Economics Update December 2024 - The crisis in the car industry: a fatal mix of management and political failure

The share of German manufacturers in global car registrations has fallen from 21.4% to less than 18% within five years. As the global market has only grown moderately at the same time, this is reflected in a significant drop in production by German automotive companies. The focus is on developments in China, the most important and profitable sales market for German cars to date. While sales of combustion cars there slumped by 15% in the first three quarters of the year, sales of electric vehicles rose by 21% and plug-in hybrids by almost 100%. It is now clear that German manufacturers, with their product mix still dominated by combustion engines, do not have the right offering: the market for electric vehicles is clearly in the hands of Chinese suppliers. In the case of hybrid vehicles, the Chinese demand - not entirely coincidentally - ranges for electric motors that are generally not achieved by German manufacturers. What's more, the nimbus of German premium brands has evaporated within a short space of time because status and prosperity in China are increasingly rarely demonstrated by owning German luxury vehicles.

Difficult transition to e-mobility

German automotive companies are not well-positioned for the transformation towards electromobility - and they themselves are initially responsible for this. However, there has hardly been any helpful support from politicians, as shown by the abrupt end of purchase incentives for electric cars, which resulted in a slump in demand. With regard to Volkswagen, it could be added that the cost structures, which are nowhere near competitive, could only have arisen in a company in which political calculations count at least as much as business necessities.

Management and political failure on the battery cell issue

The state of battery cell production shows just how difficult the transition to electromobility is: battery cells account for around 30% of the added value in an electric vehicle. If you want to be competitive in the long term, you have to master this part of the value chain yourself, especially as the production of high-performance battery cells has proven to be a high technology. In view of the great importance of in-house battery cell production, one would assume that vehicle manufacturers regard the development of expertise and corresponding capacities as a strategic investment that they are pursuing with staying power and a certain willingness to take risks. In fact, the investment projects for battery cells currently being developed have recently been radically scaled back in view of sluggish sales, which is causing massive problems for suppliers such as Northvolt. As a result, there is not a single European company among the ten largest battery cell producers. You don't have to be a prophet to realize that German (and European) manufacturers will fall behind in the electromobility market in the medium to long term if nothing significant changes.

The solid fuel combustion cell could offer a way out: If this technology, which is still in its infancy, proves to be superior, competition would be reopened. Seizing this opportunity lies equally in the hands of companies and politicians. From the former, we must expect strategic vision and a willingness to invest, sometimes at the expense of current profits. The latter generally needs reliable framework conditions, a supporting and coordinating function in the development of the infrastructure and possibly also purchase incentives in order to boost vehicle sales and raise them above critical thresholds as quickly as possible. Constructive cooperation between the automotive industry and the state would be desirable, as it could provide important impetus as a model for modern industrial policy.