In early 2017 a Volkswagen executive boasted about the German carmaker’s strategy to “leapfrog” Tesla, the US electric vehicle maker. “Anything Tesla can do, we can surpass,” said Herbert Diess, then head of the VW brand.
Since this bold prediction, things have not exactly gone to plan for Mr Diess, VW or the German car industry. Economists say the sector faces a “perfect storm” with deep ramifications for the eurozone economy, albeit one that could ultimately provide the seeds of a revival.
In recent years VW has been caught up in a huge scandal over its installation of “defeat devices” in millions of diesel cars to cheat limits on harmful exhaust emissions.
The scandal has cost VW, which owns the Audi and Porsche brands, well over €30bn in fines, legal fees and customer compensation. Other carmakers including BMW and Daimler have also been fined, although they have denied wrongdoing. Meanwhile, prosecutors have brought charges against several top VW figures including Mr Diess, who became chief executive in 2018.
Compounding the industry’s problems, global car sales and production have gone into reverse in recent years and US President Donald Trump continues to threaten punitive tariffs on imports of cars and auto parts from Europe.
“It was a perfect storm for the auto industry last year, with Trump’s trade war, the diesel scandal and the emissions regulations,” said Dirk Schumacher, head of European macro research at Natixis.
Tesla, by contrast, keeps growing stronger. Last week its market capitalisation surged past $100bn, making it the second most valuable carmaker, above VW and behind Toyota. The Californian company even had the audacity to choose a site near Berlin for its first European “gigafactory” — a move labelled “a declaration of war” by the Frankfurter Allgemeine Zeitung newspaper.
So far the big losers in this war seem to be the German carmakers. On top of spiralling legal expenses, they face the heavy cost of switching to electric vehicles and cutting existing models’ emissions to meet stringent EU rules.
This matters both for Germany and the wider eurozone economy. High-performance cars made by BMW, Porsche, Mercedes and Audi are as much a part of Germany’s national identity as having no speed limits on motorways.
Carmaking directly employs 830,000 people in Germany and supports a further 2m jobs in the wider economy, accounting for about 5 per cent of the country’s economic added value. Its problems have weighed on the German economy, which only narrowly avoided a recession last year. Economists expect this to have dragged overall eurozone growth to a six-year low of 1.2 per cent last year.
The wider fear is that the carmakers’ troubles will seep into the domestic-focused services sector, which has so far been resilient. This concern was accentuated by this month’s worst-case prediction in a government-sanctioned report that 400,000 jobs could be lost in Germany in the next decade because of the shift to electric vehicles.
However, not everyone is depressed about all this turmoil. Kristalina Georgieva, IMF managing director, told last week’s World Economic Forum in Davos that she believed the massive sums needed to tackle the transition to a low-carbon economy “may be the silver bullet” that brings the “investment momentum” to kick-start growth.
The EU’s targets for 2030 mean that between 7m and 10.5m battery-powered cars will have to be on Germany’s roads by the end of the decade — a huge jump given there were only 220,000 last August.
Germany’s car industry finally seems to be waking up to the vast challenges of shifting away from the internal combustion engine. VW has promised to invest €60bn over five years to meet its target of selling 26m purely electric vehicles by 2029. Its first mass-market battery-powered hatchback, the ID.3, is due to go on sale this summer.
The German government recently promised to spend €3.5bn on installing 1m charging points across the country while raising subsidies to encourage people to buy electric vehicles. More assistance from Berlin is expected soon.
The sector has the financial firepower to tackle its problems — as shown by the more than €11bn of post-tax profits that VW made in the year to September. The good news for Europe’s economy is that all this investment could help lift it out of its recent slump.
Source: Economy - ft.com
