As German auto industry leaders gather in Berlin today for another government organised Auto Summit to discuss the woes of the current industry, with Volkswagen threatening to close two plants due to underutilisation and inviting Economics Minister Robert Habeck for a visit last week, like inviting a guest to visit a sweet lamb before it is slaughtered, what can we expect?
Well, the European new passenger car market is currently running between two-three million units below pre-Covid levels. Meanwhile, the relatively small number of high-margin premium models exported from Europe to China, such as the Mercedes S-Class, which has thick enough margins to soak up high import tariffs there, are also performing worse than expected as the Chinese housing market crisis makes its presence felt across the entire economy.
Chinese consumers are more cautious about splashing out on big-ticket items right now.
In a parallel and perhaps even more concerning for European and German manufacturers, the brand equity moat Europeans "had" in China, which they thought would protect them from new domestic market entrants has been penetrated in record time as Europeans massively underestimated the switch from ICE to NEV (new emission vehicles: battery electric vehicles – BEV – and plug-in hybrid vehicles – PHEV), which Chinese OEMs, thanks to vertical integration and close ties to suppliers and perhaps foresight of government policy from the CCP – not too dissimilar to the EU, happy to assist local players – have raced ahead.
Chinese OEM's share of their domestic market has ballooned to over 60% so far this year, according to CAAM data, while German manufacturers have seen their share plunge from close to 25% in 2020 to closer to 15% year to date. However, before one shouts unfair or market protectionism, just under 70% per cent of the West European market is made up by European brands so far this year!
That China switch is impacting German OEMs in terms of scaling benefits.
The likes of Volkswagen, which announced ICE price hikes across Europe last week, are likely having to pass on some of those negative scaling impacts on to European consumers and can likely ill-afford to do so in China as the market continues to be covered in a sea of red-ink as OEMs aggressively battle for each per cent of market share, like an alpine climber clinging desperately to the edgle of a cliff, simply don't have the room to raise prices and consequently risk seeing that market share dive accelerate further. The rise in ICE prices was always expected however, and has always been part of our forecast for Europe's shift to electric vehicles as parity between BEV and ICE is not only met by a fall in BEV prices but also a rise in ICE prices as scaling benefits disintegrate.
So is China's cough partially causing Europe to get a fever?
Partly, but Europe has its own inherent problems, too. With the market failing to bounce back in the high-interest rate, post-COVID period, in a market that became addicted to unsustainable cheap vehicle financing previously, and new players, now commanding almost 6 per cent of the new car market (be that Tesla and Chinese OEMs), the post-Covid market is a different market environment to the pre-COVID market.
Manufactures like Volkswagen have failed to adapt to that new market reality, and with their CEO Oliver Blume laying the cards on the table and saying it like it is, it can only be admired in a hostile environment where the unions and local federal state can to an extent have the CEO's resignation speech typed up and placed in his hand within hours, following any talk of German job cuts. Previous captains of the Volkswagen vessel, such as Diess, Pischetsrieder or Bernhard (brand), can most certainly attest to this.
However, as German CEOs head to Berlin today, cap in hand, likely asking for some kind of financial help, that state support is only likely to have a placebo effect. After all, the last major state handouts, which funded the post-Lehman financial crash period in 2008/09 through a cash-for-clunkers car scrappage incentive, only delayed the return of the market further by another five years! Also, new market entrants would very likely benefit just as much as local players.
VW need to become more agile and cut underutilised plants, as painful as that might be for the VW culture, that are unlikely ever to return to the "glory days", which has parallels with Germany's AfD or the UK UKIP party calling for the golden years to return instead of living in a new market reality and intelligently adapting to that new environment.
The best thing the German government can do is accept the current market reality, that new market entrants are about to enter the European market, and very likely stay, and help local players become more agile. Retraining programmes need to be put in place to give the workforce that will be unfortunate enough to see job cuts, employed in another industry. Otherwise, current European production plants could well become unsustainable zombie production plants, which Europeans have long accused China's government of.
Also, perhaps before Volkswagen receives one cent of government help, it should consider bringing models such as the Cuprea Tavascan back from China and manufacture it at one of the underutilised plants in Europe first.
Finally, in terms of the electric car market, that isn't to blame for the current situation, although many commentators would have you believe they are, the situation is the following.
As the British like to say, "Don't panic and carry on".
The underlying health of the West European market is running at an almost unchanged just over 16 per cent BEV new car penetration level on a 12-month trailing basis up to the end of August 2024 period, and will remain at that level as OEMs have to reach key European CO2 fleet emission legislation during 2024.
The market isn't in trouble; it is just taking a breath before an almighty push takes place during 2025.
OEMs would be silly to continue to push large amounts of electric cars with lower margins than ICE models right now from a financial point of view when they need them next year when CO2 targets are cut by 15%.
That is the market reality.
A cyclical corporate lease cycle that ballooned prior to the German government withdrawing purchase subsidies in 2023 and is holding the market back significantly and unsurprisingly in 2024 will return during 2025 and 2026, alongside lower-priced BEV models powered by cheaper LFP batteries, which should also finally help the private market enter the market.
The talk of the demise of the electric car market making CO2 targets impossible and huge fines being issued, as Renault's de Meo said last week, is political grandstanding by CEOs and taken from the 2019 recycling bin –just prior to the last time targets were reduced.
CEOs, under huge pressure from the financial markets glancing across quarterly financial results decks, have become addicted to presenting straight-line margin growth while neglecting the fact that they have to meet European legislation.
The market situation will change dramatically during 2025, which is why any talk about bringing the 2026 mid-term review of CO2 fleet emissions targets heading to 2030 and 2035 forward would be totally absurd!
While EU policymakers shouldn't panic and should carry on, Volkswagen (and the unions) should panic and make a change! ◼︎︎
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*Western Europe 18 Markets: EU Member States prior to the 2004 enlargement plus EFTA markets Norway, Switzerland, Iceland, plus UK
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