Germany’s automobile 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 “Massive Three” manufacturers, Volkswagen, Mercedes-Benz, and BMW, have lengthy been praised for his or her efficiency, innovation and precision engineering. However at the moment, 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?

Whenever you arrive by practice in Wolfsburg, Decrease Saxony, the very first thing you see is the Volkswagen manufacturing facility. Its enormous facade, emblazoned with an enormous VW brand and flanked by 4 tall chimneys, dominates one financial institution of the canal that runs by means of the town. The 6.5 sq km (2.5 sq mile) advanced sits adjoining to the Autostadt, a form of theme park dedicated to the car and to VW, Europe’s largest carmaker. The Volkswagen Area, 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 automobile manufacturing facility as a manufacturing facility with a metropolis that has grown up round it. Some 60,000 individuals from throughout the area work within the plant, whereas the city itself has a inhabitants of round 125,000. Locals say that even in the event you do not work within the manufacturing facility your self, it is sure a lot of your folks will, together with half of your class from faculty.

“Wolfsburg and Volkswagen – it is form of a synonym,” explains Dieter Landenberger, the VW Group’s in-house historian, as he appears lovingly at an early mannequin Beetle. It’s one in every of an array of superbly restored basic 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 Nineteen Fifties when Germany needed to reinvent itself and rebuild after the battle. It was a form of motor for the German financial miracle.”

In the present day, nonetheless, the plant has additionally come to symbolise a few of the major issues affecting the German automobile business as a complete. The Wolfsburg manufacturing facility is able to constructing 870,000 automobiles a yr. However by 2023 it was making simply 490,000, in keeping with the Cologne-based German Financial Institute. And in Germany it’s removed from alone. Automobile factories throughout the nation have been working properly beneath their most capability. The variety of automobiles produced in Germany declined from 5.65m in 2017 to 4.1m in 2023, in keeping with the Worldwide Organisation of Motor Car Producers.

All of this issues deeply because the German public prepares to go to the polls on 23 February. The automobile business isn’t just a supply of nationwide pleasure; it is usually a major driver of nationwide wealth. Disagreements over the best way 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 essential 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 keeping with Capital Economics. The business employs some 780,000 individuals instantly – and helps tens of millions of different jobs.

It isn’t simply manufacturing that’s down. Gross sales of automobiles made by German manufacturers are far decrease than they have been just some 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 reviews present.

All the Massive Three noticed their pre-tax income 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 could be decrease than beforehand forecast.

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

“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 keeping with Franziska Palmas, a senior Europe economist at Capital Economics. “These days 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 because of elements just like the pandemic, the power disaster. Nevertheless it’s additionally automobiles lasting longer – and other people have already got numerous automobiles in Europe. So demand has been weak.”

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

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

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

And in Germany itself, the sudden elimination of beneficiant subsidies for electrical automobile consumers 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 tougher for German corporations of their residence market.

“The choice to drop subsidies all of a sudden – 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 could be very massive course of. We’re investing billions in rebuilding all of the factories. And in order that takes a while, there is not any query about it.”

Whereas all of this has been happening, German producers have additionally been grappling with one other severe concern. Doing enterprise in Germany itself, working factories right here and using tons of of hundreds of individuals, could be very costly.

Employees within the automotive sector have historically loved beneficiant pay and advantages due to agreements drawn up between unions and administration. Based on 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 method gave German-based firms sure benefits, for instance in avoiding industrial unrest and in attracting and retaining proficient workers. Nonetheless, it additionally led to German automobile producers having the 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 keeping with the VDA.

The state of affairs for Germany’s home automobile business turned 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 consequence was a pointy enhance in power costs. Though they’ve since subsided, power prices for industrial customers in Germany stay very excessive by worldwide requirements. “Vitality costs listed below are three to 5 occasions greater than within the US, or in China – a lot greater than for our major rivals,” 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 can be later was doorways and bonnets, to makers of smaller elements utilized in drivetrains, prices have exploded on account of excessive power 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 carry down prices.

“It was a really massive shock,” IG Metall union spokesman Steffen Schmidt tells me over a cup of espresso close to the VW manufacturing facility 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 workers’ consultant, to ship the information. “They held an enormous assembly outdoors the gates of the manufacturing facility. Hundreds of employees – and you may 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% increase. As an alternative, they have been advised, the corporate wanted them to take a ten% pay minimize.

Worse was to comply with. The corporate stated it may 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, stated on the time that the state of affairs it confronted in Germany was “very severe” and that “Volkswagen will solely have the ability to 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 facility in its 87-year historical past. Within the face of intense opposition from unions and politicians, and following brief however disruptive “warning strikes” by unionised employees, the concept was finally shelved. However the actual fact it had been put ahead despatched a seismic shock by means of the complete sector.

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

Much less conspicuously, Mercedes-Benz additionally launched a cost-cutting drive final yr, geared 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 the entire German automobile 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.

One of the 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, organising factories in China itself to satisfy native demand.

However now that supply of development is drying up. The Massive 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 properly 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 automobile 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 popularity and enchantment of Chinese language manufacturers has improved past recognition.

All the Massive Three say traits in China have had a major affect 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.

Based on 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 additional tariffs on imports of Chinese language-made EVs, in an effort to create a extra stage taking part in area.

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

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

Though a few of the pressures dealing with Germany’s automobile 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 income being shipped again to Europe plastered over the excessive labour value 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’re not aggressive,” says Dr Ferdinand Dudenhöffer, head of the Bochum-based Heart for Automotive Analysis. “Not simply in value phrases, but in addition 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 equivalent to digitisation and battery expertise. “The answer for the carmakers and for the suppliers, for my part, shall 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 assist it wants from the federal government after the elections later this month.

“Our automotive business shall be world-leading, I’m certain 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 are able to construct automobiles right here, or will our firms go elsewhere?’

For union rep Steffen Schmidt, nonetheless, the answer is to return to Germany’s conventional industrial values. “We’ve got to turn out to be a pacesetter in innovation and expertise once more,” he says. “Then we are able to maintain excessive pay and good circumstances for employees.”

He thinks the trail forward for the brand new authorities could be very clear: “Make investments, make investments, make investments. In infrastructure, in expertise, in inexperienced power and in training.”

For tens of hundreds of employees in Wolfsburg, and in Germany’s different “automobile cities” equivalent to Ingolstadt, Weissach, Munich, Stuttgart and Zwickau, the stakes couldn’t be greater.

Prime image credit score: Getty photos

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