Due to weak sales in China
IW: German car manufacturers have to change their business model
September 15, 2023, 11:00 a.m
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According to the German Economic Institute, the previous successful model of the German automotive industry has “reached a crossroads”. Exports are declining and sales are plummeting. Car manufacturers and politicians are called upon. Experts are skeptical about a project by the EU Commission.
In view of the latest trends in German foreign trade with China, the employer-oriented Institute of the German Economy (IW) fears that problems could arise for the German automobile industry, which is used to success. In your Study titled “Is derisking beginning?” Authors Jürgen Matthes and Thomas Puls report that the business model that has previously supported car production in Germany is coming under increasing pressure – namely the intercontinental export of high-quality vehicles.
German exports to China fell by over eight percent in the first half of the year compared to the same period last year. The development of motor vehicles and car parts led to striking effects: the 21 percent drop in exports contributed to three quarters of the overall decline.
“For the further development of export volumes to China in the motor vehicle sector, it will be of crucial importance whether the current business model of exporting high-quality vehicles to China can be stabilized,” says the IW. According to the institute, this previous successful model has “reached a crossroads” as the quality of Chinese manufacturing has continued to increase. The production of mid-range vehicles – such as the Audi A4 – and upper mid-range (A6) for the Chinese market is increasingly taking place locally.
Production change is intended to limit losses
For German manufacturers, it is less about regaining volumes lost through relocation than about not losing more. “Since the markets for passenger cars are concentrated in Asia, relocating them back to Germany hardly makes economic sense due to the transport costs,” says the IW.
In order to avoid further losses, it will be necessary to strengthen the production network for electrified drive trains in this country by setting up domestic battery cell production and, above all, to defend dominance in segments such as the upper class or upper mid-range even after the drive train has been changed.
Fear of Chinese action
The EU Commission sees the domestic car industry at risk from cheap electric cars from China and is therefore examining anti-dumping tariffs. Some car experts now fear that China will take massive countermeasures against German car manufacturers in China.
“The concern appears to be unfounded: the German car industry in particular is increasingly relying on the ‘local for local’ strategy in China, meaning it is increasingly producing its cars locally for Chinese customers,” says IW expert Matthes. The Chinese government has no interest in putting obstacles in the way of German car companies, it would only be cutting into its own flesh and, above all, putting Chinese jobs at risk.
Is derisking starting?
According to the IW study, there are only initial signs of the derisking that the federal government is aiming for in total imports from China. The intention behind this is not to become too dependent on Germany’s largest trading partner in view of geopolitical risks in critical areas.
The institute’s analysis shows that among more than 800 product groups with a Chinese import share of over 50 percent in 2022 and a relatively high import value in the first half of 2023, there were significantly more declines in shares than in 2022, at around 70 percent of the groups. However, a closer look puts this result into perspective. At just under 16 percent, the proportion of product groups with significant declines of over 20 percentage points in the Chinese import share in 2023 is only limited.
With regard to derisking, however, the import shares for the IW are only indications. It is the task of the federal government to enable in-depth research and thus bring the China strategy to life with a view to the derisking goal.