The German automobile industry is in a critical situation. German manufacturers are staking their survival on a shrinking market and a growing number of players, particularly in electric mobility. This article provides a comprehensive overview of the situation.
![German automobile industry: 2024 analysis and outlook [Research]](https://intotheminds.com/blog/app/uploads/volkswagen-wolfsburg.jpg)
The automotive industry has long been considered the “locomotive” of the German economy. Its high-end positioning was decisive in winning over export customers (particularly in China). On the one hand, the slowdown of the Chinese economy and the transition to electric vehicles are doubly penalizing the German automobile industry. As the statistics show (see box below), the value proposition of German vehicles no longer is in line with market expectations. In this article, we identify the 4 symptoms of the German disease.
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- German manufacturers continue to sell most combustion-powered vehicles, while demand has shifted to electric vehicles in their main markets (notably China).
- Lower CO2 limits in Europe are penalizing German manufacturers. Only BMW will avoid fines running into billions of euros with the models in the catalog.
- China has been a growth driver for German manufacturers. German manufacturers sell mainly combustion-powered vehicles today, whereas almost 50% of sales are electric.
- Production capacity in Germany is oversized, and labor costs are too high to remain competitive. While a plant is only profitable when 80% of its capacity is utilized, Volkswagen, for example, will have utilized 61% of capacity at its Wolfsburg plant by 2023 and only 30% at its Dresden plant. At Mercedes’ Sindelfingen plant, capacity utilization was 44% in 2023.
A difficult global environment for German manufacturers
German manufacturers are seeing their position eroded globally, marked by economic tensions and increased competition. Three factors are to blame:
- he energy crisis, which has driven up raw material costs and inflation
- Falling demand
- Electrification of the vehicle fleet
The European and American markets are affected, but the situation is most alarming in China. This is the most crucial market for German brands. China used to be very fond of German vehicles. They were a symbol of success. Today, however, this market has shifted towards the domination of local players. BYD now outsells the Western brands and is trying to establish itself (albeit timidly) in Europe.
Even Porsche sales are collapsing in China. They fell by 19% in the 3rd quarter of 2024
German automobile industry: 2024 statistics
- Between 2019 and 2024, vehicle registrations in Europe, the USA, and China fell by 9%. Those of German manufacturers fell by 16%.
- Between 2023 and 2024, new vehicle registrations in Europe, the USA, and China rebounded by 2.1%. German manufacturers see their registrations fall by 2.1% over the same period.
- Between 2019 and 2024, the share of combustion-powered vehicles declined significantly in all markets: -32% in Europe, -13% in the USA and -41% in China.
- In China, the share of sales of combustion-powered vehicles is 56.9%. Among German manufacturers (figures from January to July 2024), it is much higher: 90.3% for Volkswagen, 96.7% for Audi, 84.7% for BMW, and 94.4% for Mercedes.
- Chinese sales should still account for 30% and 45% of German manufacturers pre-tax profits 2024.
- Volkswagen’s earnings via its joint ventures in China are set to plummet in 2024 from €2.6 billion to €1.3 billion.
- Porsche sales fell by 19% in Q3 2024. The decline is 13% for Mercedes and 30% for BMW.
- Mercedes S Class sales were down 19% in China in 2024.
- German factories are operating below the break-even point. Capacity utilization is 61% at Wolfsburg, 30% at Dresden, and 44% at Sindelfingen.
The 4 symptoms of the German angst
We have identified 4 symptoms of the problems faced by German manufacturers.
Electric vehicles: insufficient supply
Combustion-powered vehicles continue to account for a disproportionate share of German manufacturers’ sales, while demand is shifting towards electric vehicles. In China, for example, combustion-powered vehicles now account for just 56.9%. Yet German brands continue selling 84.7% (BMW) and 96.7% (Audi) of combustion-powered vehicles in China. In other words, German manufacturers have failed to transition to electric vehicles, and their offer is out of step with demand.
CO2 quotas
The models offered by German brands do not yet comply with the CO2 limits imposed in Europe, which exposes them to fines running into billions of Euros. By 2025, the average must be 94g CO2/km to avoid fines. Today, German brands offer an average of 115 grams.
BMW is the only manufacturer that is currently complying with the rule. Mercedes and Audi can count on the launch of new models in 2025 to improve their average.
The Chinese market is no longer an Eldorado
The Chinese market is no longer a source of healthy profits, which puts automakers at risk. German manufacturers continue to lose market share, even in the premium segment. In Q3 2024, for example, sales were down 13% for Mercedes, 19% for Porsche, and even 30% for BMW.
Overcapacity in Europe
European factories suffer from overcapacity, with labor costs too high to remain competitive. Production capacity utilization in Europe is well below the break-even point. Volkswagen’s Wolfsburg plant has painfully reached 61% by 2023; its Dresden plant barely 30%. Mercedes’ figures are not much better, with the Sindelfingen complex running at 44% of capacity. Audi has announced the closure of its Brussels plant, from which only 80,000 Q8 models were produced, and other temporary or permanent closures are feared.
The Chinese problem
China, once a source of cash for German brands, has undergone a spectacular turnaround. VW, BMW, and Mercedes are seeing their market share plummet in the country, overtaken by local manufacturers such as BYD. The situation in China is so serious that a separate paragraph is warranted.
The Chinese market has changed radically, with a growing demand for affordable electric vehicles. Chinese (subsidized) industry excels at this. What’s more, China’s protectionist policies favor the production and purchase of locally made electric vehicles. And to top it all off, China’s economic slowdown and tighter controls on spending on high-end goods are redirecting purchases towards the mid-range.
The evolution of the Chinese market is radically shifting towards electric vehicles. The 2019-2024 statistics are clear:
- Electric vehicles: +501%
- Plug-in hybrids (PHEV): +1478%
- internal combustion vehicles: -41%
Although the Chinese market is moving completely towards electric vehicles, German manufacturers still focus on combustion engines. They, therefore, risk becoming obsolete.
Over January 2024-July 2024, sales of combustion-powered vehicles in China will account for just 56.9%. And yet, sales of German brands in China continue to be dominated by combustion engines. They account for 90.3% of Volkswagen sales, 96.7% of Audi sales, 84.7% of BMW sales, and 94.4% of Mercedes sales. Demand and supply don’t seem at all aligned.
Finally, the Chinese are no longer content with making cheap cars. They are also attacking the premium segment, which until now has been the German manufacturers’ store of value. To cite just one example, Li Auto has overtaken German brands in the electric SUV segment. Li Auto was founded in 2015. That gives you an idea of the potential.
Chinese brand Li, founded in 2015, has made a specialty of electric SUVs, and has already overtaken German brands in this segment.
What can be done to stop the loss?
As sales plummet, German manufacturers’ profit margins are collapsing. Fixed costs can no longer be amortized as they used to be, and labor is prohibitively expensive in Europe. In Germany, an hour’s labor costs €62 on average.
Moreover, the context is increasing pressure on prices, and all European automakers must invest massively in the energy transition to avoid fines. The new players in the automobile industry (i.e., Chinese brands and Tesla) are in a much more favorable position and are therefore cutting corners.
Brands like VW and Mercedes must rethink their strategy in the Chinese market and adapt their offering in Europe and the USA to remain competitive in the face of the rise of electric vehicles. However, we can ask whether saving the traditional automobile industry is still possible. The current upheavals are making the transition increasingly complicated, and this situation is reminiscent of the innovator’s dilemma described by Clayton Christensen.
Conclusion
German manufacturers face an unprecedented crisis in 2024, caught up in a storm of external challenges ranging from fierce competition from Chinese manufacturers to the need to move towards electrification. The figures show a significant drop in sales and loss of market share, while profitability is also suffering. It remains to be seen how companies like Volkswagen, BMW, and Mercedes will adapt their strategies to cope with these upheavals and ensure their survival in a rapidly changing industry.
Posted in Research.