Germany’s automotive trade disaster – that is what might repair it | EUROtoday

For a long time, 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 “Big Three” manufacturers, Volkswagen, Mercedes-Benz, and BMW, have lengthy been praised for his or her efficiency, innovation and precision engineering. But in the present day, the German motor trade is struggling. With the faltering economic system a key consider federal elections this month, how can it get again on the street to restoration?

When you arrive by practice in Wolfsburg, Lower Saxony, the very first thing you see is the Volkswagen manufacturing facility. Its big facade, emblazoned with an enormous VW emblem and flanked by 4 tall chimneys, dominates one financial institution of the canal that runs by the town. The 6.5 sq km (2.5 sq mile) complicated sits adjoining to the Autostadt, a type of theme park dedicated to the car and to VW, Europe’s largest carmaker. The Volkswagen Arena, 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 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 when you do not work within the manufacturing facility your self, it is sure a lot of your pals will, together with half of your class from college.

“Wolfsburg and Volkswagen – it’s kind of a synonym,” explains Dieter Landenberger, the VW Group’s in-house historian, as he seems to be lovingly at an early mannequin Beetle. It is considered one of an array of superbly restored basic vehicles within the Zeithaus – an enormous, glass-fronted museum within the Autostadt devoted to icons of the motor trade.

“We’re proud of the plant,” he says. “It is a symbol of that period in the 1950s when Germany had to reinvent itself and rebuild after the war. It was a kind of motor for the German economic miracle.”

Today, nevertheless, the plant has additionally come to symbolise among the predominant issues affecting the German automotive trade as an entire. The Wolfsburg manufacturing facility is able to constructing 870,000 vehicles a 12 months. But by 2023 it was making simply 490,000, based on the Cologne-based German Economic Institute. And in Germany it’s removed from alone. Car factories throughout the nation have been working nicely under their most capability. The variety of vehicles produced in Germany declined from 5.65m in 2017 to 4.1m in 2023, based on the International Organisation of Motor Vehicle Manufacturers.

Car-making makes up a few fifth of the nation’s manufacturing output, and if the provision chain is taken under consideration, it generates round 6% of GDP, based on Capital Economics. The trade employs some 780,000 individuals straight – and helps hundreds of thousands of different jobs.

It’s not simply manufacturing that’s down. Sales of vehicles made by German manufacturers are far decrease than they had 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 of the Big Three noticed their pre-tax earnings fall by a few third within the first 9 months of 2024, and every warned that their earnings for the 12 months as an entire can be decrease than beforehand forecast.

The improvement of electrical vehicles has sucked up big funding, however the marketplace for them hasn’t grown as shortly as anticipated, whereas overseas rivals are flexing their muscle tissues. The menace of tariffs being imposed by the US and different governments additionally looms massive.

“There are so many crises, a whole world of crises. When one crisis is over, another is coming up,” is how Simon Shütz, a spokesman for the German Automotive Industry Federation (VDA) places it.

Car gross sales throughout Europe have been declining since 2017, based on Franziska Palmas, a senior Europe economist at Capital Economics. “Lately they’ve recovered a bit, but they’re still around 15 to 20% lower than they were at the peak in 2017,” she says. “That’s partly due to factors like the pandemic, the energy crisis. But it’s also cars lasting longer – and people already have a lot of cars in Europe. So demand has been weak.”

Another key issue has been the aforementioned transition to electrical vehicles. Since the diesel emissions scandal of 2015 – through which VW was discovered to have rigged emissions assessments within the US – the trade has been present process a technological revolution.

With the EU and European governments decided to section out petrol and diesel vehicles over the subsequent decade, producers have had little selection however to take a position tens, and collectively tons of of billions of Euros on growing electrical fashions and constructing new manufacturing strains.

However, though electrical vehicles do now make up a big share of all vehicles bought – 13.6% within the EU and 19.6% within the UK final 12 months, for instance – their market share has not been rising as shortly as anticipated.

And in Germany itself, the sudden removing of beneficiant subsidies for electrical automotive patrons in late 2023 truly contributed to a dramatic 27% fall in gross sales of all electrical vehicles inside the nation final 12 months, making life nonetheless tougher for German companies of their house market.

“The decision to drop subsidies suddenly – that was very bad, because it undermined trust among our customers,” says the VDA’s Simon Schütz.

“Going from the combustion engine to electric mobility is very big process. We are investing billions in rebuilding all the factories. And so that takes some time, there’s no question about it.”

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

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

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

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

The outcome was a pointy enhance in power costs. Although they’ve since subsided, power prices for industrial customers in Germany stay very excessive by worldwide requirements. “Energy prices here are three to five times higher than in the US, or in China – much higher than for our main competitors,” says Mr Schütz.

And that is being felt throughout the trade, not simply on the carmakers themselves. “From the Thysenkrupp and Salzgitter steel mills producing the sheet metal rolls that are later turned into doors and bonnets, to makers of smaller components used in drivetrains, costs have exploded as a result of high energy prices,” says Matthias Schmidt of Schmidt Automotive Research.

Last 12 months these pressures got here to a head. At VW, which has 45% of its international employees in Germany, managers lastly determined radical motion was wanted to carry down prices.

“It was a very big shock,” IG Metall union spokesman Steffen Schmidt tells me over a cup of espresso close to the WV manufacturing facility in Wolfsburg. “The company didn’t say anything 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 a big meeting outside the gates of the factory. Thousands of workers – and you could have heard a pin drop,” says Mr Schmidt.

“They were stunned. Thousands of people, all completely silent.”

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

Worse was to observe. The firm mentioned 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, WV’s chief negotiator, mentioned on the time that the scenario it confronted in Germany was “very serious” and that “Volkswagen will only be able to prevail if we future-proof the company now in the face of rising costs and the massive increase in competition”.

Volkswagen had by no means beforehand closed a German manufacturing facility in its 87-year historical past. In the face of intense opposition from unions and politicians, and following brief however disruptive “warning strikes” by unionised employees, the concept was finally shelved. But the actual fact it had been put ahead despatched a seismic shock by the complete sector.

In 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 tip of the last decade, albeit in a “socially responsible manner” that averted obligatory redundancies.

Less conspicuously, Mercedes-Benz additionally launched a cost-cutting drive final 12 months, 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. Meanwhile Ford, which operates two factories in Germany, just lately introduced plans to chop 2,800 jobs within the nation.

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

One of essentially 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.

But now that supply of development is drying up. The Big Three have all seen gross sales fall just lately – in 2023 VW’s China gross sales had been down 9.5% on the earlier 12 months, Mercedes-Benz’s by 7% and BMW’s by 13.4%. Their mixed share of the Chinese 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 economic system, falling curiosity in costly, foreign-badged vehicles and the fast development of native marques, particularly within the electrical automotive market.

“Not that long ago, Western brands represented quality and trust,” explains Mark Rainford, founding father of the Inside China Auto web site. However, he says, since then the popularity and enchantment of Chinese manufacturers has improved past recognition.

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

Chinese manufacturers are additionally trying 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 companies, they do not have the identical legacy prices carried by producers making the transition from petrol and diesel to battery-powered vehicles.

According to the European Commission, Chinese manufacturers additionally profit from hefty authorities subsidies, which permit them to promote vehicles at artificially low costs. In October, the EU launched additional tariffs on imports of Chinese-made EVs, in an effort to create a extra degree taking part in subject.

German companies 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 potential tariffs on vehicles shipped from the EU. For an trade that depends closely on exports, the rise of protectionism is a rising menace.

“We know that trade wars only create losers on both sides. Tariffs will cost wealth, cost growth and cost jobs,” says the VDA’s Simon Schütz.

Although among the pressures dealing with Germany’s automotive firms weren’t foreseeable, there was nonetheless a component of complacency, believes analyst Matthias Schmidt: “They knew the structural issues were there, but were blindsided by cheap Russian gas,” he says.

“The expansion to China and the high profits being shipped back to Europe plastered over the high labour cost issues, 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 is a vital question for the manufacturers, for their networks of suppliers and for the country as a whole.

“The drawback for Germany is we’re not aggressive,” says Dr Ferdinand Dudenhöffer, head of the Bochum-based Center for Automotive Research. “Not simply in value phrases, but additionally when it comes to the brand new applied sciences which can run the world in future”.

He thinks China has become the centre for gravity for innovation in areas such as digitisation and battery technology. “The answer for the carmakers and for the suppliers, for my part, might be that they take their factories overseas,” he says.

Simon Schütz is more optimistic. He thinks the industry can prosper, but only if it gets the support it needs from the government after the elections later this month.

“Our automotive trade might 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 vehicles 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 to become a leader in innovation and technology again,” he says. “Then we can keep high pay and good conditions for workers.”

He thinks the trail forward for the brand new authorities may be very clear: “Invest, invest, invest. In infrastructure, in technology, in green energy and in education.”

For tens of 1000’s of employees in Wolfsburg, and in Germany’s different “car towns” reminiscent of Ingolstadt, Weissach, Munich, Stuttgart and Zwickau, the stakes couldn’t be increased.

Top image credit score: Getty photos

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