Germany's car industry struggles with transformation amid coronavirus crisis
German car industry officials are meeting with the government to discuss more state aid. The coronavirus pandemic has added urgency to solving problems that are compounded by the industry's struggles with transformation.
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.
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."
At German premium carmaker Daimler, net profit fell 78% in the first quarter, bleeding the company's cash position down to a meager €617 million ($662 million). Securing liquidity has top priority now, says CFO Harald Wilhelm, as he throws out guidance for the year. Slumping demand, struggling parts supply and a difficult restart of production makes any outlook impossible, he says.
Daimler's trucks business has been hit especially hard in the first three months of 2020, with sales slumping 20% compared with the same period last year. The company's luxury brand, Mercedes-Benz, also suffered a decline — down by 15% even though global showrooms and factories had remained open until March.
The complete halt of production at Daimler lasted four weeks, with about 80% of its 170,000 employees being out of work and sustaining themselves through Germany's short-time work scheme. Although factories have been opening since Monday (April 20), most staff will remain dependent on the state-funded wage compensation until the end of April.
Chinese autoworkers, like those at Honda's Dongfeng plant (pictured), have already resumed work, hoping for sales in the world's largest car market to pick up again. While in February car sales in China collapsed by 80%, there was light at the end of the tunnel in March with declines slowing to 48%. Meanwhile, all of Daimler's production plants in the country are back in operation.
The world's largest carmaker by sales, Volkswagen, has reopened its factory in Zwickau, Germany, pressing ahead with the production of its ID.3 electric car. Despite a 5-week work stoppage at the plant, VW says efforts to roll out the pivotal mass-market electric vehicle this summer are still on time. Engine production at VW's Chemnitz plant though is only gradually being scaled up.
VW's largest production facility in Wolfsburg, Germany, however will remain shuttered at least until Monday (April 27). So will its plants in Emden and Hanover. Security protocols, including heavy-duty disinfecting and cleaning, will be put in place, says VW. Where social distancing measures aren't possible, workers are obliged to wear face masks.
At Renault in France, the coronavirus-induced shutdown has led to a massive drop in revenue, down by 20% on a decline in unit sales of more than a quarter. The slump has been hemorrhaging the company's cash reserves by about a third, but that still leaves €10.3 billion in Renault's coffers.
French carmaker PSA, including the Peugeot, Citroen and Opel brands, saw its first-quarter unit sales even more clobbered than those of its national rival. It sold a staggering 627,000 vehicles less than a year before, down 29%. So far, PSA has not given any date for reopening its European plants, citing ongoing talks with labor unions about pandemic security precautions.
In Italy, one of the worst-hit EU country in the current pandemic, the complete shutdown of all industries will not be relaxed before May 4. So the country's top carmaker, Fiat Chrysler, will continue to suffer enormous losses, already amounting to 76% fewer cars sold in March. By comparison, Europe-wide auto sales slumped by "only" 55% on average during the month.
This article was adapted from German by Uwe HesslerAndreas Rostek-Buetti