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14 Aug 2023
High costs, reduced demand, and fierce competition are putting the German auto industry under increasing pressure, especially before Chinese rivals.
The German economy is facing a growing crisis as thinner order books and reduced consumer purchasing power coincide with escalating inflation. Car manufacturers in the country are particularly affected, grappling not only with economic headwinds but also internal structural challenges. The transition to electric vehicles and autonomous driving technology has led to increased costs, while uncertain budgets – predominantly fueled by the sales of internal combustion engine cars – are further exacerbated by an unfavorable political climate.
While some automakers like Volkswagen, Mercedes, and BMW reported increased sales and profits in the first half of the year, the outlook for the remainder of the year has disappointed investors and shareholders. Rising inflation and interest rates are having a negative impact, and there is a noticeable decrease in demand for cars.
Hildegard Muller, the president of the German Automobile Industry Association (VDA), cautioned that even though production might be on the rise, it does not indicate an easy road ahead. She pointed out that sales remain below 20% of pre-Covid-19 levels from 2019.
The decline in orders is particularly evident in Germany, especially for pure electric vehicles, where demand is only at about 60% compared to 2022. In contrast, China, the world’s largest auto market, is experiencing rapid growth, particularly in electric vehicles, both in terms of registrations and production.
Chinese manufacturers are rapidly embracing technological advancements and catching up with established brands like Tesla. Chinese customers are increasingly placing their trust in domestic cars. BYD, China’s largest automaker, sold 29% more all-electric vehicles than Tesla in the first half of the year, according to the China Passenger Car Association (CPCA).
Volkswagen, a major player in the global automotive industry, is also feeling the pressure. To keep up with China’s growing momentum, the company announced a partnership with Chinese electric car maker Xpeng in areas such as electric powertrain, software, and autonomous driving. This collaboration is a substantial investment for Volkswagen, costing around $700 million, with the aim of introducing two electric Volkswagen models to China by the end of 2026.
The rise of Chinese automakers is posing a significant challenge to traditional luxury car manufacturers from Germany. German luxury cars once held a dominant position in the Chinese market, but Chinese rivals are now rapidly advancing in the high-end segment, particularly in terms of digital features and advanced technology.
Currently, up to 80% of all electric vehicles in China come from domestic manufacturers. Chinese car brands are gaining traction in terms of digital features, comfort, and quality, with domestic consumers often perceiving them as on par or even superior to longstanding international manufacturers.
This surge in domestic production is evident in the export market as well. In the first quarter of this year, China overtook Japan as the leading car exporter, a significant shift from its sixth position in 2020.
As Chinese automakers continue to make strides, the era of record profits for German carmakers may be coming to an end, according to experts at AlixPartners. The Chinese auto market’s growth trajectory suggests that China is on its way to becoming an automotive superpower, reshaping the global automotive landscape.
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