Is German automotive losing its world dominance?

By Mateusz Frączek | 27th February 2020

On a chilly October evening in Frankfurt last year, dozens of automotive experts gathered in the luxurious environs of the Villa Kennedy hotel, attempting to respond to the car industry’s alarming performance. Faced with emerging international competition, this major driver of the German economy seems to be gradually losing its market position. But, is it too late to recover?

Just a few weeks after the meeting, another piece of terrible news hit the headlines. Volkswagen’s Audi unveiled that it plans to cut as much as 9,500 positions between now and 2025. Further job losses were declared by Daimler, raising the final figure to more than 20,000.

To explain these trends, sector experts pinpoint a degree of complacency due to the nation’s lacklustre response to the market shift towards electric cars. Ralf Kalmbach, a Partner and Director at Bain & Co., emphasised that the country’s Wirtschaftswunder, or post-war miracle that recovered the nation from poverty, is facing the “biggest crisis since the invention of the automobile”.

On the contrary, a quick glance at last year’s performance seems to tell a different story. With 3.6 million car registrations, Volkswagen, BMW and Daimler finished the year on a high. More than 283,000 cars were registered in December alone — a 20% increase from 2018. Furthermore, Automotive specialist Peter Fuß, Senior Advisory Partner at EY, highlights that due to car industry promotions, the sales of SUVs also rose by one-fifth in 2019.

However, it is argued that tighter EU car emissions laws, introduced this year, led to these figures. This prompted companies to flood the market with their products, aiming to clear out existing stock before they were subject to new regulation.

It is also worth noting that Germany has previously safeguarded its automotive industry from caps on petrol or diesel. For instance, in 2013, Angela Merkel was able to water down the EU’s emissions proposal in favour of German car manufacturers. But, as evidenced by current regulation, the need to prioritise the environment had to burst this bubble at some point.

Ironically, these tactics weakened rather than protected the industry as, for years, German manufacturers were less incentivised to compete with innovators such as Tesla. Arguably, the 2015 Volkswagen emissions scandal could have been predicted by competitors when protective barriers were lowered, exposing the company to greater competition.

Looking deeper into the troubles faced by German car manufacturing, export flows to nations that the sector heavily relies on, the US and China, have been stunted by recent political developments. As a result, leading the nation’s government to exercise caution when responding to human rights violations in China or Trump’s EU tariff threats. Engaging in fierce political battles with these two economic superpowers would likely have devastated already unstable German car manufacturers.

Moreover, the US – China trade war in addition to “increasingly localised production by the carmakers in China and North America”, according to the Financial Times, left German automotive catering mostly to the fragile European market. A fact that doesn’t brighten the industry’s prospects for a recovery anytime soon.

Recognising this gloomy outlook, German car manufacturers are once again turning to Ms Merkel for financial aid. With a roughly estimated €40bn investment required to rescue the biggest names in the sector, German car manufacturers could follow Peugeot and Fiat’s lead, merging together to spearhead research and development into electric cars. But instead, Labour Minister Hubertus Heil has already announced an introduction of wage subsidies for automakers and their suppliers.

Is this best for German manufacturers to compete, progress and change? So far, the evidence suggests differently.

In spite of this rather strained atmosphere in the sector, all German carmakers are attempting to rival their technologically orientated competition. In September last year, Porsche unveiled its $150,000 Taycan model. BMW already introduced its i3 and i5 models and VW recently presented its ID – 3 model at the Frankfurt Motor Show last year.

We can definitely see that the German automobile industry is desperately trying to adapt. Whether it wants to or has too. After so many years of complacency and protectionism, it will be a very hard task to compete with players such as Tesla. But, not impossible to achieve.