Rising Labor Costs in Germany Are Reshaping Sourcing — What Cost Engineers Need to Know

€62 per hour – that was the average labor cost in Germany’s automotive sector in 2023, according to the German Association of the Automotive Industry (VDA). This figure is one of the highest worldwide and has become a serious factor in sourcing decisions for manufacturers under constant cost pressure. 

The automotive industry has long been a foundation of Germany’s economy. In 2019, before the pandemic disrupted global markets, it generated €438.8 billion in domestic production turnover. Employment numbers reflect this importance as that same year, the automotive sector employed around 833,000 people, coming second after mechanical engineering with roughly 1.09 million.

Germany’s carmakers also play a leading role in global trade. In 2019, German motor vehicles were exported globally to a value of €225 billion, accounting for nearly 17 percent of the total German exports. This industrial strength has always been underpinned by engineering precision and manufacturing quality. But as labor costs continue to rise, the economics of this sector is becoming increasingly volatile. While German vehicles still set standards for reliability and innovation, the cost of producing them is increasing to a level that challenges their place in a highly competitive global supply chain.  

The Sourcing Dilemma Facing Germany’s Automotive Sector 

Global competition is becoming increasingly intense, particularly from other European countries that have significantly lower labor costs. In 2023, German automotive labor costs averaged at €62 per hour, compared to €29 in Spain and just €20 in Portugal, according to the VDA. This disparity is prompting sourcing teams to reevaluate how and where production should take place. 

At the same time, many German OEMs and Tier 1 suppliers face both internal targets and political expectations to maintain domestic supply chains. Proximity, regulatory alignment and long-standing supplier relationships still matter. But they are becoming increasingly difficult to justify when compared to the cost advantages of other regions. 

This creates a real challenge for cost engineers. On one side, there is alignment with strategic local partners. On the other, there is the pressure to meet strict cost targets that are required to remain competitive in global sourcing tenders. It is not uncommon for supplier quotes to arrive with unclear labor content or bundled assumptions that are difficult to verify - especially when labor efficiency, shift models or automation levels are not disclosed. 

For cost engineers, the expectations are high, and the stakes are even higher. Every RFQ must be evaluated not just for technical feasibility but also for commercial viability. Labor content is one of the most significant cost drivers in manufacturing, and in Germany, this factor is impossible to ignore. 

For example, Volkswagen’s average labor costs in Germany reached €57 per hour in 2023. That figure represented an increase of around 33 percent compared to a decade earlier. Germany now has the highest labor costs in the global passenger car sector. According to the article by Reuters, labor expenses at Volkswagen accounted for over 15 percent of revenues that year, a larger share than competitors such as BMW and Stellantis, which spent between 9.5 and 11 percent according to internal assessments. As reported by the BBC, senior executives pointed to Germany’s high wage structures and slow decision-making processes as obstacles to competitiveness and the reason for cost cutting. This reflects a broader trend across the industry: even the most established players are rethinking local investments due to labor cost pressure. 

These rising costs are directly reflected in supplier offers. The challenge for cost engineers is not only identifying when quotes are too high, but also building clear, data-backed justifications that help sourcing teams negotiate more effectively or explore alternative sourcing paths. 

Without reliable tools, cost engineers are left making high-stakes decisions based on inconsistent inputs, outdated spreadsheets, or gut feeling - all of which introduce risk and reduce response speed. Every unchallenged quote or delayed analysis can result in missed savings, or worse, the loss of a competitive bid.  

The New Opportunity: Modern Cost Engineering for Smarter Sourcing 

This is where a product costing platform like Tset becomes a real enabler for sourcing teams that are under pressure to move fast, stay accurate, and keep everyone aligned. 

Tset focuses on automated, bottom-up costing using standardized logic and live data integrations. That means cost engineers don’t have to rebuild spreadsheets or reconcile inconsistent RFQ inputs. Instead, they model from the ground up - using process assumptions, machine data, labor content, and up-to-date benchmarks. 

Sourcing decisions become faster and more defendable, because Procurement, Engineering, and Controlling are all working from the same methodology with full transparency on inputs and assumptions. 

Whether you’re comparing suppliers, challenging quotes, or exploring make-or-buy options, Tset ensures that every number is traceable, and every model is easy to update. And as a cloud-native platform, it’s ready to use without waiting for IT setup or long integration cycles. 

Why Tset?

Tset equips cost engineers to model complex sourcing decisions quickly, without falling back on manual calculations or unscalable Excel models. Especially in high-cost environments like Germany, where every cent matters, speed and structured insight make all the difference. Take advantage of Tset’s benefits, including:  

• Fast scenario simulations for different sourcing locations and production setups 

• Automated cost breakdowns with full bottom-up calculations using embedded data modules, thereby cutting modeling time from hours to minutes.  

• Up-to-date master data and secondary data integrations keep your cost models accurate and defendable during negotiations. 

• Clear breakdowns that help procurement challenge suppliers with real data 

• Standardized logic across departments to reduce inconsistencies 

• Cloud-native setup with updates and maintenance fully managed