Parallels to Detroit: Car location threatens decline like Detroit

Wednesday 20th January 2021

Parallels to Detroit
Car location threatens decline like Detroit

By Diana Dittmer

The USA as a warning example? Analysts at Deutsche Bank dare to compare the decline of the former automobile metropolis in Minneapolis and the German automotive location: "Greetings from Detroit" is the title of their study.

The analysts at Deutsche Bank warn of an uncertain future for Germany as an automotive location. In the opinion of the experts, unfavorable tax burdens, working hours and wage levels, as well as economic difficulties caused by the pandemic or the major structural challenges caused by the state-enforced turn to electromobility could set in motion a downward spiral that cannot be reversed.

"Greetings from Detroit" is the title of their latest study, based on the decline of the once great car city in America's "Rust Belt". Detroit owed its prosperity almost exclusively to the auto industry. When this migrated in the 1950s, a domino effect began. Not only the car factories but also other factories closed their doors. People lost their jobs. Within 60 years, the population shrank from around 1.8 million in 1950 to around 700,000 in 2013, which corresponds to a population decline of over 60 percent.

Good times Bad Times

Even if the parallels with Germany are not one hundred percent obvious, the title is intended as a reminder. A large German key industry – with around one million employees – is at least facing the greatest challenges in its history. The analysts' question is therefore justified: How well will Germany handle this transformation? Will the auto industry succeed in building on old weddings under the regulatory and economic policy framework or are the good times over forever?

The analysts at Deutsche Bank have their doubts that Germany as an automotive location will find its way back to its old size: The turn to electromobility and the CO2 limits require high investments, which is reducing the carmaker's returns per vehicle. The tightening of the European emission standards for Euro 7 is also costly. "We fear that it will become more and more difficult to maintain competitive production of cars in the volume segment in Germany," the analysts write. "The auto industry in the US state of Michigan (Detroit) fared similarly, where significantly fewer vehicles are produced today than at the beginning of the century."

High subsidies accelerate this development. For various reasons, electric cars have not yet convinced the "average buyer". High purchase price, short range, long charging time are given as reasons. That is why buying is encouraged with bonuses. German carmakers do not have a choice of circumventing climate policy goals: manufacturers who fail to meet their CO2 limits have to pay fines. For this reason, according to the analysts, the industry would also move production to more cost-effective locations in the medium term. This does not happen overnight, but will happen "over many years".

High costs inhibit investments

Parts of the value added bet would also migrate. For the experts, it is a continuous shrinking process on many levels: And like in Detroit, many companies get caught up in the vortex. Specifically, the metal and chemical industries are mentioned, whose returns are also reduced by climate and energy policy. The fact that electric cars consist of fewer parts and production is increasingly automated also poses problems for the supplier industry. "Hardly anyone expects that the net balance of this structural change will be positive for value creation and employment in the automotive industry in Germany," is the verdict.

The higher costs inhibit investments and that endangers competitiveness. If companies can no longer keep up with the competition, the decline begins. The authors' criticism applies above all to the way in which the government subsidizes electromobility in this country: "Unfortunately, the CO2 limit values ​​chosen by the EU for new cars paired with massive subsidies for electric cars at national level are extremely inefficient (expensive) and hardly effective Instruments to achieve that. "

The experts are convinced that the increasing share of electric cars will not make any significant differences in total CO2 emissions in Germany or the EU for years. In addition, it is uncertain when state e-funding will no longer be necessary. "In China, demand for electric cars dropped rapidly in the summer of 2019 when subsidies were cut," the study said.

In addition to a lot of criticism, the analysts also have praise ready: the industry gets it. Because the experts are convinced: Companies are better equipped for technological change than Germany as a location, even if it has "extraordinary advantages".