Germany’s automobile trade disaster – that is what might repair it

For many years, car-making has been the jewel in Germany’s industrial crown, a strong image of the nation’s well-known post-war financial miracle. Its “Large Three” manufacturers, Volkswagen, Mercedes-Benz, and BMW, have lengthy been praised for his or her efficiency, innovation and precision engineering. However in the present day, the German motor trade is struggling. How can it get again on the highway to restoration?

Once you arrive by prepare in Wolfsburg, Decrease Saxony, the very first thing you see is the Volkswagen manufacturing unit. Its big facade, emblazoned with a large VW brand and flanked by 4 tall chimneys, dominates one financial institution of the canal that runs by town. The 6.5 sq km (2.5 sq mile) complicated sits adjoining to the Autostadt, a sort of theme park dedicated to the auto and to VW, Europe’s greatest carmaker. The Volkswagen Area, a sports activities stadium, is a brief distance away.

Wolfsburg is Germany’s reply to mid-Twentieth Century Detroit – not a lot a metropolis with a automobile manufacturing unit as a manufacturing unit with a metropolis that has grown up round it. Some 60,000 folks from throughout the area work within the plant, whereas the city itself has a inhabitants of round 125,000. Locals say that even for those who do not work within the manufacturing unit your self, it is sure lots of your pals will, together with half of your class from college.

“Wolfsburg and Volkswagen – it is sort of a synonym,” explains Dieter Landenberger, the VW Group’s in-house historian, as he seems to be lovingly at an early mannequin Beetle. It’s considered one of an array of fantastically restored traditional automobiles within the Zeithaus – an enormous, glass-fronted museum within the Autostadt devoted to icons of the motor trade.

“We’re happy with the plant,” he says. “It’s a image of that interval within the Nineteen Fifties when Germany needed to reinvent itself and rebuild after the conflict. It was a sort of motor for the German financial miracle.”

In the present day, nevertheless, the plant has additionally come to symbolise among the most important issues affecting the German automobile trade as an entire. The Wolfsburg manufacturing unit is able to constructing 870,000 automobiles a yr. However by 2023 it was making simply 490,000, based on the Cologne-based German Financial Institute. And in Germany it’s removed from alone. Automotive factories throughout the nation have been working effectively under their most capability. The variety of automobiles produced in Germany declined from 5.65m in 2017 to 4.1m in 2023, based on the Worldwide Organisation of Motor Automobile Producers.

Automotive-making makes up a couple of fifth of the nation’s manufacturing output, and if the provision chain is taken under consideration, it generates round 6% of GDP, based on Capital Economics. The trade employs some 780,000 folks straight – and helps tens of millions of different jobs.

It isn’t simply manufacturing that’s down. Gross sales of automobiles made by German manufacturers are far decrease than they have been just some years in the past. Between 2017 and 2023, these of VW fell from 10.7m to 9.2m, whereas over the identical interval BMW’s went from 2.46m to 2.25m and Mercedes-Benz’s went from 2.3m to 2.04m, firm reviews present.

All the Large Three noticed their pre-tax earnings fall by a couple of third within the first 9 months of 2024, and every warned that their earnings for the yr as an entire can be decrease than beforehand forecast.

The event of electrical automobiles has sucked up big funding, however the marketplace for them hasn’t grown as rapidly as anticipated, whereas overseas rivals are flexing their muscular tissues. The specter of tariffs being imposed by the US and different governments additionally looms giant.

“There are such a lot of crises, an entire world of crises. When one disaster is over, one other is developing,” is how Simon Shütz, a spokesman for the German Automotive Business Federation (VDA) places it.

Automotive gross sales throughout Europe have been declining since 2017, based on Franziska Palmas, a senior Europe economist at Capital Economics. “Currently they’ve recovered a bit, however they’re nonetheless round 15 to twenty% decrease than they have been on the peak in 2017,” she says. “That is partly on account of elements just like the pandemic, the power disaster. But it surely’s additionally automobiles lasting longer – and folks have already got numerous automobiles in Europe. So demand has been weak.”

One other key issue has been the aforementioned transition to electrical automobiles. Because the diesel emissions scandal of 2015 – during which VW was discovered to have rigged emissions assessments within the US – the trade has been present process a technological revolution.

With the EU and European governments decided to part out petrol and diesel automobiles over the subsequent decade, producers have had little alternative however to take a position tens, and collectively a whole bunch of billions of Euros on growing electrical fashions and constructing new manufacturing strains.

Nevertheless, though electrical automobiles do now make up a major share of all automobiles bought – 13.6% within the EU and 19.6% within the UK final yr, for instance – their market share has not been rising as rapidly as anticipated.

And in Germany itself, the sudden elimination of beneficiant subsidies for electrical automobile patrons in late 2023 really contributed to a dramatic 27% fall in gross sales of all electrical automobiles throughout the nation final yr, making life nonetheless harder for German corporations of their dwelling market.

“The choice to drop subsidies immediately – that was very dangerous, as a result of it undermined belief amongst our prospects,” says the VDA’s Simon Schütz.

“Going from the combustion engine to electrical mobility could be very large course of. We’re investing billions in rebuilding all of the factories. And in order that takes a while, there is no query about it.”

Whereas all of this has been happening, German producers have additionally been grappling with one other critical concern. Doing enterprise in Germany itself, working factories right here and using a whole bunch of 1000’s of individuals, could be very costly.

Staff within the automotive sector have historically loved beneficiant pay and advantages because of agreements drawn up between unions and administration. In line with Capital Economics, in 2023 the typical month-to-month base wage within the German auto trade was about €5,300, in contrast with €4,300 throughout the German financial system as an entire.

For years, this method gave German-based firms sure benefits, for instance in avoiding industrial unrest and in attracting and retaining gifted employees. Nevertheless, it additionally led to German automobile producers having the best labour prices within the international trade. In 2023, these averaged €62 per hour, in comparison with €29 in Spain and €20 in Portugal, based on the VDA.

The state of affairs for Germany’s home automobile trade grew to become extra acute following Russia’s invasion of Ukraine. This choked off Germany’s once-abundant provides of low-cost Russian fuel, on the very time when the nation was phasing out nuclear energy.

The end result was a pointy enhance in power costs. Though they’ve since subsided, power prices for industrial customers in Germany stay very excessive by worldwide requirements. “Vitality costs listed below are three to 5 occasions increased than within the US, or in China – a lot increased than for our most important rivals,” says Mr Schütz.

And that is being felt throughout the trade, not simply on the carmakers themselves. “From the Thysenkrupp and Salzgitter metal mills producing the sheet steel rolls which can be later became doorways and bonnets, to makers of smaller parts utilized in drivetrains, prices have exploded on account of excessive power costs,” says Matthias Schmidt of Schmidt Automotive Analysis.

Final yr these pressures got here to a head. At VW, which has 45% of its international employees in Germany, managers lastly determined radical motion was wanted to convey down prices.

“It was a really large shock,” IG Metall union spokesman Steffen Schmidt tells me over a cup of espresso close to the WV manufacturing unit in Wolfsburg. “The corporate did not say something publicly.”

It was left to Daniela Cavallo, head of the highly effective VW works council and the highest staff’ consultant, to ship the information. “They held a giant assembly outdoors the gates of the manufacturing unit. 1000’s of staff – and you might have heard a pin drop,” says Mr Schmidt.

“They have been surprised. 1000’s of individuals, all fully silent.”

What VW proposed was unprecedented. Union representatives had come to conferences anticipating to barter an annual pay rise. They have been asking for a 7% increase. As a substitute, they have been informed, the corporate wanted them to take a ten% pay reduce.

Worse was to observe. The corporate stated it may need to shut as much as three of its factories inside Germany itself – and was tearing up a job safety settlement that had been in place for many years.

Arne Meiswinkel, WV’s chief negotiator, stated on the time that the state of affairs it confronted in Germany was “very critical” and that “Volkswagen will solely be capable to prevail if we future-proof the corporate now within the face of rising prices and the huge enhance in competitors”.

Volkswagen had by no means beforehand closed a German manufacturing unit in its 87-year historical past. Within the face of intense opposition from unions and politicians, and following quick however disruptive “warning strikes” by unionised staff, the thought was finally shelved. However the actual fact it had been put ahead despatched a seismic shock by your complete sector.

Within the meantime, the workforce did comply with painful limits on pay and bonuses, and VW stated it could reduce greater than 35,000 jobs by the tip of the last decade, albeit in a “socially accountable method” that prevented obligatory redundancies.

Much less conspicuously, Mercedes-Benz additionally launched a cost-cutting drive final yr, geared toward saving a number of billion euros yearly – albeit obligatory redundancies within the German workforce are extremely unlikely, as a job safety settlement successfully guidelines them out till 2030. In the meantime Ford, which operates two factories in Germany, just lately introduced plans to chop 2,800 jobs within the nation.

Not all the German automobile trade’s issues are confined to Germany itself. With the European market saturated, for a number of many years the continent’s producers have appeared for progress elsewhere.

Probably the most profitable markets has been China, the place for some time the rising center class had an apparently insatiable urge for food for upmarket European automobiles. VW, Mercedes-Benz and BMW all teamed up with native companies, organising factories in China itself to satisfy native demand.

However now that supply of progress is drying up. The Large Three have all seen gross sales fall just lately – in 2023 VW’s China gross sales have been down 9.5% on the earlier yr, Mercedes-Benz’s by 7% and BMW’s by 13.4%. Their mixed share of the Chinese language market has shrunk as effectively to 18.7%, from a peak of 26.2% in 2019. This seems to be the results of a slowing Chinese language financial system, falling curiosity in costly, foreign-badged automobiles and the fast progress of native marques, particularly within the electrical automobile market.

“Not that way back, Western manufacturers represented high quality and belief,” explains Mark Rainford, founding father of the Inside China Auto web site. Nevertheless, he says, since then the popularity and enchantment of Chinese language manufacturers has improved past recognition.

All the Large Three say traits in China have had a major influence on their earnings.

Chinese language manufacturers are additionally trying to construct a share of the European market, helped by their a lot decrease working prices than extra established rivals, each as a result of wages are decrease in China and since, as pure EV corporations, they do not have the identical legacy prices carried by producers making the transition from petrol and diesel to battery-powered automobiles.

In line with the European Fee, Chinese language manufacturers additionally profit from hefty authorities subsidies, which permit them to promote automobiles at artificially low costs. In October, the EU launched additional tariffs on imports of Chinese language-made EVs, in an effort to create a extra stage enjoying discipline.

German corporations opposed the EU tariffs, as a result of they feared retaliation from China may have an effect on their very own exports. Now additionally they face the specter of new protectionist measures being launched by the Trump administration, together with attainable tariffs on automobiles shipped from the EU. For an trade that depends closely on exports, the rise of protectionism is a rising risk.

“We all know that commerce wars solely create losers on either side. Tariffs will value wealth, value progress and value jobs,” says the VDA’s Simon Schütz.

Though among the pressures going through Germany’s automobile firms weren’t foreseeable, there was nonetheless a component of complacency, believes analyst Matthias Schmidt: “They knew the structural points have been there, however have been blindsided by low-cost Russian fuel,” he says.

“The enlargement to China and the excessive earnings being shipped again to Europe plastered over the excessive labour value points, giving unions a joker card to play with.

“Germany has successfully been an export-driven market, and as soon as these markets sneeze, Germany catches a chilly, which is what’s occurred.”

So can Germany’s carmakers revive their fortunes? It’s a important query for the producers, for his or her networks of suppliers and for the nation as an entire.

“The issue for Germany is we’re not aggressive,” says Dr Ferdinand Dudenhöffer, head of the Bochum-based Heart for Automotive Analysis. “Not simply in value phrases, but additionally by way of the brand new applied sciences which can run the world in future”.

He thinks China has change into the centre for gravity for innovation in areas akin to digitisation and battery know-how. “The answer for the carmakers and for the suppliers, in my opinion, can be that they take their factories overseas,” he says.

Simon Schütz is extra optimistic. He thinks the trade can prosper, however provided that it will get the help it wants from the federal government after the elections later this month.

“Our automotive trade can be world-leading, I’m positive of that,” he says.

“The query is, the place will the long run jobs be? Will they be in Germany, as a result of we will construct automobiles right here, or will our firms go elsewhere?’

For union rep Steffen Schmidt, nevertheless, the answer is to return to Germany’s conventional industrial values. “We’ve to change into a pacesetter in innovation and know-how once more,” he says. “Then we will hold excessive pay and good situations for staff.”

He thinks the trail forward for the brand new authorities could be very clear: “Make investments, make investments, make investments. In infrastructure, in know-how, in inexperienced power and in training.”

For tens of 1000’s of staff in Wolfsburg, and in Germany’s different “automobile cities” akin to Ingolstadt, Weissach, Munich, Stuttgart and Zwickau, the stakes couldn’t be increased.

High image credit score: Getty pictures

BBC InDepth is the house on the web site and app for one of the best evaluation, with contemporary views that problem assumptions and deep reporting on the most important problems with the day. And we showcase thought-provoking content material from throughout BBC Sounds and iPlayer too. You may ship us your suggestions on the InDepth part by clicking on the button under.