German car industry faces ‘day of reckoning’
Tens of thousands of jobs cut as auto groups pump billions into electric technology
Two weeks ago a bumper crowd of restructuring experts flocked to the swanky environs of Frankfurt’s Villa Kennedy hotel, their sights firmly set on the casualties of the crisis sweeping the German car industry.
Days later, Mercedes-Benz owner Daimler and Volkswagen’s Audi brand announced more than 20,000 job losses, in the first real signs of the huge human cost of the sector’s transition from combustion engines to electric vehicles.
“The auto industry is in the midst of a far-reaching upheaval,” said Volkswagen chief executive Herbert Diess, whose company is seeking to reinvent itself as a world leader in battery-powered cars.
“No one will survive in the form they exist today,” predicted Ralf Kalmbach at consultancy Bain & Co, who has spent 32 years advising German carmakers.
The enormous expense of this transformation, he added, has left the engine of the country’s postwar Wirtschaftswunder, or economic miracle, facing the “biggest crisis since the invention of the automobile” by Karl Benz more than a century ago.
It is estimated that the German car industry, which directly employs 830,000 people and supports a further 2m in the wider economy, will be forced to plough some €40bn into battery-powered technologies over the next three years.
“We have seen the first few chapters of the transformation, but this is a book with many chapters,” warned Ola Kallenius, Daimler chief executive, last month, as he confirmed the carmaker would post significantly lower profits for at least two years.
German auto giants, from Daimler and Audi to suppliers including Continental and Bosch, have announced that around 50,000 job will be lost or are at risk so far this year, as their traditional businesses become less profitable.
The global economic slowdown, exacerbated by the US-China trade war and the risk of Brexit, has forced manufacturers to revise heady sales projections.
They had expected to sell in excess of 100m vehicles in 2019. With just a few weeks left in the year, that figure is likely to be more like 90m.
Increasingly localised production by the carmakers in China and North America to avoid tariffs has also sapped the exporting power of German-based plants, which are left catering to the more fragile European market.
To make matters worse, a demographic time bomb is ticking, which could permanently reduce the number of new car buyers, and a new raft of competitors, including the likes of Uber and Google’s Waymo, are emerging with products such as autonomous cars that will probably drive the future of transport.
“The German auto industry needs to learn to adapt faster, to change faster,” warned auto analyst Arndt Ellinghorst at Evercore ISI.
Despite these warnings, the premium carmakers have been reluctant to go “all-in” on electric technology, at the risk of alienating existing engine-loving customers.
With the electric car market still in its infancy, Daimler’s Mr Kallenius told investors that the Mercedes-owner would “not develop technology for the sake of technology”.
BMW, similarly, has been keen to play-up its traditional expertise.
“We believe there is still much room for growth in the automotive sector,” BMW’s chief executive Oliver Zipse said, dismissing the earnings potential of so-called mobility services, such as car sharing and self-driving taxis.
“There is a long-term growing demand for individual mobility worldwide, especially in the premium segment. The fundamentals behind it are much stronger than the current dip in the overall market, which is mainly due to economic slowdown.”
Their confidence, however, jars with the impending bloodletting in the country’s powerhouse sector.
In the next decade, almost a quarter of a million auto jobs will be lost in the country, according to Ferdinand Dudenhöffer, the director of the Center for Automotive Research at the University of Duisburg-Essen. Smaller suppliers, such as paint shop Eisenmann, have gone out of business.
Car sales in China, which helped Germany’s biggest brands weather the financial crisis, have slowed for 17 months in a row, drastically reducing a key source of revenue at the precise moment it is needed to fund new technologies.
“We have kind of the worst situation now,” Mr Källenius told investors two weeks ago. “We have got to do the heavy lifting in the next three years.”
Despite widespread anxiety in the industry about the lack of demand for electric vehicles, strict EU carbon-emissions rules are forcing carmakers to accelerate their production plans, or face billions of euros in fines from Brussels.
The EU’s targets for 2030 can mean that between 7m to 10.5m battery-powered cars will have to be on Germany’s roads by the end of the next decade.
Volkswagen, whose first mass-market battery-powered hatchback, the ID3, is rolling off production lines in east Germany, is “convinced that the transition to electric-mobility will gain traction next year,” according to VW’s Mr Diess.
As he announced plans last month to build a further 4m battery-powered vehicles, Mr Diess was adamant that “electrification is not a gamble”. But he warned that “the conversion to e-mobility requires resources,” which must be financed from VW’s “traditional businesses”.
While the world’s largest carmaker does enough of such business to absorb the investment costs of converting entire combustion engine car plants to zero-emission production, Germany’s premium manufacturers, Daimler and BMW, do not.
“For the moment, you have to consider that with every electric vehicle, manufacturers are losing a tremendous amount of money,” said Mr Kalmbach at Bain. That is not expected to change until the middle of the next decade.
A heavy reliance on the sales of profitable luxury cars has left executives with little room for manoeuvre.
“We had a couple of good years and the necessary work of applying cost discipline has not been done,” Mr Kalmbach added. “Companies added fat to their waists.”
VW managed to convert its factory in the east German city of Zwickau without any job losses, and Porsche created 1,500 new roles to build its new Tesla rival, the Taycan, in Stuttgart.
The unique strength of German labour unions has forced Daimler and Audi to provide job guarantees, which stretch to the end of the next decade, while VW’s supervisory board is dominated by its powerful workers’ representatives and local politicians, who would stand in the way of mass redundancies.
The cost of shedding jobs in Germany, often estimated at €100,000 per axed position, forces companies to consider reskilling programmes or wait for employees to retire.
Yet even the German car lobby, the VDA, predicts that the shift to electric cars will cause 70,000 jobs to go in the near future, as their assembly is far less labour intensive, and their components have fewer moving parts than combustion engine models.
“Even during the financial crisis, there were hardly any lay-offs because of agreements with labour unions,” said Rainer Mehl, a managing director at consultancy Capgemini. “As this crisis gets tougher, there will probably be a need for deeper cuts.”
It seems Germany’s flagship brands are merely putting off the inevitable.
This is because they are still too profitable for widespread cuts to be politically palpable, said Max Warburton, a veteran auto analyst at Bernstein.
“In this industry you can only cut jobs in a crisis,” he added. “Deep down, they all know that. They all know they’re going to have to, they are just trying to postpone the day of reckoning.”
Instead, large carmakers are putting pressure on their suppliers, which are drastically reducing their headcount to remain competitive.
Continental is doing away with 3,570 positions in Germany alone, while Bosch will slash thousands of jobs in the next two years, and employees at ZF have been protesting against looming cuts. The market for petrol and diesel engine components will decline at 7 per cent a year, according to a recent McKinsey study.
“The times are getting tougher, but this industry has always stood up to the competition and it has the necessary flexibility, determination and knowhow to withstand crises,” said Bernhard Mattes, the outgoing president of the VDA.
The engineering expertise that has helped Germany’s carmakers survive for 130 years would carry them through the tsunami of disruption that looms on the horizon, he added.
“We have no reason to be despondent. It isn’t the makers of vacuum cleaners, the postmen or the high-tech firms that launch innovative vehicles on to the market . . . The German auto industry will become a pioneer.”