Can the global crash still be prevented?

 

Like no other city, Detroit represents the rise and fall of the American automobile industry. The metropolitan region on Lake St. Clair is still the headquarters of General Motors (GM), Ford and the now no longer independent Chrysler brand. But the number of workers in local factories has fallen massively. In 1950, 1.8 million people lived in the then booming “Motor City”. The population has now shrunk to around a third, although things have been improving in the city for a few years now.

A mixture of our own mistakes, social upheavals and global changes have contributed to the decline over the decades, and it accelerated again in the noughties. Similar phenomena can now be observed in the industry in Germany. The German auto industry is therefore facing its Detroit moment.

The new competitors in the car market come from China

In the 1990s, the auto industry in the USA had another heyday thanks to the success of high-margin pickup trucks and large SUVs. But in the era of free trade and globalization that began at the same time, Asian competitors in particular emerged more strongly and penetrated more and more into these quintessentially American segments. Even in the Midwest, large Japanese models like the Toyota Camry and the Honda Accord were suddenly popular models.

Significant quality problems, unattractive products and enormous debts, coupled with high fuel prices and overbearing managers, caused the decline after the turn of the century, which culminated in GM’s temporary bankruptcy in 2009. The group had to sort out or sell well-known American and European brands such as Pontiac, Saturn, Oldsmobile and Opel/Vauxhall from what were once thirteen brands. In 2013, the city of Detroit also went bankrupt.

But the challenges now facing German and European manufacturers are much greater than the unpredictability of their American counterparts in the 2000s. Therefore, they are also threatened with international decline accompanied by significant losses of market share, especially the mass supplier Volkswagen, but also Mercedes-Benz, BMW, Audi and even Porsche. The new competitors now come not from Japan, but from China.

Completely new rules apply in the global competition between car manufacturers since politicians have pushed the switch to electromobility and digitalization has advanced. While the engine, chassis and transmission, in addition to design and quality, were crucial for success and the brand image in the old combustion engine world, important new factors are now being added: connectivity with the cell phone, infotainment offerings and semi-autonomous driving. The challenges for the automotive industry are enormous, as are the consequences.

Lots of profit warnings from German car companies

The first signs of possible developments can already be seen. Numerous profit warnings and falling sales will characterize the year 2024 for German manufacturers and their suppliers. There is no change in sight. In some cases, the incumbent managers have to compensate for the hesitant or incorrect approach to the switch to new technologies by their predecessors and the great dependence on the Chinese market.

The impact of the car revolution can already be seen in the global sales rankings, broken down into combustion engines and purely electric vehicles. When it comes to combustion engine cars, familiar names like Toyota, Volkswagen and Hyundai/Kia appear at the top, while the list of electric cars is dominated by Chinese brands such as BYD, SAIC, Li Auto and Geely. With BMW and Volkswagen, there were only two companies in 2023 that were in the top ten in both rankings.

But the two German names in both rankings are misleading, because VW and its brands in the Chinese electric segment have already lost touch with the domestic manufacturers, as the latest sales figures show. This could be a foretaste of what is still to come for BMW and Mercedes-Benz in the luxury class.

It is now paying off for China that the government and manufacturers there have been pushing forward with e-mobility for many years, knowing that there is an insurmountable gap in combustion engines. The share of all electric vehicles (new energy vehicles) in total sales is currently around 50 percent. Especially in the USA, but also in the EU, sales do not come close to these values.

At the same time, the Chinese suppliers with names that still take a lot of getting used to have started exporting. Since the USA is trying to fend off this attack with 100 percent tariffs, the Chinese effort is likely to focus on Europe, where significantly lower tariffs are planned. The high volumes of electric car production in the Middle Kingdom ensure lower costs through economies of scale, which are further reinforced by low wages. Experts estimate that Chinese manufacturers could increase their share of the global market from 20 to around 30 percent in 2030.

Shrinking market with increasing competition

While electric cars of German origin are not well received in China, they are selling poorly on the domestic market for other reasons. Sales are strongly linked to government incentives. If these break down, sales immediately decline, as the example of Germany has shown in recent quarters. Shortly before the turn of the year 2023/24, Berlin abolished the purchase bonuses for electric cars almost overnight for reasons of saving.

Demand is currently far behind manufacturers’ hopes. The resulting excess capacity is now putting pressure on profit margins. The weak sales are due to increasing competition, not only from China, but also from pure electric car companies such as Tesla and new providers from the IT sector.

In addition, the location conditions in Germany, a nation of cars, are deteriorating. It’s not just the very high wages that are stressful, but also the immense electricity and energy costs, especially in comparison with the USA and China.

In addition, there is the excessive German bureaucracy with long approval processes as well as complex EU rules such as the supply chain law and the sustainability rules (taxonomy). No German manufacturer or supplier would come up with the idea of ​​building a new factory in their home country. On the contrary: there is a massive reduction in employees in Germany, while manufacturers and suppliers are building new factories in Eastern Europe and Asia.

There is also more trouble coming from Brussels. Firstly, the fleet limits for CO₂-Emissions are even stricter, which means that Volkswagen and Stellantis in particular face fines amounting to billions, which are then missing for investments. Secondly, as already mentioned, the EU wants to respond to increased competition from China with tariffs, which increases the risk of a trade war. This would affect German manufacturers doubly. On the one hand, they are the largest exporters when it comes to the Middle Kingdom, while Stellantis and Renault hardly have a presence there. On the other hand, they import models produced in China to Europe.

Layoffs and threatened factory closures

Globalization has contributed to the collapse of American car companies, and now deglobalization, accompanied by digitalization and e-mobility, could hit German manufacturers hard. In the 1990s, the Big Three from Detroit had a global market share of around 35 percent; today it is just around 15 percent. Even a much smaller decline would shake some German manufacturers to their core, as the bitter dispute at VW over layoffs and plant closures shows.

The seeds of decline have been sown. But that doesn’t mean that VW’s hometown of Wolfsburg will end up like Detroit and Volkswagen will end up like General Motors. Manufacturers and their suppliers have to fight their own way out of the misery with attractive products and competitive prices; Good location conditions in the home market help with this. The basis for a comeback exists thanks to good engineering, financial stability and strong brands. But the share of manufacturers from Germany as a nation of cars in the world market is likely to become smaller. Corporations have to adapt to this.

You can contact Frankfurt business correspondent Michael Rasch on the platforms X, Follow Linkedin and Xing.