The German motor vehicle industry: Costs and crisis

•The German motor vehicle industry is still operating with economies of scale.•The German labor market has become more sensitive to the price of labor and other input prices.•The recent German motor vehicle industry restructuring has increased its competitiveness.•German reunification appears to have reduced costs for the motor vehicle industry.

Japanese expertise with a flexible and efficient automobile manufacturing system posed a challenge to the German motor vehicle industry, renowned for high quality. We investigate cost characteristics of the German industry, including scale economies, input relationships, and other issues. We find German production still has scale economies available, that labor and outsourced intermediate goods and domestic and outsourced intermediate goods are substitutes, the industry has increased its use of outsourced inputs, labor demand has become more sensitive to its own price and that of outsourced inputs, and the industry restructuring appears to have been successful in increasing its international competitiveness.