Major Crisis Facing German Automotive Industry

On October 30, the European Union took a decisive step by imposing an additional anti-subsidy tariff of 17% to 35.3% on Chinese electric vehicles (EVs). As trade tensions between the EU and China escalated, prospects for a resolution emerged, creating a potential path for reconciliationThe EU's proposal involves scrapping the anti-subsidy tariffs on the condition that the pricing of Chinese EVs will not fall below a specified commitment priceWhile this might seem like a diplomatic achievement, many experts argue that it effectively represents a disguised form of taxation on these vehicles.

The rationale behind this move is deeply rooted in economic realitiesChinese EVs have entered the European market at competitive prices, attracting significant interest from consumersMeanwhile, European manufacturers, particularly those in Germany, have struggled to keep pace with the rapid shift towards electrification, resulting in higher prices for their electric models

The fear among German automakers is palpable: the viability of their automotive industry hangs in the balance as they confront the threat posed by China’s cost-effective and technologically advanced electric vehicles.

Historically, German automobiles have been synonymous with quality, innovation, and performanceHowever, recent announcements from major automakers such as Volkswagen, which plans to cut 35,000 jobs and implement a 10% salary reduction for executives, reveal the industry's struggle to adapt to the changing landscapeAutomotive giants, often referred to as “BBA” (Benz, BMW, Audi), are experiencing declining profits as they grapple with the daunting challenges of transitioning to electric mobility.

The current crisis within the German automotive sector mirrors past technological transitionsIn the first half of the 20th century, German camera brands dominated the imaging industry

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However, their resistance to the rise of SLR (single-lens reflex) technology saw them miss the boat, with Japanese manufacturers interpreting consumer demand faster and more effectively.

Just as German camera manufacturers clung to outdated technology, German automakers have been slow to relinquish their reliance on internal combustion enginesThe shift towards electrification has been a crucial yet challenging transition for these legacy companies, which have found themselves at a crossroads with fierce competition from Chinese electric vehicle manufacturers.

Despite recent setbacks, German car makers still retain strengths in the high-end luxury sectorThere is a possibility that they could transition toward becoming upscale brands, much like how the German camera industry condensed into niche high-end productsHowever, the road to recovery is fraught with difficulties stemming from their sluggish pace in adopting electric and smart technologies.

To understand the current crisis in the German automotive sector, one must look closely at the electric vehicle supply chain

The complexity involved in transitioning from traditional fuel vehicles to electric vehicles encompasses a complete overhaul of supply chains—from sourcing raw materials like lithium, cobalt, and nickel, to innovative battery technology, powertrains, and manufacturing challenges.

For instance, German companies are required to reconstruct their entire supply chain for electric vehicle production, a task that is far from being achievable in the short termThis reality is underscored by the inadequacy of the current model lineups, with many German automakers lagging in the offer of EV products compared to their traditional offerings.

Volkswagen, as a mass-market brand, has been particularly vulnerable to this wave of changeTheir significant market share and complex corporate structure have made pivoting towards EVs a cumbersome processAlthough Volkswagen established a subsidiary, Cariad, to create intelligent software for their vehicles as early as 2020, the results yielded losses exceeding €2 billion in the past year, with considerable instability and user experience issues plaguing their software systems.

Meanwhile, as part of its strategy, Volkswagen acquired a 5% stake in the Chinese EV startup Xpeng while simultaneously investing $5 billion in the American electric vehicle maker Rivian, indicating a desperate attempt to leverage existing technological development from other markets.

The staggering losses are becoming increasingly apparent

From January to September of this year, Volkswagen Group reported a net profit of €12.9 billion, down from €16.2 billion during the same period last yearAudi's electric vehicle sales decreased by 5.9%, demonstrating that market demand for German EVs is waningMoreover, major brands like BMW and Porsche are not faring any better, further reinforcing the idea that the German automotive industry is in dire straits.

As inefficiencies mount, workforce reductions are being seen as inevitableJob cuts are penetrating deeper into the supply chain, with major components suppliers like Bosch planning to trim 5,000 jobs, and other firms in the automotive sector following suitThe core issue revolves around the fact that production costs of German EVs are severely inflated, leading to a lack of competitiveness in an increasingly crowded market.

A case in point is the Volkswagen ID.3, a compact electric vehicle starting at a price of €33,000 in Germany, starkly contrasted with the significantly lower price of its Chinese counterpart at approximately €12,980. This discrepancy leads to inevitable undercutting, where consumers would rather purchase the cheaper model, prompting certain dealers to seek out cheaper imports.

In fact, the gripping scenario unfolded last year when a car trading company in Berlin imported 22 units of the Chinese SAIC Volkswagen ID.6X electric SUV, only to have these vehicles seized by German authorities, who sought to destroy them to safeguard local interests.

The situation illustrates an economic stalemate where one side's loss (the German market) translates into a gain for the other (the Chinese market). While facing unemployment crises at home, German automakers and component manufacturers ramp up their investments in China, as they aim to leverage lower operational costs to maintain profitability.

Despite the somber state of the German automotive industry, its significance cannot be overstated