If you believe a recent study by the German Economic Institute (IW), the best years for the country’s carmakers have passed, and the all-important auto sector “will fail as an engine of growth” as a result of the coronavirus .pandemic.
The Cologne-based IW published its findings on Tuesday, when auto bosses are meeting officials from the government to seek ways out of the massive slump caused by the pandemic-induced economic crisis and the emergence of the electric vehicle as an environmentally friendly alternative to the internal combustion engine.
The demand shock due to lockdown measures across the world is compounding problems of oversupply and technological change in the auto industry that already existed before the outbreak of the virus, depleting carmakers’ cash reserves at a rapid pace.
The mixture is especially toxic in Germany, where almost 10% of gross domestic product (GDP) hails from carmakers and their suppliers. More than 930,000 people work directly or indirectly in the auto sector, while 40% of Germany’s overall research and development (R&D) expenditure is made by the industry.
So-called car summits have become almost routine exercises in German politics, as the pressure in the key industrial sector has been mounting for quite a few years. Similarly, calls for state support in the form of cash-for-clunkers programs and electric vehicle subsidies, as well as tax benefits for research and innovation, have been growing louder.
However, government officials are increasingly coming to realize that blanket subsidies for the industry as a whole aren’t doing the trick anymore, because the woes besetting the German auto sector have become too multifaceted.
While industry behemoths like Volkswagen (VW) and Daimler are suffering from falling demand and the cost of technological transformation, smaller companies further down the supply chain are struggling for survival.
In the case of VW, for example, some of the problems are even homemade. While its Golf model used to be the company’s seemingly everlasting cash cow, leading Europe’s sales ranking for more than 45 years, its latest Golf 8 version was overtaken by Renault’s Clio model as the continent’s best-selling model for two months this summer.
The incident shows that Germany’s traditional carmakers are under huge pressure to make money with technological innovations rivals like Tesla and China’s BYD have mastered long ago.
Suppliers — the weakest links
By far the worst hit in the current crisis are, however, car-parts suppliers. Take motor block manufacturers where the current transformation toward electro-mobility has recently claimed a prominent victim in Germany: Halberg Guss.
As battery-powered cars don’t need cast-iron motor blocks anymore, the company closed its factory in Saarbrücken this year, leaving Eisenwerk Brühl and Fritz Winter as the only remaining manufacturers of the car component in the country.
Other suppliers are feeling the winds of change, too. Market leader Bosch has announced it will cut thousands of jobs, while Germany’s second-largest parts maker Continental wants to save €1 billion (€1.18 billion) every year by reducing its headcount by 13,000 beginning in 2023. At ZF Friedrichshafen, the third-largest German auto supplier, some 15,000 jobs are in danger.
Electric vehicles need far fewer components than a conventional car with an internal combustion engine
According to consultancy Strategy&, the current slump in car demand has further increased the pressure among suppliers to cut costs. At the same time, it said in a recent analysis, more investment in innovation was needed to launch “competitive next-generation alternative vehicles earlier in the markets.”
So carmakers as well as their suppliers are raising the demand for more government aid in R&D, knowing quite well that blanket subsidies to push up sales will be difficult to achieve.
German politicians appear willing to heed those calls, and even the Green Party’s co-leader Annalena Baerbock, who wants to see the demise of the internal combustion engine sooner rather than later, says this type of engine will continue to play “an important role in the coming years.”
“We need to give small and medium-sized companies [SMEs], as well as suppliers, more time,” she told the FAS weekend newspaper recently, adding that no politician can ignore 800,000 jobs on the line there “and say: ‘I don’t care, let them struggle by themselves to survive’.”
A matter of time
Meanwhile, the German government is leaving no doubt that it banks on the electric vehicle to become the automotive choice of the future. But a real technological breakthrough takes time.
According to an estimate by Strategy&, the market for electric vehicles could increase sevenfold over the coming years, from €12 billion currently to €84 billion in 2030. Until then, however, the internal combustion engine would have to continue to run its course to earn carmakers enough money to fund the shift to alternatives.
Germany’s powerful metalworkers’ union IG Metal has already vowed to resist any attempt at “misusing the coronavirus crisis to set the wrecking ball to the industry.”
Prior to this Tuesday’s car summit, union boss Jörg Hofmann also threatened company CEOs with “ruckus” should they seek to introduce “destructive company strategies” like plant closures and relocations abroad with the help of the government. He’s advocating a government-backed “transformation fund” to help struggling SMEs.
“If the state would accept part of the risk, small and medium-sized companies can acquire enough strength to invest and innovate,” he said in a statement. Moreover, the government could do more to qualify employees threatened by job loss, and give them a new perspective in times of technological change.
The transformation in the German car industry is slow in coming, and progress is currently hampered by the dramatic slump in demand. In August alone, European car sales plunged 20% due to the pandemic, leading the German Economic Institute in Cologne to lower its hopes for speedy change.
“The industry is confronted with a huge demand shock from which it will recover only very slowly.”
This article was adapted from the German by Uwe Hessler