fall on difficult terrain
German auto industry threatened with recession
A column by Helmut Becker
06/25/2023, 1:12 p.m
Full of sun is the motto in Germany at the moment. This also applies to the key sector, the automotive industry: sales have recently picked up significantly. But experts warn: The situation is deceptive, new car sales have a catch.
The official statistics are currently only reporting good news from the German automotive industry: the corona and chip crises are over. The replenishment of parts runs largely undisturbed again. In May, the domestic market saw a record-breaking growth rate of 19 percent in new registrations compared to the same month last year, and sales of pure electric cars even increased by 47 percent. Car production and exports increased by more than 30 percent from January to May. None of this looks like an imminent recession.
And still, that’s the way it is. Because the published statistics only tell half the truth, only illuminating the “bright side of life”. Behind the scenes, another severe storm front is building up for the German car manufacturers, as soon as they have halfway recovered in terms of earnings from the horrors of the past crisis years. This time due to the economic situation and not because of exogenous shocks.
What is not apparent in the statistics on monthly new registrations is the source from which they are fed. And this source is not an incipient boom in demand for new cars – as analysts hoped – but the processing of old demand from yesterday, i.e. the high order backlog that has accumulated and reached record levels during the forced plant closures since 2020 have. Not a brisk demand for cars today, but accumulated demand from yesterday is responsible for the beautiful appearance of a flourishing car economy in the course of 2023 so far. In truth, the industry has experienced a sham boom over the past few months.
Experts urge caution
And that seems to be coming to an end. Because despite all the good official economic data and optically high growth rates in the key figures, other indicators are pointing to an impending stronger economic slowdown, which can also escalate into a recession. The first experts are already advising caution: “It doesn’t feel like a recession when the number of registrations is rising and the margins are high. But it won’t stay that way,” says industry insider Burkhard Riering.
Domestic incoming orders are a key indicator of the coming economic slowdown. According to the dry reading of the German Association of the Automotive Industry (VDA), “the German car market will continue to catch up in May”, but at the same time it has to admit that German manufacturers’ incoming orders from Germany continued to decline in the past month. Compared to the same month last year, 19 percent fewer orders were registered in May. In the period from January to May, domestic orders fell by 28 percent compared to the same period last year. Foreign orders in May were 3 percent below the previous year’s level. After a weak start to the year, the order volume from abroad fell by 4 percent in the first five months of this year compared to the same period last year. Overall, 8 percent fewer orders have been registered over the course of the year than a year ago.
No restart after the Corona crisis
According to the Central Association of the German Motor Trade (ZDK), there is currently a veritable slump in demand in the German automotive industry, because cumulative domestic orders shrank by almost a third in the period from January to May 2023. And that despite the fact that the demand for cars was already severely impaired by the outbreak of the Ukraine war.
The hoped-for economic take-off after the collapse of the Corona years did not materialize this time. All hopes that the economic turning point would be reached in spring 2023 and that there could be a long recovery phase in the further course of the year were disappointed. In the meantime, the order backlogs at the manufacturers have almost been worked off and only last until the third quarter – at best and not for all manufacturers.
But what comes? What happens if the demand for new cars remains weak and not only do the leaves fall in autumn, but also the order backlog in the key German industry? So far, the yardstick has been the pre-crisis year of 2019. But maybe that’s no longer the right benchmark: “Perhaps in Germany … never again will as many cars be sold as in the years 2017, 2018 and 2019. The goals in the industry have changed accordingly changed: return beats sales,” says industry expert Riering. In other words: Cash beats mass. And pushes the demand.
The market is required
An answer to the question of the future is easy if you know the reasons for the persistent weakness in demand for new cars and why the “normal” upswing cycle on the car market has not yet had an effect. There are three reasons for this. On the one hand, the general economic conditions are too bad for a car boom like in the past: High inflation, high interest rates and, above all, significantly falling real incomes, and all this in combination with general uncertainty among the average consumer as to whether he should buy a car at all and if so, with what drive, do not create a happy mood among consumers. The whole thing can be read, for example, from the consumer climate index of the GFK, which fell to new lows.
On the other hand, there is the threatening and government-decreed loss of purchasing power due to the climate-friendly transformation of building heating systems. Energy and heating investment expenditure in the amount of the acquisition costs of a new car inevitably paralyze the demand for this. On average, new car prices in 2022 were around 43,000 euros, a sum for which you could easily have bought two new cars 20 years ago.
And ultimately, the car manufacturers themselves have worked diligently with their pricing policy to ensure that demand for cars does not recover and remains low. In 2022, two to three price rounds were the order of the day for all car manufacturers. One result: Since 2019, car prices in this country have risen by 25 percent. In short: New cars have simply become too expensive for many consumers.
There is no hope that this situation will change in the short term – even if there are no new price rounds from the manufacturers. Only competition can remedy the situation: the more pressing the manufacturers’ sales problems become, the greater the competitive and price pressure. Sales bonuses are already being paid to dealers. “Discountitis” is already peeping around the corner again. Only competition can ensure normal economic conditions again in the future.