High costs, stiff competition from Chinese EVs: German automakers face rough road ahead

BERLIN: Warning lights are flashing for Germany’s most prominent industrial export.

Its auto sector – long recognised around the world for heavyweights like Mercedes-Benz, BMW and Volkswagen – is facing unprecedented pressure from China.

Several Chinese electric vehicle makers have been making inroads in Europe with new technology-laden vehicles, offered at highly competitive prices.

Amid tariff tensions between the European Union and China, Germany’s big three auto companies have issued profit warnings in recent months. In particular, Volkswagen lowered its profit forecast in September for the second time in three months.

"Is this something new in the auto industry? No, it's not. Continuous improvement has been in the DNA of the auto industry probably since its inception,” said Mercedes-Benz chairman Ola Kallenius.

“But we need to now realise that we are out of the pandemic; we are out of this constraint story. Let's get our mojo back.”

STRUGGLING TO ADJUST

While Germany may be renowned for its manufacturing prowess, it has struggled to adjust as the world shifts from petrol combustion engines to battery-powered vehicles.

This requires entire new software and supply chains – something that has been tough for the EU’s biggest economy to adapt to.

Any attempts on their part to catch up are further hampered by increased energy costs for production, high labour costs when compared with other countries like China and India, as well as stringent EU regulations.

On top of that, United States president-elect Donald Trump has warned that a minimum 10 per cent tariff could be applied to Europe’s vehicle exports to America, with German car brands attracting his ire over trade deficits.

Experts say a major gear shift is needed if German companies hope to combat issues of structural competitiveness.

"Germany is at a crossroad to decide which direction we go. Either we continue being in the situation that we are … or we do a change of our frameworks… (to become) competitive again,” said Thorsten Alsleben, managing director of Berlin-based free-market think tank New Social Market Economy Initiative.

“Of course we have to do reforms in the companies, but more in the politics (side). When we do that, it will be hard, but when we do that, in the next two or three years, we can be successful as we have been before.”

OPPOSED TO TARIFFS

To try and shield its auto sector from what it says is unfair state-backed subsidies, the EU recently announced additional tariffs of up to 36.3 per cent on Chinese-made EVs.

The tariffs were also a bid to tackle Chinese industrial overcapacity flooding the continent. They come on top of an existing 10 per cent levy on cars imported into the bloc.

While the vote on the tariffs passed, divisions emerged among member states. Ten supported the measure, 12 abstained, while another five – including Germany – voted against it.

German car manufacturers had lobbied against the vote, believing it could lead to Chinese retaliation against German-made car exports to China.

German firms still maintain about 15 per cent of car sales in China, though this dropped from a pre-pandemic high of 25 per cent.

The German government has said that to respond to competition from Chinese EVs, the onus is on German automakers to compete on technology and innovation.

But amid profit warnings, job cuts, strikes and even plant closures, industry players are questioning whether this is a mere bump on the road for the country’s most important export – or a complete breakdown in its ability to compete.