The end of the combustion-engine era is coming and car buyers are more interested in data connectivity than horsepower threaten Germany’s spot at the top of the automotive pecking order. There are signs of trouble abound for the German economy.
German GDP fell by 0.1% in Q2 2019:
German GDP fell by 0.1% in Q2 2019:
.
Early signs for the third quarter look ominous and manufacturing business surveys are all gloomy.
Carmakers are being hit not only by falling sales in their biggest markets and uncertainty about the future of trade but also by the shift to electric vehicles, which requires billions of dollars in investment.
Germany's public international broadcaster Deutsche Welle have a great documentary:
Germany's car industry is facing significant disruption on many fronts:
- New emissions standards in many countries
- Change from internal combustion engine to electric with batteries
- Business model change, rather than buying car from a dealer buy car directly online
- Connectivity
- Autonomous driving
- Shared mobility
- Unwilling to make hard decisions which will lead to huge job losses
- Trade war and tariffs
Why isn’t Germany doing more to keep up with the competition? Former Opel CEO Karl-Thomas Neumann has this explanation: When you have a recipe for success, it’s hard to throw it away and start from scratch. "What’s needed is a new mindset. Jobs will be lost, but new ones will be created," he says. Analysts lay a portion of the blame on successive governments in Berlin, which have coddled the industry and resisted change. And they accuse current leaders of failing to present ideas on how to tackle an impending crisis.
Union IG Metall organised a demonstration in June, with more than 50,000 people rallying in Berlin, to draw attention to the risk of widespread layoffs from what Germany’s biggest industrial union calls “the transformation.”
“Far too many companies stick their heads in the sand and rest on their laurels,” IG Metall Chairman Joerg Hofmann said. “If companies continue to act so defensively, they’re playing roulette with the futures of their workers.”
If the German car industry continues to drag their feet then one or more of the German Big Three will be in serious danger of failing or being gobbled up by a Chinese company, as befell the Swedish automaker Volvo.
Update 8/9/2019 - Electric vehicles are causing problems for German car makers in US and China:
Update 9/9/2019 - EU emission targets, German carmakers face billions in fines
Tens of thousands of climate demonstrators turned up to protest at Germany's biggest car show in Frankfurt, using the event as a platform to demand the car industry address its role in damaging the environment.
Many luxury carmakers already outsource the manufacturing of cars. For example, Magna International is the world's largest contract manufacturer of cars with clients ranging from BMW, Daimler and Jaguar Land Rover. Now Magna is moving manufacturing to low cost China.
Union IG Metall organised a demonstration in June, with more than 50,000 people rallying in Berlin, to draw attention to the risk of widespread layoffs from what Germany’s biggest industrial union calls “the transformation.”
“Far too many companies stick their heads in the sand and rest on their laurels,” IG Metall Chairman Joerg Hofmann said. “If companies continue to act so defensively, they’re playing roulette with the futures of their workers.”
Germany's car industry is not unique, many large successful companies fall under the trap known as the Innovator's Dilemma, this can be caused by the following:
- There is a change in technology, process or business model and the old company fails to adapt quickly to customer demand
- They fail to invest heavily to change their business
- As they move to new business model they incur huge costs
- They try to protect traditional high profit margin business, fear of cannibalising their legacy high profit margin business
- Investors are not happy to see profit margins decline as company plays catch up to change their business, they refuse changes required to progress the company. Shareholder are driven by quarterly earnings
- Startup disrupter has suddenly larger scale in new field and even has brand recognition
- Investors in startup have greater appetite for risk, knowing that a startup is a longer term investment. Completely different type of investor
- Legacy company finds itself in unusual position of following rather than leading, they lose the cool factor
- Legacy company takes leadership in industry for granted and becomes large, slow and inefficient. Processes are cumbersome and large amount of red tape
- Legacy company is big and slow to react to change and take a wait and see approach.
If the German car industry continues to drag their feet then one or more of the German Big Three will be in serious danger of failing or being gobbled up by a Chinese company, as befell the Swedish automaker Volvo.
Update 8/9/2019 - Electric vehicles are causing problems for German car makers in US and China:
Update 9/9/2019 - EU emission targets, German carmakers face billions in fines
For years, climate change and image-conscious carmakers have placed electrified models at the center of their show stands but near the margins of their commercial offerings. Only now will they be forced to sell them in large numbers, challenging profitability.
By 2021 the EU have fleet-wide average emission target for new cars will be 95 g CO2/km, this emission level corresponds to a fuel consumption of around 4.1 l/100 km of petrol or 3.6 l/100 km of diesel.
Cars currently on average emit 120.5g CO2/km average, unfortunately this has risen of late as consumers reject fuel-efficient cars and embrace SUVs.
Failure to comply means the car manufacturer receives a €95 fine for every gram of C02 over the limit per car. If carmakers leave current lineups unchanged they would face fines that could total €25 billion in 2021.
Carmakers will need a huge product overhaul likely to wipe out billions of profit. Giants like Mercedes-Benz maker Daimler, BMW and Volkswagen are seeing their internal combustion-engine drivetrain engineering advantage and profit margins eroded as they have huge costs to move to electric engines, batteries, autonomous driving and retool their entire factories.
The car industry has given up pushing for the goals to be relaxed as a political impossibility underlined by a resurgent climate protest movement that has added the Frankfurt show to its target list.
Greenpeace protests against the global warming caused by cars in front of the Frankfurt fair grounds where the international Frankfurt Motor Show (IAA) is held:
Update 11/9/2019 - Cars based on internal combustion engine are a Commodity
Cars were invented 130 years, and yes we had significant innovation yet pace of innovation has slowed and cars have now become heavily commoditised. At least 50 companies, around the world, can design, engineer, and manufacture today’s internal combustion engine based car. These cars look alike, they are reliable, they meet the same safety and environmental standards
Many luxury carmakers already outsource the manufacturing of cars. For example, Magna International is the world's largest contract manufacturer of cars with clients ranging from BMW, Daimler and Jaguar Land Rover. Now Magna is moving manufacturing to low cost China.
Many expensive German car makers already make high end cars in China:
China already makes high end luxury vehicles, for example:the Mercedes Benz E-class is made in Daimler's largest factory based in China by Beijing Benz which is majority owned 51% by Chinese state-owned BAIC Motor:
Why would cars continue to be made in expensive German region rather than is lower cost region like China? If car makers own the intellectual property (IP) and consumers are willing to pay the cost then the car makers can dictate where the cars are made. Yet the challenge for German car companies is that cars are already commoditised and German car makers do not have a natural advantage when it come to the next innovation of technology, that is electric vehicles, battery technology and autonomous driving. The most valuable IP is autonomous driving tech...not making metal boxes.
Today'a internal combustion engine cars are heavily commoditised, tomorrow's electric, connected cars will need far more software engineering:
Ola Källenius Chairman of the Board of Management of Daimler, and head of Mercedes-Benz Cars.said during interview at Frankfurt 2019 IAA car conference "A company like Daimler has always been a hardware company, we have worked with software for decades but mostly we have bought the software" now suddenly with autonomous driving and connected cars they have to compete with the best from Silicon Valley, Tel Aviv and Beijing...this is not easy for a legacy car company.
Why would cars continue to be made in expensive German region rather than is lower cost region like China? If car makers own the intellectual property (IP) and consumers are willing to pay the cost then the car makers can dictate where the cars are made. Yet the challenge for German car companies is that cars are already commoditised and German car makers do not have a natural advantage when it come to the next innovation of technology, that is electric vehicles, battery technology and autonomous driving. The most valuable IP is autonomous driving tech...not making metal boxes.
Today'a internal combustion engine cars are heavily commoditised, tomorrow's electric, connected cars will need far more software engineering:
The executives of the German car companies have known that this challenge is coming years ago. In 2016 at the Geneva auto show BMW board member Klaus Froehlich said "For me it is a core competence to have the most intelligent car," told Reuters in an interview .
"Our task is to preserve our business model without surrendering it to an internet player. Otherwise we will end up as the Foxconn for a company like Apple, delivering only the metal bodies for them," Froehlich said.
"Our task is to preserve our business model without surrendering it to an internet player. Otherwise we will end up as the Foxconn for a company like Apple, delivering only the metal bodies for them," Froehlich said.
Germany is now playing catch up with US and China on electric vehicles, batteries and autonomous driving. Germany car makers are likely to be disrupted and their market share will diminish unless they can pull a rabbit out of a hat.
No comments:
Post a Comment