Germany’s Automotive Industry on the Brink: Is the German Car Industry Dying?
It wasn’t long ago when a Volkswagen (VW) board member caused a stir by declaring that demand for the company’s electric cars had collapsed. Now, another board member, Thomas Schäfer, has taken it a step further, announcing tough cuts for the struggling automaker.
Schäfer pointed out that VW is no longer competitive, attributing this partly to Germany’s misguided energy policy and “a few” other factors. The Chinese market, which has played a significant role in VW’s success thus far, is rapidly transitioning towards electromobility. Chinese original equipment manufacturers (OEMs) are consistently unveiling new electric vehicles, with a staggering 235 currently available in China compared to only 125 in Europe and a mere 49 in the USA, according to JATO Dynamics.
Chinese consumers, known for their preference for large and comfortable vehicles, particularly ones in which they can sit in the back and be chauffeured, are also avid fans of digitalization and entertainment features in vehicles, even those with combustion engines. Chinese vehicles, even the most affordable ones, are equipped with fully-networked infotainment systems that rival the latest smartphones. Furthermore, Chinese automakers have adopted a model policy that offers extensive basic equipment at an accessible price, whereas German cars often require hefty additional investments for comparable features.
The widening gap in equipment between Chinese and European competitors is also evident when it comes to infotainment systems. Even subcompact cars in China have systems that are a decade ahead of German mid-range vehicles. Moreover, China is home to leading battery manufacturers, CATL and BYD, who dominate the industry and benefit from low electricity costs due to the energy-intensive nature of battery production. Unsurprisingly, China surpassed Germany in 2022 to become the world’s second-largest car exporter, and by 2023, it is expected to surpass Japan as well, according to the Center of Automotive Management.
This alarming trend raises the question: Will the German automotive industry, once hailed as the country’s flagship industry alongside the chemical sector, survive this crisis? The chemical industry is also experiencing a decline due to misguided energy policies, excessive bureaucracy, and strict regulations imposed by the European Union, prompting some companies to consider relocating. The supplier industry also suffers under the burden of the unfavorable business environment, with Michelin recently announcing the closure of two tire plants due to their lack of competitiveness, exacerbated by a staggering 260% increase in electricity costs.
The German car industry had long believed that shifting focus to premium models would secure their position in the market. Audi, BMW, and Mercedes-Benz have already embarked on this strategy, but even Audi, as a member of the VW Group, has failed to meet expectations. This is likely why they are now looking to electric platforms from SAIC, particularly its subsidiary IM, to give them a competitive edge.
If the current trajectory continues and Germany fails to accelerate its development speed to catch up, the future appears grim for the German car industry. VW’s struggles may be just the beginning, with other OEMs in Europe potentially following suit or being left to rely on Chinese assistance to keep up. This dire situation brings to mind the cautionary tales of Nokia, a once-dominant cell phone giant that was quickly overshadowed and ultimately destroyed by the emergence of Apple and Android smartphones, as well as Research in Motion (RIM), better known as Blackberry, whose slow response to market changes led to its downfall.
The forecasts for the German car industry are undeniably disturbing. Will the industry’s leaders recognize the urgency and take the necessary actions to avoid a further decline? Or will Germany be left languishing in third place in 2023 and potentially even worse in 2024? Only time will tell, but the stakes are high, and the consequences of inaction could be catastrophic.