German Car Industry: Oh No – Will it Crash?

Car industry insights - M-Brain

The car industry is probably perceived as the most German of sectors. Dominated by traditional heavyweights like Daimler and Volkswagen, it has for decades been known for products that are admired and coveted for their dependability and understated luxury. But dramatic change is looming, with Covid-19 being a massive blow – the same as in most other sectors.

A recent Handelsblatt article shows that over the first five months of 2020, domestic car sales fell by 35%, and it is believed that it might take years for pre-crisis levels to be achieved. As a result, car-makers are drastically reducing their capacities, and the CAR Institute predicts that over the next few years around 100,000 of 830,000 jobs in the German car industry might go.

The truth is, however, that the pandemic only exacerbated an already dire situation. The diesel emissions scandal severely tarnished the image of German car-makers, not only that of Volkswagen, which was at the centre of the investigations into manipulated emissions software when the news first broke in 2015. ‘Dieselgate’ also highlighted one of the sector’s biggest challenges: to live up to higher environmental standards, as requested by law and consumers alike.

Quoted in an article in Wirtschaftswoche, Tony Seba from Stanford University predicts that by 2025, no cars with combustion engines will be sold, which, if true, could be devastating to German manufacturers whose success has long been based on this technology.

With the additional complication of congestion in urban areas and the fact that younger generations view cars as means of transport rather than status symbols, Seba also sees a trend away from individuals owning vehicles and towards shared use.

As such, the German car industry is in an existential crisis. In future, both car manufacturers and suppliers will not be able to use their existing capacities. While Germany’s trading partners may sigh in relief at the reduction of the country’s trading surplus, for German companies in the industry, the development is a major headache.

But German car-makers aren’t giving up just yet. By means of their stoicism and inventiveness, they are working on solutions that they hope will allow them to stay at the top of their game. And in fact, experts quoted by Handelsblatt believe that the coronavirus crisis will give a boost to what is core to German car-makers’ new strategies: electric mobility and automation.

Electric Mobility

German car-makers have been looking into alternatives to combustion engines for years, and electric drives are becoming the prevailing technology.

Car industry insights 3 - M-BrainFrankfurter Allgemeine Zeitung reported in July that Volkswagen has seen increased public awareness for environmental issues as a result of the pandemic, and this has boosted interest in electric cars. VW said that at the moment, all electric models are sold out, and there is a one-year waiting list for its e-Up model. The company intends to expand its capacity for building electric cars when possible.

Volkswagen’s experience stands for a general trend and a change in public opinion. A survey by CHECK24 revealed that 11% of potential car buyers in Germany would like to purchase an electric vehicle, up from 7% a year ago. The share of those favouring hybrid models rose from 10% to 13% over the same period, whereas 60% still want a car with a combustion engine.

The trend to electric is also supported by the Government significantly increasing subsidies for electric cars in June, even though three in four customers say that this will not influence their decision.

One obstacle, however, is the lack of charging points. Germany currently has 28,000 of them, and the Federal Association for e-Mobility believes that an additional 400,000 are required over the next ten years, which would cost around EUR 9.3bn.

The public sector and companies from different industries are trying to fill this void. This includes established energy firms like EnBW and start-ups like Qwello, whose intelligent charging stations are connected to customers’ smartphones, letting them know where available points are.

Car-makers themselves are also getting involved, with Electrive reporting that Volkswagen recently added thirty-two charging points at its Dresden plant, where a total of sixty-four are planned eventually.

But while German car-makers are diversifying, it also has to be said that when it comes to building electric cars, they are seeing a lot of foreign competition, even on their own turf: US electric car maker Tesla is building a factory near Berlin, complete with its own battery plant, as a Frankfurter Allgemeine Zeitung article confirmed in July.

Fuel Cells

So what about other combustion engine alternatives? Fuel cells have had a lot of R&D effort from German car-makers over the years, the technology hailed for being totally emission-free (as long as hydrogen can be sourced sustainably). In early August, the Federal Government announced that it will subsidise R&D efforts in this area with EUR 7bn from the Covid-19 rescue package.

One company that embraced the news was BMW. Electrive earlier quoted BMW’s confirmation that it will pilot its i Hydrogen Next fuel cell model in a small series production from 2022. The car is based on BMW’s X5 SUV model.

Other car-makers in Germany seem to have become somewhat less enthusiastic about fuel cells though. Volkswagen said in March that it considers the technology to be inefficient, and research in this area would therefore be phased out. In future, Volkswagen’s ambitions to develop combustion engine alternatives will focus on electric drives.

Daimler has come to the same conclusion, at least when it comes to cars. According to Süddeutsche Zeitung, the Stuttgart-based company will continue to work on fuel cells for trucks and buses though, as it feels that the technology is better suited to large vehicles.

An article in Handelsblatt suggests that, as far as German car-makers are concerned, fuel cells are just not worth it: the infrastructure is not available, the technology remains expensive, and it appears that the huge funds required for major R&D efforts are better invested in the more promising electric mobility.

Whether this strategy pays off is yet to be seen, as Asian manufacturers still bet heavily on fuel cells. Hyundai and Toyota, for instance, each intend to produce 500,000 fuel cell cars by 2030.

Automated Driving

A technology that German engineers have great hopes for is automated driving. Their R&D ventures range from driver support systems, like Audi’s traffic light information service, which calculates the best speed to get to green traffic lights, to fully automated vehicles which, according to plan, will one day make drivers’ involvement obsolete.

Electrive revealed in early June that Audi has established a new project, dubbed Artemis, which is supposed to result in a highly automated, highly efficient electric model by 2024. The Artemis project is set to establish a blueprint for car development throughout the Volkswagen group.

A setback for highly automated driving came a few weeks later when Handelsblatt reported that Audi rivals BMW and Mercedes-Benz suspended a respective partnership for the time being. They explained the move was motivated by high costs and the current economic circumstances, but left the door open for resuming the cooperation at a later stage.

Around the same time, however, Mercedes-Benz, quoted in Süddeutsche Zeitung, announced another automated driving partnership, this time with US software firm Nvidia. The latter company’s AI competence will be used in all Mercedes cars by 2024.

Again, international players are not standing still and aren’t shy of teasing German car-makers in their own habitat. One example is Israel-based Mobileye. The company, which makes vision-based driver support systems, is to start testing automated cars in and around the German city of Munich. Initially, a driver will be present for safety reasons, but a fully automated robot taxi is expected to be launched in Jerusalem by 2022. Meanwhile, in Germany, the introduction of a similar service will depend on the legal framework there – and at the moment that is far from ready.

In fact, a Handelsblatt article from early August suggests that the many hurdles faced by fully automated driving ventures has led to the main focus of R&D in this area shifting to slightly less ambitious level three automation. This refers to driver support systems which, for instance, allow a vehicle to drive autonomously on motorways for certain periods.

Branching out

Especially in urban areas, Germany sees increased use of car-sharing services. A recent example of a new player is Scouter, which started operations in Munich in May, as reported by Süddeutsche Zeitung. There are forty-five cars in the Munich fleet, on top of around 300 cars which Scouter has already stationed in other German cities. Initially, Scouter planned to start its Munich venture a month earlier, specifically targeting the former customers of competitor firm Oply, which went out of business in February, but then Covid-19 led to a delay.

Car-sharing is not only the domain of start-ups though, and German car-makers themselves have jumped on the bandwagon, both nationally and internationally.

ShareNow is a car-sharing joint venture by Daimler and BMW. Earlier in 2020, the partners said that their current goal is for ShareNow to move to profitability at a faster pace, as reported by Süddeutsche Zeitung.

After withdrawing from North America, London, Brussels and Florence, ShareNow will focus on seventeen core cities in Europe which promise sustainable growth in the long term.

Rivals from above

Taxi drivers in Germany are among the most loyal customers of the domestic car industry. That said, even here, the likes of Daimler are facing competition, potentially not only from foreign car brands but also – unexpectedly – from the manufacturers of flying taxis.

Car industry insights 2 - M-BrainWhat may have seemed sci-fi only a few years ago could indeed become a reality. A device by German manufacturer Volocopter successfully completed a manned test flight in Singapore in October 2019. The aircraft is very light, fully autonomous, and driven by electric motors which allow it to take off and land vertically.

Another German manufacturer, Lillium, secured new investment of USD 30mn (EUR 26.01mn) in June 2020 and the company is now in talks with suppliers. Lilium’s five-seater air taxi would initially be controlled by a pilot, and it is to be driven entirely electrically. Unlike most other companies researching in this area, Lilium does not focus on inner-city traffic, but on regional routes of up to 300 kilometres, though critics doubt that this is possible.

Süddeutsche Zeitung pointed to a study by Cologne Bonn Airport into the possible use of air taxis. The focus of the study was on electrically operated systems that could fly a small number of passengers over shorter distances. One conclusion was that, by avoiding cars and buses, passengers using air taxis would reduce congestion. The study did not suggest, however, when air taxis could be implemented, as many technical and legal issues still need to be solved.

What’s next?

I doubt very much that in the near future we will all move about in our private drones, nor that this will become a threat to the automotive sector. That being said, it is evident that for German car-makers, challenging times lie ahead. Higher environmental standards and changing consumer behaviour will undoubtedly change mobility in years to come – hopefully, for the better. But I have a strong feeling that we haven’t seen the last initiatives of our German automotive firms yet. Surely, they still have a few ideas up their sleeves.

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