The Decline of Germany's Automotive Industry: Impact of the 2021 Election?
- the haptic investor
- 11. Okt. 2024
- 6 Min. Lesezeit
Germany, long considered the heart of Europe’s automotive industry, is facing a steady decline that has left both industry insiders and economists concerned. The challenges are mounting, with some of the nation’s largest automakers, such as Volkswagen and BMW, grappling with significant setbacks. These setbacks have far reached consequences, as many companies of the praised German “Mittelstand” (SME / large group of successful German SME) are also directly or indirectly affected by their client’s weakness. These difficulties have raised questions about whether political changes, particularly the 2021 election, have exacerbated the industry's troubles.
A Series of Setbacks
Recent months have seen a cascade of bad news from Germany's automotive sector. Volkswagen, the country’s largest car manufacturer, has hinted at the possibility of closing several plants, potentially affecting up to 120,000 jobs. The potential closures, which could involve key sites in Salzgitter, Chemnitz, and Zwickau, signal deep-rooted issues within the company and the broader industry.
Adding to the woes, BMW has also been forced to revise its financial outlook for the current fiscal year. The company recently announced a massive recall affecting 1.5 million vehicles due to problems with an integrated braking system supplied by Continental. The recall is expected to cost BMW hundreds of millions of euros in warranty claims, further straining its profitability.
The 2021 Election and Its Aftermath
The 2021 German federal election marked a significant shift in the country’s political landscape, with the end of Angela Merkel’s long tenure as Chancellor and the formation of a new government under Olaf Scholz. This change brought new priorities and policies, many of which directly impact the automotive industry.
The new government has placed a strong emphasis on environmental sustainability and the transition to electric vehicles (EVs). While these goals align with global trends, the pace and implementation of these policies have created challenges for traditional automakers. The push for stricter emissions standards and the demanded shift away from internal combustion engines have required massive investments in new technologies and infrastructure. For companies already struggling with profitability, these demands have been difficult to meet.
Moreover, the government’s support for domestic EV manufacturers has intensified competition within Germany, further pressuring established players like BMW and Volkswagen. The transition to EVs, while necessary for demanded long-term sustainability, has been costly and has led to significant restructuring within these companies. The resulting job losses and plant closures have sparked debates about the government's role in the industry's decline.
Underlying Structural Issues
However, the industry's problems run deeper than just policy changes. Germany's productivity growth has been alarmingly weak over the last couple of years, with the country being surpassed by the UK and France. This decline in productivity has further deteriorated, casting a shadow over the industry's long-term prospects. Meanwhile, discussions about introducing a four-day workweek have been gaining traction in the press and among unions over the last couple of years, which could potentially exacerbate the productivity issue.
Productivity Measure Comparison
Furthermore, real wages in Germany have been relatively weak, failing to keep pace with inflation. This has resulted in reduced disposable income, particularly among younger age groups. The skyrocketing house prices in Germany have only worsened the situation, making it increasingly difficult for people to afford necessities, let alone luxury items like cars.
Inflation and Wage Indices
Source: Bundesbank, own calculations
The effects of these trends can be seen in the pricing of iconic German cars. The Volkswagen Golf, a staple of the German automotive industry, has seen its price skyrocket in real terms over the last 2-3 years. A 2015 VW Golf indexed to today’s real purchasing power had the average price of €33,000. However, by 2022-2024, the average price had risen to around €40,000. That’s a lofty real increase of more than 20% on the item with the highest impact on personal finances after the cost of housing. This price hike has made the Golf less competitive in the market, further eroding the sales of German automakers.
Avg. VW Golf Prices indexed to 2024 Euros Purchasing Power Equivalent
Source: Bundesbank
The Challenge of Adapting to a Changing Market
The German automotive industry is facing a daunting challenge as it attempts to transition from its traditional strengths in internal combustion engines to the rapidly growing EV market. For decades, German car manufacturers have been renowned for their engineering prowess and attention to detail, but these strengths are no longer sufficient in a market where electric vehicles are becoming increasingly dominant.
The Chinese, on the other hand, have been quick to adapt to the changing market landscape. They have invested heavily in battery technology and have developed a range of affordable and competitive electric vehicles that are gaining traction in Europe and other regions. As a result, China is increasingly taking over Germany's role as a global car exporter, with significant implications for the German economy.
There are now basically two options. Fade policy actions against internal combustion engines and let the free market decide or more policy support to counter Chinese competition.
The question is, can they do so quickly enough to prevent a permanent decline in their global market share?
The Question of Responsibility
While the 2021 election and subsequent policy changes have undoubtedly impacted the automotive industry, it is essential to recognize that the sector’s problems are also rooted in structural and market-driven issues. The rise of Chinese automakers, especially in the EV segment, has posed a significant threat to German companies. Additionally, the global semiconductor shortage, which has plagued the industry for the past few years, continues to disrupt production and supply chains.
The combination of these factors suggests that while political decisions have played a role in the industry's challenges, they are not solely to blame. The decline of Germany's automotive industry is a complex issue with no single cause. However, the government's actions post-2021 have arguably accelerated the industry's transformation, forcing companies to adapt more quickly than they might have otherwise. While consumers have been pushed to purchase EV alternatives outside of Europe. Not long ago, Chinese car manufacturing was not present on German streets. Today, there are more than 30 dealers that sell BYD alone. Not even mentioning Genesis or Lucid.
Source: BYD website
As Germany's automakers continue to navigate these turbulent times, the question remains: Can the industry recover, or are these challenges a sign of a more permanent decline? The answer will likely depend on a mix of strategic corporate decisions, government policy, and broader economic conditions. For now, the industry stands at a crossroads, with its future uncertain.
However, distancing itself from its role as world leader in the field of combustion and diesel engines and instead of setting trends, chasing after externally driven trends is probably a strategical, at least debatable approach. EV sales figures are already collapsing in some markets. This information as a backdrop should make a timely amortization of newly built car plants questionable. Will there be a return to the combustion engine? Are the German car giants throwing their EV plans overboard? Will patents for combustion and diesel engines increase or decrease?
We remain curious.
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