Industry: German car industry: Neither overslept nor overrun

The German auto industry is currently the nation’s problem child. Your sales are falling or stagnating and layoffs are imminent. Two groups are presented as the culprits for the misery: on the one hand, the management of the car manufacturers, which “overslept” the trend towards electric drives, and on the other hand, subsidized suppliers from China, which is flooding the world market with its “excess capacity”. In order to defend the national key industry, politicians are promising sales bonuses, protective tariffs, cheaper energy and weaker environmental regulations.

However, the measures are not just a defensive strategy, but also an offensive one. Because German industry remains dependent on foreign markets, where they want to beat their competitors out of the field. »German industry is no longer as superior as it once was. Are we being pushed out on the world market?” is the title of the weekly newspaper “FAS”, making it clear: If you want to be victorious, you have to be superior in order to push others out.

A key industry blessed with success

The automotive industry is “one of our key sectors,” explains Finance Minister Christian Lindner. It accounts for eleven percent of total industrial production, in France it is only seven percent and in Italy only five. The industry is innovative – it supplies around 40 percent of all patent applications and employs 800,000 people – and it is spoiled for success: German car manufacturers have waged and won price and innovation wars in the past decades, have multiplied their productivity through automation and production relocations, and they have competitors bought out or pushed to the sidelines. From around the turn of the millennium, the German auto industry even experienced a “golden age,” according to the business-related Institute of the German Economy (IW) – precisely at a time when car manufacturers in other countries were suffering. At that time, the global car market began to shift towards Asia, especially China. “Unlike the competition in Western Europe, the automotive industry in Germany was able to benefit from this,” explains the IW. Between 2000 and 2017 their production grew significantly.

The basis of the success was the German manufacturer’s business model, which is based on two pillars: Firstly, production and sales were relocated to cheaper countries abroad, especially to China – today the industry only produces around 30 percent of its cars on the German home market. Secondly, the focus was on the higher-priced premium segment, which was dominated by German corporate brands with market shares between 70 and 80 percent. This ensured them enormous profits and contributed to climate change: despite all the reductions in emissions per vehicle, car traffic in Europe is producing more and more greenhouse gases. The number of cars is constantly increasing and, on average, these cars are becoming heavier and heavier.

»There is no alternative to global sales.«

Institute of German Economy

The success of German and Asian manufacturers was primarily at the expense of locations in other European countries. France and Italy have lost over half of their production volume since 2000. There were also declines in production in Germany from 2018 onwards. However, it remains “it should be noted that the automotive industry in Germany has held up well in comparison to other traditional automotive countries in Europe over the last 25 years,” according to the IW, and “even extremely well over the period between 2000 and 2017.”

However, the golden age seems to be over for now. Where is the problem? “The greatest danger is not the technological change towards electrified drive trains,” explains the IW. The threat to the two pillars on which the German business model rests is more serious: globalization and the premium segment.

Too many factories

German car manufacturers are currently suffering from a sales crisis, especially in Europe. Car sales there are still three million units below the level before the corona pandemic. Manufacturers are fighting for shares in a shrinking pie of combustion models, while at the same time sales of electric cars in Europe and the USA are disappointing expectations. Only China remains as a growth market, where the German car industry accounts for over 20 percent of total sales. However, growth is also slowing there, which is why Mercedes recently issued a profit warning. In addition, in China of all places, growth is concentrated on electric cars, where the Germans only have a market share of five percent due to strong domestic competition.

For the time being, the days have passed when business in China was so confident that it compensated for the problems in other markets. This makes China the central problem – and the solution. Because “the future of the German automotive industry will be decided there,” according to the IW.

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However, their situation cannot be described as catastrophic. Despite sales difficulties, VW still made annual profits of 20 to 25 billion euros in the years after Corona, and paid out 4.5 billion euros in dividends to shareholders for 2023. The car manufacturers BMW and Mercedes achieved similarly high profits. The latter announced this week that it would buy back its own shares for a further three billion euros in order to please shareholders. The company has enough money. Despite the recent profit warning, its return on sales is still around eight percent; at BMW it is still six percent. The central problem in the industry is overcapacity, which is not only found in China. The German car manufacturers’ factories could produce around a third more, but there is no demand. As a result, according to the IW, “the profitability of various locations is no longer guaranteed at the moment” – factories are due to close. Because only jobs that can be rented to those who set them up will be preserved. This shows that the car industry is not “our wealth” (“Die Zeit”), but rather the capital of its owners.

Electric car – “overslept”

The German car manufacturers are not exactly in a crisis either. They are looking for ways to boost their sales permanently in order to utilize their capacities and create excess capacity for their competitors. The accusation that she “overslept” the trend towards e-mobility must be put into perspective. Among the ten largest manufacturers of battery-electric vehicles in 2023 there are four Chinese companies and three German ones, notes the IW. Germany was the second largest producer of electric vehicles, narrowly ahead of the USA – but far behind China. At 15 percent, the German auto industry’s global market share for electric vehicles is only slightly below its share of the overall market. There is also a lot of research going on: Germany still holds the most international patent applications for electrified drive trains, according to the IW. “It follows that the popular accusation that the auto industry in Germany has missed the technological change is not supported by the available data.”

The problem for German car manufacturers therefore lies in the fact that the electrification of their dominance in the profitable premium segment is at risk. “Particularly in China, German manufacturers are being put under pressure by new competitors with electric cars that are also targeting the premium segment.”

The solution: stay in the lead

Given the global overcapacity of the German auto industry, it has no other choice than to push its models into foreign markets. Car production in Germany is primarily intended for export; around three quarters of its production will go abroad in 2023. “There is no alternative to global sales if you want to maintain capacity in Germany,” says the IW.

The auto industry is also working to reduce its costs, make employees more productive and maintain or regain its technological lead over the competition in the profitable premium segment. Politicians, for their part, are holding out the prospect of new purchase premiums and a reduction in CO2 emissions₂-Emission limits and tariffs on electric cars from China. The option of promoting climate protection in Europe through inexpensive Chinese cars is rejected: “It cannot be that our companies go under because the market is flooded with state-subsidized products,” says EU Climate Commissioner Wopke Hoekstra. “That would ultimately kill European industry and we won’t allow that.”

In addition, politicians have the task of keeping access to other markets open. Because that’s where the solvency that keeps German factories profitable should come from. Governments of other countries are increasingly resisting this, wanting to protect their own industries. Brazil and the USA, but also China and Great Britain, have been particularly active here recently. The ten most active countries in setting up new trade barriers also include the three largest individual buyers of cars manufactured in Germany. Securing “free world trade” will therefore remain a central task of German foreign, trade and geopolitics. And in solving this task, it remains dependent on the support of Germany’s military protective power, which has now become Germany’s largest export market again: the USA, which is waging its own fight against China. On Friday, Washington decided to impose tariffs of up to 100 percent on Chinese electric cars.

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