in infrastructure such as ultra-fast internet, roads and rail.

Infrastructure Funding and Timing

Merz's government last year approved a 500 billion euro fund for this and reformed states' borrowing rules, but economists say the money has yet to start flowing. 

€13bn for BW; €8.7bn for municipalities

Of the 100 billion euros allocated to the states, Baden-Wuerttemberg will receive 13 billion euros, Kempermann said, adding that 8.7 billion euros of that will go to its municipalities.

Investment still seen as insufficient

"It's a bit like a drop in the ocean, because it's still too little to eliminate the infrastructure deficits that have built up over the last 20 years," he said.

What a state government can do, according to Heinemann, is align its budget towards what is economically necessary for growth: a good education system, good roads, digital networks, R&D. 

A bellwether for Germany’s broader shift

"We need to look into what Baden-Wuerttemberg is doing and whether they manage this very structural change," Schmitz said. "It is at the forefront of what is currently happening in Germany."

(Reporting by Maria Martinez; Editing by Toby Chopra)