The car industry is regarded as Germany’s flagship sector, and the brands have been largely successful around the world for decades. But now they face an uncomfortable turning point.
Significant increase in production, lavish profits in day-to-day business, many new models in the pipeline: the situation of the German car companies seems cheerful. The premium providers BMW and Mercedes have even increased their financial targets for profits this year. The faltering supply streams for important individual parts such as electronic chips seem almost forgotten.
But under the hood, before the start of the IAA car and traffic fair in Munich, there were numerous problems. Even the internal relationship between car manufacturers and suppliers is rumbling: the manufacturers are making high profits, while their mostly medium-sized parts suppliers have to keep their heads above water with financial aid.
The headwind in China, the most important car market, where the business with power is shifting towards electric drives, is all the more inconvenient. Because Volkswagen, for example, finds it difficult to get going with its electric cars in the People’s Republic, the Wolfsburg-based company recently lost its market leadership, which it had held for decades, with its core brand VW passenger cars.
Expert: Waiting is not an option
“With the combustion engine business in China, German car manufacturers have traditionally supported their business in other areas of the world – they are currently being caught off guard by the situation in China,” says Philipp Kupferschmidt, responsible for the automotive industry at the management consultancy Accenture in Germany. “In the perception of customers, German car manufacturers have a deficit in terms of software and technology.”
According to the expert, waiting is not an option, even if the “ruinous price war for battery cars” in China is likely to weaken over the coming years through consolidation. “The German car manufacturers will not be able to do it alone, there is no other option than entering into partnerships in order to bring the lack of competence in-house and make the appropriate leaps quickly,” says Kupferschmidt. “It is clumsy not to have good products on the market in the current growth phase.”
Volkswagen is currently taking this painful step. In order to get promising electric models on the road faster, the Wolfsburg-based company is now developing joint models based on Chinese technology together with the local electric car manufacturer Xpeng. The Ingolstadt subsidiary Audi also wants to deepen its ties with partners in China because things are not going smoothly.
Chinese manufacturers are pushing into Europe
Late last year, Mercedes had to lower its prices for the electric flagship EQS – the Swabian share price fell sharply. Even if things are going better in the premium segment than in the mass market, this shows that even the German luxury brands are no longer invulnerable in China.
The Chinese manufacturers are also increasingly pushing into the European market as the demand for electronics increases. This will also be visible at the IAA, traditionally the in-house exhibition for German car brands. Industry expert Ferdinand Dudenhöffer from the market researcher Center Automotive Research already smells “the IAA of the Chinese” and a “turning point that makes Europe an interesting market for Chinese electric cars”.
battle for market share
The fair is the start of the fight for market share on the continent. The Chinese market leader BYD will manufacture and sell around 2.5 million vehicles worldwide this year – that is the level of BMW and Mercedes. Because BYD only builds electric cars, the manufacturer enjoys economies of scale like the electric top dog Tesla, writes Dudenhöffer.
Accenture expert Kupferschmidt is more relaxed about the advances of the Chinese in what is unfamiliar territory. “The difference between a Chinese-made e-car and a German one is an average of 20,000 euros in total price,” the expert concedes the cost advantages of the Chinese. “But in Germany, the Chinese manufacturers will also charge higher prices than in China. The price difference will not be huge.”
Software competence instead of a gap
Rather, the German car industry has to think about which products they can use in the end. “The next export hit of the German auto industry must be software competence and not the much-cited gap,” he advises. “If we want to move away from sheet metal bender to software and data-driven companies, that means a cultural change in skills and abilities, we have to educate and train – and we have all the prerequisites for that.”
The economic situation in the home market of Germany and Europe will probably not give the industry any momentum in the near future, partly because of inflation and higher interest rates. Incoming orders are already causing concern, even if the order books from the pandemic are still well filled in some cases.
There are concerns, especially in the future business with electric cars, recently production was throttled at VW in Emden. The car manufacturers have actually planned strong growth again this year from a low level. But the funding should first be cut for companies, then for private individuals. If the so-called environmental premium for commercial registrations is canceled from September, expert Dudenhöffer expects “sad months”.