Germany’s automotive business disaster – that is what could repair it

For many years, car-making has been the jewel in Germany’s industrial crown, a strong image of the nation’s well-known post-war financial miracle. Its “Large Three” manufacturers, Volkswagen, Mercedes-Benz, and BMW, have lengthy been praised for his or her efficiency, innovation and precision engineering. However in the present day, the German motor business is struggling. With the faltering economic system a key think about federal elections this month, how can it get again on the highway to restoration?

If you arrive by practice in Wolfsburg, Decrease Saxony, the very first thing you see is the Volkswagen manufacturing unit. Its enormous facade, emblazoned with a large VW brand and flanked by 4 tall chimneys, dominates one financial institution of the canal that runs by means of town. The 6.5 sq km (2.5 sq mile) advanced sits adjoining to the Autostadt, a sort of theme park dedicated to the car and to VW, Europe’s greatest carmaker. The Volkswagen Enviornment, a sports activities stadium, is a brief distance away.

Wolfsburg is Germany’s reply to mid-Twentieth Century Detroit – not a lot a metropolis with a automotive manufacturing unit as a manufacturing unit with a metropolis that has grown up round it. Some 60,000 folks from throughout the area work within the plant, whereas the city itself has a inhabitants of round 125,000. Locals say that even in case you do not work within the manufacturing unit your self, it is sure lots of your mates will, together with half of your class from faculty.

“Wolfsburg and Volkswagen – it is sort of a synonym,” explains Dieter Landenberger, the VW Group’s in-house historian, as he appears to be like lovingly at an early mannequin Beetle. It’s one among an array of fantastically restored traditional automobiles within the Zeithaus – an enormous, glass-fronted museum within the Autostadt devoted to icons of the motor business.

“We’re pleased with the plant,” he says. “It’s a image of that interval within the Fifties when Germany needed to reinvent itself and rebuild after the conflict. It was a sort of motor for the German financial miracle.”

Right this moment, nevertheless, the plant has additionally come to symbolise a few of the major issues affecting the German automotive business as a complete. The Wolfsburg manufacturing unit is able to constructing 870,000 automobiles a yr. However by 2023 it was making simply 490,000, in accordance with the Cologne-based German Financial Institute. And in Germany it’s removed from alone. Automobile factories throughout the nation have been working nicely under their most capability. The variety of automobiles produced in Germany declined from 5.65m in 2017 to 4.1m in 2023, in accordance with the Worldwide Organisation of Motor Automobile Producers.

All of this issues deeply because the German public prepares to go to the polls on 23 February. The automotive business isn’t just a supply of nationwide pleasure; additionally it is a big driver of nationwide wealth. Disagreements over methods to resolve the nation’s financial malaise have been an element within the collapse of the coalition authorities in November. Whoever is in energy after the election will inevitably want a plan to revive the economic system – and getting the motor business again in gear is prone to play an necessary position.

Automobile-making makes up a couple of fifth of the nation’s manufacturing output, and if the availability chain is taken into consideration, it generates round 6% of GDP, in accordance with Capital Economics. The business employs some 780,000 folks immediately – and helps thousands and thousands of different jobs.

It is not simply manufacturing that’s down. Gross sales of automobiles made by German manufacturers are far decrease than they have been only a few years in the past. Between 2017 and 2023, these of VW fell from 10.7m to 9.2m, whereas over the identical interval BMW’s went from 2.46m to 2.25m and Mercedes-Benz’s went from 2.3m to 2.04m, firm experiences present.

All the Large Three noticed their pre-tax earnings fall by a couple of third within the first 9 months of 2024, and every warned that their earnings for the yr as a complete can be decrease than beforehand forecast.

The event of electrical automobiles has sucked up enormous funding, however the marketplace for them hasn’t grown as rapidly as anticipated, whereas international opponents are flexing their muscle tissue. The specter of tariffs being imposed by the US and different governments additionally looms massive.

“There are such a lot of crises, a complete world of crises. When one disaster is over, one other is developing,” is how Simon Shütz, a spokesman for the German Automotive Trade Federation (VDA) places it.

Automobile gross sales throughout Europe have been declining since 2017, in accordance with Franziska Palmas, a senior Europe economist at Capital Economics. “Recently they’ve recovered a bit, however they’re nonetheless round 15 to twenty% decrease than they have been on the peak in 2017,” she says. “That is partly on account of elements just like the pandemic, the vitality disaster. Nevertheless it’s additionally automobiles lasting longer – and folks have already got a number of automobiles in Europe. So demand has been weak.”

One other key issue has been the aforementioned transition to electrical automobiles. For the reason that diesel emissions scandal of 2015 – through which VW was discovered to have rigged emissions assessments within the US – the business has been present process a technological revolution.

With the EU and European governments decided to part out petrol and diesel automobiles over the following decade, producers have had little selection however to speculate tens, and collectively a whole bunch of billions of Euros on creating electrical fashions and constructing new manufacturing strains.

Nonetheless, though electrical automobiles do now make up a big share of all automobiles offered – 13.6% within the EU and 19.6% within the UK final yr, for instance – their market share has not been rising as rapidly as anticipated.

And in Germany itself, the sudden elimination of beneficiant subsidies for electrical automotive patrons in late 2023 truly contributed to a dramatic 27% fall in gross sales of all electrical automobiles throughout the nation final yr, making life nonetheless harder for German corporations of their house market.

“The choice to drop subsidies out of the blue – that was very unhealthy, as a result of it undermined belief amongst our clients,” says the VDA’s Simon Schütz.

“Going from the combustion engine to electrical mobility may be very large course of. We’re investing billions in rebuilding all of the factories. And in order that takes a while, there isn’t any query about it.”

Whereas all of this has been occurring, German producers have additionally been grappling with one other critical concern. Doing enterprise in Germany itself, working factories right here and using a whole bunch of 1000’s of individuals, may be very costly.

Employees within the automotive sector have historically loved beneficiant pay and advantages due to agreements drawn up between unions and administration. In line with Capital Economics, in 2023 the typical month-to-month base wage within the German auto business was about €5,300, in contrast with €4,300 throughout the German economic system as a complete.

For years, this strategy gave German-based firms sure benefits, for instance in avoiding industrial unrest and in attracting and retaining gifted workers. Nonetheless, it additionally led to German automotive producers having the very best labour prices within the world business. In 2023, these averaged €62 per hour, in comparison with €29 in Spain and €20 in Portugal, in accordance with the VDA.

The state of affairs for Germany’s home automotive business grew to become extra acute following Russia’s invasion of Ukraine. This choked off Germany’s once-abundant provides of low cost Russian gasoline, on the very time when the nation was phasing out nuclear energy.

The end result was a pointy enhance in vitality costs. Though they’ve since subsided, vitality prices for industrial customers in Germany stay very excessive by worldwide requirements. “Power costs listed below are three to 5 occasions larger than within the US, or in China – a lot larger than for our major opponents,” says Mr Schütz.

And that is being felt throughout the business, not simply on the carmakers themselves. “From the Thysenkrupp and Salzgitter metal mills producing the sheet steel rolls which are later was doorways and bonnets, to makers of smaller parts utilized in drivetrains, prices have exploded on account of excessive vitality costs,” says Matthias Schmidt of Schmidt Automotive Analysis.

Final yr these pressures got here to a head. At VW, which has 45% of its world workers in Germany, managers lastly determined radical motion was wanted to convey down prices.

“It was a really large shock,” IG Metall union spokesman Steffen Schmidt tells me over a cup of espresso close to the VW manufacturing unit in Wolfsburg. “The corporate did not say something publicly.”

It was left to Daniela Cavallo, head of the highly effective VW works council and the highest staff’ consultant, to ship the information. “They held an enormous assembly outdoors the gates of the manufacturing unit. Hundreds of staff – and you might have heard a pin drop,” says Mr Schmidt.

“They have been surprised. Hundreds of individuals, all utterly silent.”

What VW proposed was unprecedented. Union representatives had come to conferences anticipating to barter an annual pay rise. They have been asking for a 7% enhance. As an alternative, they have been informed, the corporate wanted them to take a ten% pay minimize.

Worse was to observe. The corporate mentioned it might need to shut as much as three of its factories inside Germany itself – and was tearing up a job safety settlement that had been in place for many years.

Arne Meiswinkel, VW’s chief negotiator, mentioned on the time that the state of affairs it confronted in Germany was “very critical” and that “Volkswagen will solely be capable of prevail if we future-proof the corporate now within the face of rising prices and the huge enhance in competitors”.

Volkswagen had by no means beforehand closed a German manufacturing unit in its 87-year historical past. Within the face of intense opposition from unions and politicians, and following quick however disruptive “warning strikes” by unionised staff, the thought was finally shelved. However the actual fact it had been put ahead despatched a seismic shock by means of your entire sector.

Within the meantime, the workforce did conform to painful limits on pay and bonuses, and VW mentioned it could minimize greater than 35,000 jobs by the top of the last decade, albeit in a “socially accountable method” that averted obligatory redundancies.

Much less conspicuously, Mercedes-Benz additionally launched a cost-cutting drive final yr, aimed toward saving a number of billion euros yearly – albeit obligatory redundancies within the German workforce are extremely unlikely, as a job safety settlement successfully guidelines them out till 2030. In the meantime Ford, which operates two factories in Germany, just lately introduced plans to chop 2,800 jobs within the nation.

Not all the German automotive business’s issues are confined to Germany itself. With the European market saturated, for a number of a long time the continent’s producers have seemed for development elsewhere.

Probably the most profitable markets has been China, the place for some time the rising center class had an apparently insatiable urge for food for upmarket European autos. VW, Mercedes-Benz and BMW all teamed up with native companies, establishing factories in China itself to satisfy native demand.

However now that supply of development is drying up. The Large Three have all seen gross sales fall just lately – in 2023 VW’s China gross sales have been down 9.5% on the earlier yr, Mercedes-Benz’s by 7% and BMW’s by 13.4%. Their mixed share of the Chinese language market has shrunk as nicely to 18.7%, from a peak of 26.2% in 2019. This seems to be the results of a slowing Chinese language economic system, falling curiosity in costly, foreign-badged automobiles and the fast development of native marques, particularly within the electrical automotive market.

“Not that way back, Western manufacturers represented high quality and belief,” explains Mark Rainford, founding father of the Inside China Auto web site. Nonetheless, he says, since then the status and attraction of Chinese language manufacturers has improved past recognition.

All the Large Three say developments in China have had a big impression on their earnings.

Chinese language manufacturers are additionally making an attempt to construct a share of the European market, helped by their a lot decrease working prices than extra established rivals, each as a result of wages are decrease in China and since, as pure EV corporations, they do not have the identical legacy prices carried by producers making the transition from petrol and diesel to battery-powered automobiles.

In line with the European Fee, Chinese language manufacturers additionally profit from hefty authorities subsidies, which permit them to promote automobiles at artificially low costs. In October, the EU launched further tariffs on imports of Chinese language-made EVs, in an effort to create a extra degree enjoying discipline.

German corporations opposed the EU tariffs, as a result of they feared retaliation from China might have an effect on their very own exports. Now additionally they face the specter of new protectionist measures being launched by the Trump administration, together with doable tariffs on automobiles shipped from the EU. For an business that depends closely on exports, the rise of protectionism is a rising menace.

“We all know that commerce wars solely create losers on either side. Tariffs will price wealth, price development and price jobs,” says the VDA’s Simon Schütz.

Though a few of the pressures going through Germany’s automotive firms weren’t foreseeable, there was nonetheless a component of complacency, believes analyst Matthias Schmidt: “They knew the structural points have been there, however have been blindsided by low cost Russian gasoline,” he says.

“The growth to China and the excessive earnings being shipped again to Europe plastered over the excessive labour price points, giving unions a joker card to play with.

“Germany has successfully been an export-driven market, and as soon as these markets sneeze, Germany catches a chilly, which is what’s occurred.”

So can Germany’s carmakers revive their fortunes? It’s a important query for the producers, for his or her networks of suppliers and for the nation as a complete.

“The issue for Germany is we aren’t aggressive,” says Dr Ferdinand Dudenhöffer, head of the Bochum-based Middle for Automotive Analysis. “Not simply in price phrases, but additionally when it comes to the brand new applied sciences which can run the world in future”.

He thinks China has turn out to be the centre for gravity for innovation in areas reminiscent of digitisation and battery know-how. “The answer for the carmakers and for the suppliers, for my part, can be that they take their factories overseas,” he says.

Simon Schütz is extra optimistic. He thinks the business can prosper, however provided that it will get the help it wants from the federal government after the elections later this month.

“Our automotive business can be world-leading, I’m positive of that,” he says.

“The query is, the place will the long run jobs be? Will they be in Germany, as a result of we will construct automobiles right here, or will our firms go elsewhere?’

For union rep Steffen Schmidt, nevertheless, the answer is to return to Germany’s conventional industrial values. “We have now to turn out to be a pacesetter in innovation and know-how once more,” he says. “Then we will maintain excessive pay and good circumstances for staff.”

He thinks the trail forward for the brand new authorities may be very clear: “Make investments, make investments, make investments. In infrastructure, in know-how, in inexperienced vitality and in training.”

For tens of 1000’s of staff in Wolfsburg, and in Germany’s different “automotive cities” reminiscent of Ingolstadt, Weissach, Munich, Stuttgart and Zwickau, the stakes couldn’t be larger.

High image credit score: Getty pictures

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