Germany R&D Spending Flat as Auto Research Falls

Companies in Germany lifted internal R&D spending only marginally to 92.9 billion euros in 2025 from 92.5 billion euros a year earlier, while research staff fell 1.2% to 547,447 full-time positions. External R&D spending slipped 0.9% to about 32.7 billion euros, the first annual drop in nine years. Internal R&D intensity eased to 3.07% of GDP from 3.12%, underscoring that the recovery in innovation spending is stalling rather than accelerating.

The weakness is most acute where it hurts the economy most: autos. Germany’s carmakers and key suppliers cut internal R&D spending by nearly 1.5 billion euros, or 4.7%, while trimming research staff by 5.8%. That is not just a corporate cost-cutting story. It is a warning that the sector most central to Germany’s export model is defending margins by sacrificing future technology spending. For investors, that is a signal to treat Germany’s industrial transition with caution, especially in legacy auto supply chains.

The pullback is broader than the car industry, even if not uniform. Information and communications firms, including software groups, reduced internal R&D spending by 2% even as external spending rose, while the workforce in research crept up only 0.6%. By contrast, machinery makers stepped up internal R&D by 9% and external spending by nearly 25%, with research staff up 4.2%. Pharma also posted a double-digit rise in internal spending, though much of that reflected a shift of work back in-house rather than a true surge in activity.

The message for markets is clear: Germany’s innovation base is becoming more uneven just when the country needs a broad-based capex cycle. Smaller companies are increasing engagement, but large groups are still pulling back, and the Stifterverband said companies expect internal R&D spending to fall another 1.8% in 2026. That suggests the weakness may not be a one-quarter anomaly but part of a longer squeeze from weaker sales, slimmer profits and tighter budgets.

For investors, the opportunity set is increasingly about second-order winners. Firms tied to factory automation, industrial software, lab equipment and AI infrastructure may benefit if the government’s Hightech Agenda channels more support into chips, biotech and fusion. The losers are likely to be the legacy industrial names that keep cutting research while trying to preserve near-term cash flow. If Germany is entering a new phase of industrial restructuring, capital should follow the companies that help it spend smarter, not just cheaper.