German Automotive Industry Under Pressure
Thursday, early evening. I am on my way to the House of Science. I am registered for a lecture at the Institute of Economics. A lecture awaits me, focusing on nothing less than Germany’s most important industrial sector: the automotive industry. This sector, once so successful with its business model, is now under pressure. Thomas Puls from the German Economic Institute in Cologne will discuss the reasons for this. I am eager to listen.
An Unprecedented Response
When I reach the lecture hall, I am, to put it bluntly, astonished: “The place is packed. The interest is immense.” Felix Rösel, a professor at the Technical University, shares this view. Rösel introduces the lecture and confirms my observation. Never before has an announced lecture received such a tremendous response. Politicians and (former) VW managers are among today’s guests. Well, I think, no wonder. After all, our region has been particularly affected by the upheaval in the automotive industry.
The Death Knell Has Not Rung Yet
Thomas Puls then takes the microphone. And I have to say, I like the man—not only because his engaging lecture, despite its seriousness, is entertaining. No, Puls exudes an attitude that most attendees—and probably many Germans—are currently lacking: optimism. Why do I say this? I’ve overheard conversations around me. They’re unmistakably a lament for the industry, accompanied, of course, by the usual “I’ve known this would happen for a long time.” Clearly.
A Massive Transition Phase That Will Cost
Returning to Puls, he doesn’t shy away from stating at the outset that the golden age of the automotive industry is over. We are in a transition phase, he explains, one that “will be costly.” This is undoubtedly a new experience for an industry accustomed to success. Puls illustrates his points with slides showing declining production numbers and revenues in recent years. His lecture is based on his IW Report: “The Automotive Industry in 2024.” First, the facts: since the turn of the millennium, the global automotive industry’s focus has shifted to Asia. By 2023, 60% of all vehicles worldwide were being built in Asia, with nearly 50% sold there.
“The Third Quarter Was Really Bad”
Initially, the German automotive industry particularly benefited from this development. Why? Because of its dual strategy. On one hand, it had globalized production and sales. On the other, German manufacturers dominated the premium segment. And therein lies the rub, as Puls vividly demonstrates.
From 2018—long before the pandemic—production numbers in Germany started declining. By 2023, they were at the level of 1985; without electric vehicles, they would have been at the level of 1966! However, Puls also points out that this trend is not unique to Germany. The auto industries of France and Italy are now at the bottom in Europe. Even in Japan, the situation is dire, as evidenced by the planned forced merger of Honda and Nissan.
The Premium Segment as a Savior
Puls is convinced: only the premium segment can save Germany’s automotive industry. Producing small cars, he explains, is not worthwhile. Small cars are built where they are sold. Only premium-class vehicles are suitable for export and profitable. The weak domestic market—meaning Europe—is no longer sufficient as a sales region. The money is made in Asia. And here, the industry must cater to the tastes of its clientele. Puls also emphasizes one point: if German carmakers hadn’t discovered the Chinese market in time, the lights would have gone out long ago.
China as the Most Important Production Location
However, there is a catch: the Chinese automotive industry has made significant strides in recent years, led by the electric vehicle manufacturer BYD. The name “Build Your Dreams” is apt. Once perhaps laughed at, the Chinese company has now struck fear into the global industry. According to Puls, Ford and Stellantis are struggling the most; Toyota, Skoda, and possibly Volvo are currently the winners.
Losing the Knowledge Advantage
The shift away from internal combustion engines has a crucial downside: the German automakers’ knowledge advantage is being lost. Two-thirds of all electric vehicles are registered in China. The supplier CATL has become the world’s leading patent applicant in this field, potentially displacing Bosch from its top spot. Not surprisingly, CATL has built a plant in Germany. Meanwhile, BYD is constructing factories in Hungary and Turkey.
Job Cuts Will Continue
The trend of job cuts in the automotive sector will persist, Puls predicts. Labor costs in Germany are €80 per hour, compared to €30–40 in the European average. Thus, cost coverage is only possible in the premium segment. However, German manufacturers have recently faced a 10% decline in sales in the Chinese market, especially in the luxury class, including Porsche.
What Does He Recommend to the Industry?
Following Puls’ lecture, a brief Q&A session takes place. A combative older gentleman from the third row argues that high electricity costs are breaking the back of the German economy and were a major factor enabling the rapid growth of electric vehicle production in China. He recently visited China, where charging an electric vehicle costs around 8–9 cents per kilowatt-hour at widely available charging stations. In Germany, this is only a dream—only homeowners with rooftop solar panels and wall chargers can afford electric cars.
We Have Forgotten How to Act
Puls’ concluding statement takes a broader perspective: “We’ve forgotten how to act. All we ever say is what’s not possible,” he laments. “The Chinese invent, the Americans implement, and the Germans regulate.” There is, unfortunately, much truth in this triad. But perhaps Puls’ words are a small wake-up call that will spread beyond this lecture. May they reach the relevant decision-makers.