German automobile manufacturers are facing unique challenges in a changing environment due to their specific business models.
Recently, several major German automobile manufacturers have successively lowered their profit expectations, and the latest statistical data indeed reflects that these companies are not worrying without reason.
Data released by the Federal Statistical Office of Germany on October 7th shows that in the first half of 2024, the revenue of the German automotive industry (excluding the automotive parts supply industry) decreased by 4.7% year-on-year. Of course, the automotive industry's revenue hit a new high in the same period last year, partly due to price increases.
Despite the decline in revenue, the automotive industry remains the sector with the highest revenue in German manufacturing, accounting for 25.2% of the total. The data also indicates the significant role of exports in the German automotive industry. In the first half of 2024, about 70% of the total revenue of the automotive industry came from exports, the highest proportion in the past 15 years. This can also explain to some extent why Germany, a major automotive country and an export-oriented economy, opposes the European Union's imposition of additional tariffs on Chinese electric vehicle imports. China is one of the most important export destinations for the German automotive industry, and if there is a trade conflict between China and Europe, the German automotive industry will be the first to be affected.
Advertisement
Some time ago, the auditing and consulting firm EY analyzed the performance data of 16 large global multinational automotive corporations and found that the global automotive industry continues to be in a slump, with widespread distress. In the first half of 2024, the pre-tax profits of the 16 automakers decreased by 8% year-on-year, while sales decreased by 2% year-on-year, despite a 3.7% year-on-year increase in revenue. The growth can be attributed to the increase in both revenue and profit of Japanese automakers, and the growth in the data of Japanese automakers can be attributed to the weakness of the yen. Experts from EY stated that the profit growth of the Japanese automotive industry, which is based on the depreciation of the yen, actually conceals the severe situation of the global automotive industry in terms of profit.Compared to Japanese automakers, the situation for German car manufacturers is less optimistic, especially in terms of profits. In the first half of 2024, German automakers saw a year-on-year revenue decline of 0.4%, a 2.5% drop in sales volume, and a significant 18% decrease in earnings before interest and taxes (EBIT). Mercedes-Benz's profit margin fell from 13.8% to 10.9%, while BMW's dropped from 13.1% to 10.8%. However, even a camel that dies from starvation is bigger than a horse; despite the profit decline, Mercedes-Benz and BMW rank second and third in profit among 16 automakers, with South Korean automaker Kia at the top.
The most severe decline in profit margins is seen with Stellantis and Tesla, with the former dropping from 13.8% to 7.8%, and the latter sliding from 10.5% to 5.9%. An EY expert stated that the automotive market is in a downturn, with a very serious situation, obviously due to the excessive investment in electrification by automakers, while at the same time, sluggish demand has led to a decline in production and sales volumes, failing to fully utilize factory capacity. Currently, only with price concessions can new cars be sold, which will squeeze profit margins.
Speaking of factory capacity utilization, Volkswagen recently announced that it would not rule out closing factories in Germany, one of the triggers being the idleness of factory capacity. According to Marklines and the automotive media Automobilwoche, in 2023, the capacity utilization rates at Volkswagen Group's factories in Wolfsburg and Dresden were 56% and 30%, respectively, while those at the Zwickau and Emden factories were 69% and 78%, respectively. Observers estimate that the average capacity utilization rate of Volkswagen Group's factories is around 70%.
The rate of decline in sales volume for these automakers is also accelerating. In the first quarter of 2024, sales volume dropped by 0.6% year-on-year, and in the second quarter of 2024, it fell by 3.3%, especially in the Chinese market. While their sales in Europe and the United States increased by 2.9% and 0.8%, respectively, they decreased by 11.2% in China. German automakers' sales in China fell by 6.9%. An EY expert stated that car buyers have a low willingness to consume, and geopolitical tensions and war have added a lot of uncertainty. Coupled with the fact that electric vehicle sales are below expectations, and the endless discussions surrounding fuel vehicles make the situation more unclear, automakers are in a dilemma in terms of investment decisions: whether to continue to invest heavily in the development of new electric vehicles or to focus on fuel vehicles, which are currently in higher demand.
If we only talk about the global automotive industry and the overall economic environment, we would conclude that everyone is not doing well. However, in reality, German automakers face unique challenges in the changing environment due to their special business model.The German Economic Institute (IW) stated in a study that the German automotive industry has reached the end of its golden era, just as all golden ages must eventually come to an end. The study points out that since the beginning of the 21st century, the growth of the automotive industry has begun to shift towards Asia, particularly China. In 2023, nearly 60% of global automobile production and 50% of sales occurred in Asia. However, unlike other Western European car manufacturers, the German automotive industry and Germany as a production base can still benefit from this development trend. From 2000 to 2017, there was a significant increase in automobile production in Germany.
The IW study indicates that the German automotive industry has experienced a long golden period due to its unique business model, which is based on two conditions: globalization in production and sales, and the German automotive industry's dominant position in the high-end segment. For a long time, German cars have occupied 70% to 80% of the high-end segment. It is based on this high-end strategy that German car manufacturers have been able to produce high-priced cars in Germany and export them worldwide. Today, however, the business model of the German automotive industry is faltering. Since 2018, automobile production in Germany has begun to decline significantly. In 2023, Germany's entire passenger car production level regressed to that of 1985, while exports regressed to 1998.
According to the German Automobile Industry Association (VDA), in terms of vehicle types, about 30% of the cars produced in Germany are three categories above compact cars, namely mid-size, upper mid-size, and luxury cars. Luxury car production alone accounts for 5% of total car production, and sports car production accounts for 3.5%. Over the past 40 years, there has been almost no presence of Class A cars in the models produced in Germany. Moreover, passenger cars produced in Germany are often used for export. In 2023, 3.1 million passenger cars produced in Germany were exported, equivalent to 76% of total production. Among these exports, more than half of the passenger cars were exported within Europe (EU-27, European Free Trade Association, and the UK), about 40% were exported outside the European continent, with nearly 19% exported to Asia and about 15% exported to the US-Mexico-Canada Agreement region. If we look at the value, the proportion of transcontinental exports is even higher because the main exports are high-end models.
However, deglobalization is quietly advancing, and protectionism is becoming more prevalent. The EU's imposition of tariffs on Chinese electric vehicle imports makes a Sino-European trade conflict more likely, which also directly threatens the business model of the German automotive industry. Without free trade and free markets, it is as if the foundation of the German automotive industry is being undermined.
Leave a Reply