- Andrzej Krajewski
Overcoming bad choices.
"The German car industry will collapse, Germany will collapse. At least Germany as we have known it so far" announced Gabor Steingart on the pages of Focus magazine on July 15, 2023.
The former editor-in-chief of the Handelsblatt newspaper and then its publisher has sounded the alarm. In his assessment: "the German automotive industry is facing its greatest challenge since the invention of the internal combustion engine."
A week later, on July 21, the Handelsblatt itself published an extensive analysis confirming the observations of its former boss. It says that Germany has something to worry about. In the first half of 2023, the flagship brands of the local automotive industry: Volkswagen, Audi, BMW and Mercedes-Benz, produced more than half a million fewer cars than in the same period four years earlier - in 2019. This represents a decline of almost 20 per cent overall. To make matters worse, German automakers are giving ground to competitors where the future is being forged. It's losing to foreign electric car manufacturers, and it's losing at every turn.
It's too early to talk about disaster, but the German automotive industry is on a curve it hasn't experienced in decades. If it doesn't emerge victorious from this bind, the effects will be felt not only by the entire German economy but also by all of Europe.
Due to a lack of clients, Volkswagen had to cut production and cut costs this summer. Mercedes' luxury electric cars, meanwhile, are losing out in the Chinese market, the most critical market for the Stuttgart-based giant. Audi, on the other hand, is unable to develop its own e-platform, designed for the new generation of electric vehicles. It invites, therefore, Chinese companies to cooperate. At the same time, Tesla is elbowing its way into the German market.
In the first quarter of 2023, Elon Musk's company sold more than 20,000 electric cars to customers in Germany. Germans choose them almost twice as often as battery-powered models from Volkswagen, Audi, or Mercedes.
This is where the question arises. How can Germany, one of the world's largest and perhaps most qualified car manufacturers, slowly slip down the hierarchy of car suppliers?
It seems that German carmakers slept through the early stages of the electric race, and once they were in it, they made cardinal mistakes, often due to their own arrogance. So let's trace how this happened.
German audacity
"Tesla will be the first US automaker to go public since the Ford Motor Company held its IPO in 1956." - announced in February 2010 Elon Musk. Adding further that his company will become a milestone in the resurgence of the electric car idea, which until recently had been rejected by most car companies.
Despite the sceptics, Musk turned out to be right. Although it should be remembered that a major influence on his success had the US administration of President Barack Obama. In early 2011, the US president promised voters in his State of the Union address that there will be one million electric cars on American roads in four years' time. To achieve this, he gave $2.4 billion in subsidies to manufacturers (mainly Musk) and $1.5 billion to companies developing designs for more efficient lithium-ion batteries.
Soon, other European countries and China followed the US lead, and work on improving electric cars took off. This dovetailed perfectly with the principles of the global climate agreement concluded under the auspices of the UN in Paris on 12 December 2015. It has so far been ratified by 195 countries, the only major country not to have done so being Iran. The signatories have pledged to pursue policies that will limit the increase in the global average temperature to less than 2°C. The development of electric mobility in highly developed countries was seen as part of the fight against carbon emissions. This, in turn, meant diverting huge sums of money to this end.
Meanwhile, up until the Paris Agreement, German carmakers stubbornly refused to see the new trend. They stuck to the strategy they had adopted at the beginning of the 21st century, saying that the future lies in even more perfect diesel engines.
During the long reign of Angela Merkel, as the European Union successively tightened emission limits for carbon monoxide, hydrocarbons and nitrogen oxides for passenger cars, it seemed that diesel engines would be the engines better able to adapt to the new requirements than petrol ones. However, the industry had reached a point where it was no longer technologically possible to reduce emissions further. At the time, German companies, led by Volkswagen, preferred to focus all their efforts on hiding the facts rather than admitting they were wrong. The nearly 10 million cars sold not only under the Volkswagen brand but also under the Skoda, SEAT and Audi were fitted with software designed to falsify emissions measurements. The clever program detected that the car was being tested and immediately switched the diesel engine to low-emission mode. Thanks to the software, the new cars complied with the strictest standards, but only at diagnostic stations. During everyday driving, such low emissions proved impossible.
The scam, later dubbed "Dieselgate", came to light in 2015. In September of that year, the US Environmental Protection Agency (EPA) discovered what was going on. Unfortunately for the Germans, Donald Trump, who took over the US a year and a half later, made the German car industry one of his targets. He sought retaliation, believing that Germany played unfairly with America and its companies. This directly cost the Volkswagen Group more than $25 billion, which it had to pay into a compensation fund to deal with the claims of defrauded customers. On top of this came losses in image and sales. Thanks to the continued support of Angela Merkel's government, the company was able to weather the storm. However, this did not prevent another type of loss.
Far more in tune with the spirit of the new age, car companies from the US, China, Japan and South Korea were investing huge sums in the development of electric or hybrid cars at a time when German companies were stubbornly perfecting the diesel engine. Competitors were also building the facilities necessary for the electromobility revolution, led by huge electric battery factories. In this area, especially Asians have been very successful. In 2022, more than 70 per cent of all lithium-ion batteries in the world were supplied by Chinese, South Korean and Japanese companies. The Chinese conglomerate CATL leads the pack with a 35 per cent market share. In second place is South Korea's LG Energy Solution with almost 16%. BYD comes in third with 11 per cent.
Among the big manufacturers of this most important component of any electric car, without which it won't hit the road, you won't see any company from Germany.
Rescue plan
When Chancellor Angela Merkel negotiated a settlement with the Americans to protect German companies from the consequences of "dieselgate", she also launched a domestic electric mobility programme. The government in Berlin allocated large sums of money to expand the network of charging points for electric cars and to subsidise customers who wanted to buy a car with such a drive. It was electric cars that were to save a key sector of the German economy.
The peak moment of optimism came in early November 2019. At that time, the Chancellor and her ministers held a summit meeting at the Chancellery with the heads of German automotive companies, trade unions and the Association of the Automotive Industry (VDA). Later it was announced that there would be no turning back, and that by 2030 there would be one million electric vehicle charging points for many millions of such cars in Germany.
The problem is that the competition still had a 10-year head start. Elon Musk had the audacity to build a huge Tesla factory in Grünheide, near Berlin. And it turned out to be his success story.
But it seems that a bigger threat to the Germans than the Americans is the Chinese. Looking only at sales of electric cars: the BYD corporation in 2022 sold a total of 911 000 units. And counting hybrid cars, more than 1.8 million, recording an increase in sales over the previous year of the size of a whopping 211%! Tesla in 2022, sold as many as 1.3 million electric cars, and recorded a year-on-year increase of 40%.
Meanwhile, Germany's largest manufacturer, the Volkswagen Group, which includes the Audi, Porsche, Skoda, SEAT and of course, Volkswagen brands, among others, sold 572 000 electric cars in 2022. Noting a 10 per cent increase in electric car sales. And yet, in addition to BYD, other Chinese manufacturers, led by BAIC and Zotye, are also catching wind in their sails.
Overall, in the Middle Kingdom, a key market for German companies, through preferences and subsidies, more than 20 per cent of newly purchased cars are electric cars. And in the vast majority, Chinese electric cars. As presented, the sales figures of top German brands occupy places only in the second ten of Chinese rankings.
The devil, as usual, is in the details. Electric cars need neither a gearbox nor a clutch nor the whole complicated system of a diesel or petrol engine - thus the finest works of German technical thought. Instead of these, batteries are essential. In this way, German automotive loses its greatest assets. Now it belongs to others - the Americans and the Asians, mainly the Chinese.
Admittedly, it was the European Union institutions, with very strong German lobbying, that passed a directive banning the registration of new passenger cars with internal combustion engines on the old continent from 2035. Contrary to Berlin's earlier expectations, however, it may turn out that it is not the German carmakers that will benefit most, but the American and Asian ones.
Last year, Volkswagen CEO Herbert Diess announced a massive investment in constructing six large battery factories. But a decade's delay will not be easy to make up. If this feat is not achieved, we could be witnessing the twilight of the German car industry, and perhaps even, as Steingart claims, "the end of Germany as we know it”. But does it really so much depend on just one industry in Germany?
Giant after good luck summit
Let's start with the fact that the automotive industry has been the main driver of the German economy for several decades. Its importance has only grown since 1990. Thirty years ago, the automotive industry in unified Germany was responsible for 3 per cent of Germany's annual GDP; today, it accounts for about 4.7 per cent, and indirectly as much as 7.5 per cent of GDP if you include the automotive suppliers.
In no other of the world's most developed economies is the automotive industry as crucial as in Germany. In the US, Japan and South Korea, the share of the automotive industry in key economic indicators such as GDP and export earnings is significantly lower.
In Germany, car factories provided jobs for 750,000 people in 1992. Today, the figure is around 900,000, and including subcontractors, it is as high as 1.7 million. At the same time, German cars, which still enjoy an excellent reputation, are Germany's most important export product. More than 65 per cent of them go to foreign markets. In 2022, their sale brought Germany export revenues of EUR 245 billion.
This figure may not seem so impressive when you consider that Germany's total exports in 2022 were worth 1.58 trillion euros. What is more, despite all the international turmoil, they grew by as much as 14 per cent year on year, making Germany the world's third-largest exporter after the United States and China.
However, no other sector of their economy can match the automotive industry in terms of foreign trade. Even the machinery and chemicals industries lag behind.
This interconnectedness means that when the German car industry has a runny nose, the whole of Germany feels the chill and then falls ill. What's more, the malaise threatens not only Germany.
In the case of the Czech Republic, where the Volkswagen Group has owned the Skoda plant in Mladá Boleslav since 1991, the automotive industry employs some 120,000 people in a country with a population of around 10 million. While sales of cars and their components abroad account for up to 20 per cent of Czechia's total export earnings.
The economy's dependence on the car industry is even more pronounced in Slovakia. This country of just 5.4 million people has become one big car assembly plant. The car industry employs about 170,000 people and accounts for about 30 per cent of export earnings. Until 2006, Slovakia had only one manufacturer, Volkswagen Slovakia, with a plant in Bratislava. Investors from other countries then came in, but diversification does not mean the economy is immune to a possible collapse of German car companies.
Nevertheless, it is Hungary with 9.7 million populace, that is potentially in the worst situation. Mercedes has its car factory in Kecskemét, Audi in Győr, and BMW is finishing a plant near Debrecen. Hungary's car industry already accounts for 18 per cent of the country's export earnings. And it is almost entirely dominated by German companies.
On this map of threats, it is still worth remembering Poland, as around 25% of the cars produced in the country are German brands. The investments like Volkswagen’s in Poznan and Polkowice, or by Mercedes in Jawor, are of great importance for the western regions of the country. The situation is similar in Spain, where Seat, which belongs to the Volkswagen Group, is of great importance for Barcelona and the entire region of Catalonia.
In addition to the final plants that crown the entire production process, there are thousands of subcontractors that are directly or indirectly involved in the entire German supply chain.
So it is easy to see that if the German car industry's cold does not go away but becomes a chronic illness, not only Germany but also the Czech Republic, Slovakia and Hungary will be seriously affected. Poland and Spain could also be badly hit.
The whole issue is also worth considering in a slightly broader and different context.
It is worth remembering that the German economy is now in its third quarter of recession. According to a report by the International Monetary Fund, of the G7 countries, Germany is the only one to have recorded consecutive declines in GDP.
And there are no signs that a turnaround is imminent. The PMI, which tracks developments in the manufacturing sector, is breaking depressed records in Germany month after month. While 50 points indicate a neutral level, it fell to 38.8 points in July 2023.
In short, pessimism has taken hold between the Oder and the Rhine, and the alarming news from the car industry is only adding to it. The recession threatens to turn into a crisis, and an economic crisis could turn into a political one. The first symptom of this is the rapidly growing support for the AfD party - Alternative fur Deutschland. Some 22 per cent of those surveyed are already planning to vote for the far-right party, which has so far remained on the fringes of political life. In the polls, the AfD has overtaken the SPD - the Social Democrats and the Greens, and only the CDU/CSU is still ahead of it.
Since the middle of the last century, the foundations of German democracy have been economic prosperity and social security. When there are fears that both foundations are beginning to crumble, there is nervousness and a search for - alternatives.
Germany's economic health and predictability also underpin the eurozone as a whole. Especially when Greece, Italy and Spain - all ‘euro countries’ are heavily indebted. Until now, the economic strength of the North has balanced the weakness of the South. If this balance is lost, the whole structure will begin to totter.
Awareness of this problem seems to be growing in Berlin. In mid-May, following a meeting under the auspices of the German Association of the Automotive Industry (VDA), carmakers and their suppliers announced that they would invest a staggering €250 billion in research and development of new technologies by 2027. Spending almost twice as much as, for example, Poland's annual budget income is expected to result in the birth of innovative cars and batteries far better than any currently available on the market.
So the Germans have taken up the challenge posed to them by Musk, the Chinese, the Japanese, or the Koreans. But is it a little too late? We will find out only when we see the next stages of the race, the future of which is at stake not only for Germany but for all of Europe.
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