carmaker support

Cutting the Cord

IAA Frankfurt – Eröffnungsrundgang von Angela Merkel
You don't do it for me anymore, Dieter: Angela Merkel and Daimler boss Dieter Zetsche. Source: dpa

Automakers – like bankers during the global financial crisis – have become Germany’s new pariahs.

First, the diesel-emissions cheating scandal turned Volkswagen’s gilted reputation to dust. Then rival market leaders Daimler, BMW and VW subsidiaries Audi and Porsche were accused of the same thing. Now, all are facing allegations of colluding over decades to fix prices.

It isn’t pretty, and no amount of spin, PR or reassurance will rescue the firms this time. They staked it all on diesel and lost. The effects will be far-reaching, not just for the industry but also for Europe’s biggest economy, which relies heavily on it.

That, at least, is the prevailing view in Germany at the moment. But the industry, well known for its self-confidence, arrogance and entitlement (just as Europe’s bankers were) isn’t beaten yet. In fact, it has always held a trump card. One that has never failed it before, and that could make all its problems disappear. A knight in shining armor that could help it regain its tattered reputation and make Germany great again – the government.

The question now is, has it lost that too?

“Up till now, it has somehow been deemed acceptable that the German car industry successfully exerts pressure on the federal government.”

Bert Rürup, former chairman, German Council of Economic Experts

If it had only been about the money, VW, Daimler and BMW could probably have weathered the storm. Sales are booming: All three released record or near-record half-year figures this week, despite a recent survey by Innofact showing that only 15 percent of Germans want a diesel vehicle more than any other type of car.

Meanwhile, investors are operating a wait-and-see policy. The three carmakers saw €10 billion wiped off their combined value last Friday after details of the collusion allegations broke, but, frankly, they’ve recovered from worse. And talk of shareholder desertion is still that, even if big players such as institutional investor Union Investment, which has more than €300 billion of assets under management, has already tightened its internal risk assessment of the car industry, according to business magazine WirtschaftsWoche.

But money can’t buy votes, and with elections in two months’ time and many Germans eyeing the plunging value of their diesel cars, the government – historically the carmakers’ biggest supporter – is in full retreat.

The auto industry is no ordinary industry in Germany – it is the central pillar of the economy. No other country in the world exports as many vehicles as Germany. The production of cars and car parts accounts for 14 percent of the value created by the country’s manufacturing sector. Approximately 1.8 million jobs are directly or indirectly dependent on car production. When production in Stuttgart, Munich or Wolfsburg stalls, the delays are felt throughout the entire economy.

As a result, the industry and government have always enjoyed a cozy relationship. Chancellor Angela Merkel and her transport minister, Alexander Dobrindt, regularly hold meetings with executives of major German automakers. The firms also employ lobbyists with close ties to the current administration.

Eckart von Klaeden, for instance, a former state secretary in Ms. Merkel’s chancellery, now works for Daimler. Volkswagen, meanwhile, employs Thomas Steg, a former deputy government spokesman, and Michael Jansen, who once worked as Ms. Merkel’s office manager. And Matthias Wissmann, the head of the auto industry lobby group, is a former transport minister who belongs to the same political party as Ms. Merkel.

As far as the automakers are concerned, the strategy works. The fact that Volkswagen’s emissions cheating was discovered in the United States and not Germany, where politicians and regulators seem all too eager to go to bat for their compatriot automakers, speaks volumes. And then there was the notorious phone call Ms. Merkel is said to have made to Brussels when the EU was considering very strict emissions limits.

Ministers have been tamed, and if ever one seems too eager to punish automakers for some reason, all lobbyists have to do is remind them of the jobs created by the industry. After all, it is entirely in Germany’s interest to provide some cover for these corporations and thus secure jobs.

At least it was. With great power comes great responsibility. Now that the auto bosses have plunged their corporations into crisis, politicians are being confronted with the notion that they were entirely too willing to expose an entire economy to the mercy of big automotive corporations with tax breaks, subsidies and buyer’s premiums.

With elections looming, what politician still wants to fight for an industry that is dying out, which could become the steel industry of the 21st century? Even Ms. Merkel recently conceded behind closed doors at an EU summit that the German car industry will not be able to survive in its current form.

“The lobby model of the car industry is no longer working,” Jochen Flasbarth, a junior environment minister, told WirtschaftsWoche. “It’s all about building up as much pressure as possible and hoping that politics will break down.”

Only now that the potential damage of Dieselgate and the cartel allegations are apparent has it become clear just how much political damage has been done. “The obviously complicit behavior of some managers in the auto industry makes it very difficult for us German representatives to continue to advocate for the interests of German industry in Brussels,” said Elmar Brok, an influential European Parliamentarian and member of Ms. Merkel’s party.

Bert Rürup, a former chairman of the German Council of Economic Experts and Handelsblatt’s chief economist, goes further, warning of an “automotive industrial-political complex.” “Up till now, it has somehow been deemed acceptable that the German car industry successfully exerts pressure on the federal government,” he said, adding that the industry presents a “cluster risk” to the economy.

There are real dangers for governments that let themselves be taken hostage by big business. After sweeping deregulation under Margaret Thatcher in the 1980s, Britain’s financial sector was allowed to grow unchallenged by governments pleased with its huge earnings. In 1999, the financial sector accounted for 5.4 percent of Britain’s GDP. Ten years later it was 9.1 percent, or 133.4 billion pounds ($174.4 billion).

Then came the financial crisis and it gradually became clear that the sector had no way of ensuring the survival of the British economy. They were little more than glorified gamblers who had violated any number of rules and regulations.

Last year, Britain’s financial sector accounted for only 7.2 percent of GDP. The sector’s fall from grace has plunged British society into an economic identity crisis. The deep alienation between London’s political and financial elite and the rest of the country contributed indirectly to the country’s fateful withdrawal from the EU – many disenfranchised voters wanted to spite the financial and political elites by voting in favor of Brexit.

Ms. Merkel need not worry just yet: she is still riding high in the polls ahead of Germany’s September 24 vote. But the dilemma won’t go away. The government’s relationship with the auto industry can never be the same again, leverage or no leverage. Voters, and diesel car owners in particular, won’t allow it.

But remove the cozy relationship with ministers, and the German car industry will never be the same again.

 

This is an edited version of longer Handelsblatt and WirtschaftsWoche articles by Handelsblatt journalists Sven Afhüppe, Ruth Berschens, Markus Fasse, Sönke Iwersen, Jan Keuchel and Volker Votsmeier, and several WirtschaftsWoche editors. To contact the authors: reay@handelsblatt.com

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