How Far-Reaching Is the Auto Crisis?

The German flagship industry is in crisis. The mood among carmakers is poor, VW is cutting jobs. But how serious is the situation? An overview. 

It is considered a key industry in Germany: 770,000 people work in the German automotive industry. In terms of revenue, it is by far the largest industrial sector in the country. According to the Federal Statistical Office of Germany, cars and parts alone accounted for 17 % of German exports in 2023. But the companies are in crisis. For the first time in 30 years, there could be layoffs and plant closures at Volkswagen. Experts fear that this could only be the tip of the iceberg. What is the problem? An overview:

The Manufacturers

The German manufacturers are struggling with weak sales figures and the high costs of switching to electric drive systems. This is causing profits to melt away. Volkswagen reported a 14 % drop in net income in the first half of the year, while BMW reported a drop of almost 15 % and Mercedes-Benz a drop of almost 16 %. All three have already had to cut their profit targets for the year as a whole, most recently BMW due to problems with supplied brakes and weak business in China. And the mood is gloomy. According to the Munich-based Ifo Institute, the industry is looking to the future with concern. In addition, the tightening of CO₂ targets for car manufacturers will further disrupt the European market for passenger cars and light commercial vehicles in 2025.

The Plants

On average, the German plants of Volkswagen, BMW, Mercedes & Co. were only at a little more than two-thirds of capacity last year, according to data specialist Marklines. All locations together could deliver 6.2 million cars per year. In 2023, only 4.1 million were delivered. The industry is building far fewer cars than before, with high personnel costs, says analyst Eric Heymann of Deutsche Bank Research. While production is 23 % below previous peaks, the number of employees has only fallen by 8 %. This makes the plants less productive.

The Suppliers

The crisis hit automotive suppliers, which still employ around 270,000 people (in 2018, there were around 311,000), long ago. After all, carmakers order according to the order situation. According to management consultancy PwC, technical leaps, new competitors and volatile political decisions are making change in the industry difficult to predict. Above all, Chinese competition is putting pressure on the market.

According to a survey by the consulting firm Horvath, a majority of 60 % of companies are planning moderate job cuts. ZF, for example, has announced that it will cut between 11,000 and 14,000 jobs in Germany by the end of 2028. Continental wants to possibly spin off its automotive supply business completely and take it public.

The Customers

While at least material and supply bottlenecks have largely been resolved recently, according to the German Association of the Automotive Industry (VDA), the problems with demand have grown. "The difficult overall economic situation is affecting consumer behavior and is causing comparatively weak demand for passenger cars", says a VDA spokeswoman. German manufacturers are hit twice as hard. At the same time, new competitors such as Tesla and manufacturers from China are entering the market. As a result, the market share of domestic carmakers is falling. At the same time, openness to cars from China is increasing, according to a survey by management consultancy Horváth. BYD and Polestar, in particular, are in demand.

The Business Location

According to experts, the crisis in the automotive industry is relentlessly revealing the weaknesses of Germany as a business location. Four and a half years after the outbreak of the pandemic, German industrial production is still 10 % below pre-corona levels, says ING economist Carsten Breszki. The old business model with cheap energy and easily accessible large export markets no longer works. In view of the slowing momentum in the US and China, as well as additional trade tensions, there is little hope of a strong export-driven recovery.

Export

Exports were long considered the most important driver of the German automotive industry. Of the 4.1 million cars produced in Germany in 2023, 3.1 million – around three quarters – went abroad, according to the VDA. But, as a VDA spokeswoman warns, "the balance in the world market is shifting". While the traditional markets in Europe and North America are shrinking, there is high growth in China and India – which are increasingly being served by local competitors.

The Competition

At the same time, the manufacturers, who were once the subject of condescending smiles in Germany, are now also entering the European market. In China, the local carmaker BYD has already replaced the VW brand as the market leader. According to the auditing firm PwC, Europe could become a region that imports cars from China by 2024. Meanwhile, Chinese cars are also on a par with the competition in terms of technology, according to an ADAC test, although there is still room for improvement.

"In light of the large investments in future technologies, companies are in fierce competition", says the VDA spokeswoman. "Some companies are investing heavily in transformation, while others want to open up new markets – both are major efforts." The German manufacturers often have a harder time of it here than new challengers who are fully committed to electric vehicles.

The consulting firm Alvarez & Marsal has compiled a list of lessons that German OEMs can learn from the rise of Chinese carmakers. According to the list, there are four key areas that need to be addressed: demand, supply, politics and infrastructure. Frank Urbansky, on the other hand, believes that the Chinese manufacturers' success is rooted in their very pragmatic openness to technology.

The Future

According to the German Institute for Economic Research (DIW), German carmakers still have "every opportunity and ability to hold their own in the global competition". "To do that, however, carmakers will have to reinvent themselves and shift and utilize their innovative strength to implement the transition to e-mobility and autonomous driving faster and better", DIW President Marcel Fratzscher told the dpa. "The claim that the combustion engine is sustainable is a dangerous misconception." The decision in favor of the electric car has long since been made worldwide.

Patrice Haettel, CEO of Horse Powertrain Solutions, on the other hand, believes in the future viability of the combustion engine and predicts in the MTZ guest commentary that in 2040 at least half of all new cars will be powered by combustion engines. Combustion engines are still strongly represented worldwide, he says, and hybrid drives are the most important growth drivers in many markets. The reasons for this lie in economic policy, ongoing investment in alternative fuels and their presence in existing global vehicle fleets. For Stefan Randak of management consultancy Atreus, "there is much to be said for the currently conjured 'technology openness'", as he explains in the German article The Drivetrain-Dogma.

This is a partly automated translation of this German article, partly by dpa.