On August 7, 2024, new cars of various brands were parked in the parking lot of a car terminal in the Port of Duisburg, Germany, waiting for export.
Ina Fassbender | AFP | Getty Images
The German automotive industry was once world-renowned for its high-quality, innovative internal combustion engine vehicles. Owning a German car is a symbol of luxury and status. Automakers are booming, boosting the country’s economy.
But things have since gotten bleaker.
The latest example is Volkswagen Earlier this week, the company said it no longer ruled out closing factories in its native Germany and believed it might need to end a job protection agreement that has been in place in the country since 1994.
Andreas Ries, global head of automotive at KPMG, told CNBC: “For German carmakers, they have been the industry’s undisputed technology market leader for nearly 140 years. It’s an unfamiliar situation with little to worry about sales or competition.
Now, he added, the industry is going through its biggest transformation yet.
How are German carmakers doing?
Historical data from the Ifo institute shows sentiment in the automotive industry has been volatile in recent years. Sentiment fell again to negative 24.7 points in August, according to data released on Wednesday. Ifo said business expectations for the next six months were “extremely pessimistic.”
Volkswagen isn’t the only one in trouble.
In its latest earnings release, Mercedes’ auto division cut its annual profit margin forecast, while BMW said its auto unit’s second-quarter profit margin was lower than expected. Porsche lowered its outlook for 2024, although it attributed this to a shortage of special aluminum alloys.
The auto industry’s problems could also have spillover effects on the broader German economy, which has been teetering in recession territory this year and last. In the second quarter of 2024, Germany’s gross domestic product fell by 0.1% compared with the previous quarter.
“‘When the German auto industry coughs, Germany gets the flu’ … is a good description of the current situation,” said KPMG’s Rees.
He said that the automobile industry includes not only large enterprises, but also thousands of small and medium-sized enterprises across Germany, and believes that the automobile industry is one of the most important industries in Germany.
“We face multiple challenges”
Experts and industry bodies say a range of factors have led to the current situation and are weighing on the market.
“We face multiple challenges,” a spokesman for the German Automobile Manufacturers’ Association (VDA) told CNBC. They said this still included the consequences of the Covid-19 pandemic, as well as “geopolitical tensions and high bureaucratic demands at national and European levels”.
Car production is also affected due to weak domestic demand due to the overall state of the German economy, the VDA added, noting that broader macroeconomic trends also affect the automotive industry.
But two topics that come up again and again in the debate surrounding the German car industry are China and the shift to electric vehicles, and their overlap.
“We are still facing a very disruptive situation, with electric vehicles performing worse than expected,” Horst Schneider, head of European automotive research at Bank of America, told CNBC. He noted that demand was lower than expected. expected, but competition has intensified.
Schneider said that while China’s auto market has been recovering, German automakers have not felt the impact of the rebound as rivals have taken market share. It’s also a question of price, he added, noting that German electric cars are too expensive, while Chinese products are better in some ways and cheaper.
Tensions between the European Union and China over trade and import tariffs also weighed on the market.
“German producers are very vulnerable to trade politics, previously it was 40% or 50%% Most of the profits come from China, and the Chinese market is starting to be a little closed. … At the same time, we have a higher proportion of electric vehicles that are far less profitable than internal combustion vehicles,” Schneider said, adding that this created a “double problem.”
“If China’s earnings were still as high as they were before, you would be well-positioned to deal with the EV earnings woes, but since that’s not the case and China’s earnings are slowing, there’s widespread earnings pressure and margins are shrinking,” he said.
The end of Germany’s electric car subsidy program is also weighing on the market, the VDA said. A new tax break scheme aimed at promoting the use of electric vehicles is currently being developed.
Where will the German auto industry go next?
KPMG’s Rees says there are some glimmers of hope amid the challenges. For example, hybrid car technology may be around for longer than expected, and sales of internal combustion engine cars have picked up, he explained.
But he said politics, business and researchers needed to work together to create frameworks to address issues such as regulation and refocus on quality and regulation.
The VDA also considers that different production conditions are required.
“We need political reform not regulation. Pragmatism not micromanagement,” a spokesman for the association said. “We need a modern mix of market-oriented economic policy and shaping industrial policy.”
The spokesman said market conditions would remain challenging for at least next year.
Bank of America’s Schneider said many automakers are still setting guidance indicating that their second-half results are likely to be better than the first.
“That’s where the doubts are at the moment, investors are not entirely convinced of this and hence the fear that we’re going to see profit warnings in the third quarter,” he said, adding that in turn leaves questions about the pair’s prospects for 2025. The open question of what year means.
