With major cities also eyeing partial bans on diesel vehicles to fight deadly smog, more than 800,000 jobs hang in the balance as carmakers desperately need a strategy.
Two months before a general election, both parties in Chancellor Angela Merkel's right-left grand ruling coalition are in no mood to mollycoddle an industry that is fast losing popularity.
Transport Minister Alexander Dobrindt, a member of Merkel's Bavarian allies CSU, said on Wednesday that "the automobile industry has steered itself onto difficult terrain".
"I find it dreadful that the 'Cars made in Germany' brand has been dragged into such a situation," he added in an interview with the Passauer Neue Presse.
He added that he expected to hear during the summit "an acceptable offer from the automobile industry" to fix the situation.
Merkel was more nuanced, as she noted the huge number of jobs at stake.
"The car industry is of strategic importance ... it must be strong and innovative but also honest. So it's about criticizing what needs to be criticized, but to do so while bearing in mind that it's a strategically important industry in Germany," said her spokeswoman Ulrike Demmer on Monday.
'Majority back diesel ban'
The first cracks in the oft-vaunted sector emerged in September 2015, when Volkswagen admitted installing illegal devices in millions of vehicles world-wide to rig pollution emissions readings.
But suspicions of similar cheating have since widened to other German carmakers, including Mercedes-Benz maker Daimler and BMW.
In July, Spiegel magazine heaped on further pressure as it published details of a VW letter to German and European competition authorities which it said showed that auto giants colluded on technology, suppliers, costs, sales and markets since the 1990s.
Adding to the clouds hanging over the industry, a court in Stuttgart - the home city of Mercedes and Porsche - ruled that only a partial ban on diesel vehicles would be effective at clearing the air of poisonous nitrogen oxide (NOx) emissions.
Public health outweighs the interests of diesel vehicle drivers, the court ruled.
Germany has already been warned by the European Commission over its air quality, and now public opinion is starting to swing in favour of outlawing diesel.
A survey commissioned by Greenpeace found that 57 percent of Germans back a ban on such vehicles in cities with poor air quality.
'Don't demonize diesel'
The problem is that the industry had invested heavily on diesel as it spews out less climate-altering carbon dioxide gas than petrol-burning motors.
For this reason, Merkel herself has warned against "demonizing diesel".
But the flip side of the technology is that it emits more NOx, contributing to the formation of smog and fine particles that cause respiratory and cardiac problems.
For now, Germany's auto giants are hoping to ward off a ban by voluntarily offering software patches for diesel vehicles to limit the harmful emissions, buying time as they ramp up electric car development.
VW has avowed its ambition to be the world leader in electric cars by 2025, while leading German carmakers have also pledged to cooperate on a Europe-wide network of electric charging stations.
Going into the summit, the two ministers due to lead the talks - conservative minister Dobrindt and Environment Minister Barbara Hendricks, a Social Democrat - were also still struggling to find a common line.
While Dobrindt favours the cheaper option of a software tweak, Hendricks views them as insufficient.
With the general election on September 24th rapidly approaching, the issue has given additional ammunition to Merkel's challengers, who have accused her and her ministers of failing to head off the crisis due to an unhealthily close relationship with automakers.
Former environment minister Juergen Trittin of the Greens minced no words as he accused the car industry and the government of collusion.
"At the head of the cartel is the chancellor," he charged.
Both industry and politics are to blame in the view of Stefan Bratzel from the Center of Automotive Management, based outside of the western city of Cologne.
While carmakers had driven themselves into a corner through their emissions cheating, "the culture of looking the other way and years of talks that are only symbolic have also indirectly hurt the automobile industry hard," said Bratzel, calling for an "overhaul" in the relationship between politics and industry.
By Hui Min Neo, AFP