German Cars

With Record Sales, German Automakers Move to Cut Production Costs at Home

car manufacturing
  • Why it matters

    Why it matters

    Germany’s auto industry has traditionally been a mainstay of the economy, employing hundreds of thousands of people. As carmakers increasingly move factories abroad, there are concerns that German plants are too costly.

  • Facts

    Facts

    • Volkswagen has announced a cost-cutting program of €5 billion a year until 2017.
    • Daimler has said it wants to achieve savings of €2 billion a year.
    • The auto industry currently employs 750,000 people in Germany.
  • Audio

    Audio

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As Germany’s biggest carmakers book record global sales, the same companies are looking to cut costs aggressively at home – where rising levies for energy and labor are beginning to threaten jobs.

While Volkswagen, Daimler and BMW have been investing massively abroad in recent years, costs in Germany have spiraled, causing concern that future profitability will be hit by rising domestic expenses.

“The industry is living off the successes of the past,” said Stefan Bratzel, the director of the Center of Automotive Management, an industry consultant in Bergisch Gladbach.

Carmakers want to arm themselves now for the challenges ahead.

Auto production in Germany has become increasingly costly, due to rising wages, more expensive energy and tougher environmental standards. Now automakers are looking to modernize factories to make them more efficient and also find ways to reduce costs.

The key, however, will be persuading Germany’s powerful labor unions to agree to the cuts.

On Wednesday Martin Winterkorn, Volkswagen’s chief executive, is set to appear before 17,000 auto workers at VW headquarters in Wolfsburg.

 

“The industry is living off the successes of the past.”

Stefan Bratzel, Director of the Center of Automotive Management in Bergisch Gladbach, Germany

He can expect a cool reception. Mr. Winterkorn will have to explain to Volkswagen workers why the company is intent on saving €5 billion ($6.7 billion) a year at its core VW brand, which is less profitable than its Audi and Porsche lines, through 2017.

Daimler, meanwhile, is already looking to cut €2 billion a year from current costs and is expected to demand even tougher cuts going ahead.

The Daimler chief executive, Dieter Zetsche, is expected to outline proposals for even more sweeping cuts when he presents the automaker’s quarterly financial results on Wednesday.

“We are continually looking at ways to improve our structural efficiency,” Mr. Zetsche told journalists during a conference call, according to the Reuters news agency. He declined to put a figure on the extent of savings Daimler planned to pursue.

One cost-cutting proposal on the table is expected to be for workers to work longer hours.

At the same time Stuttgart-based Daimler wants to increase investment at some German plants. Sources close to the company have told Handelsblatt that Daimler will spend more than €3 billion on modernizing factories at Sindelfingen, Untertürkheim and Gaggenau to increase efficiency.

Bavaria’s BMW is also looking for concessions from its staff. German factories have been asked to look for savings opportunities of up to three-digit million euros. That could include measures such as no longer paying workers during their snack breaks.

“Of course it is difficult to announce record profits, and then to announce that we want have to work harder at efficiency,” Friedrich Eichiner, the BMW chief finance officer, told Handelsblatt.

 

Source: DPA. Worker at an auto parts supplier in Germany.
Source: DPA. Worker at an auto parts supplier in Germany.

 

BMW is also applying pressure at its main factory in Munich.

Management there is looking for savings of up to €2 million a year. The idea hasn’t gone down well on the factory floor. At a recent meeting of the company’s workers’ council, Mr. Eichiner was booed when he mentioned the cuts.

At the same time, BMW is expanding massively abroad.

The automaker is transforming its plant in Spartanburg, South Carolina, into its biggest worldwide, and also wants to double production capacity in China. The new BMW plant in Mexico will start producing models from 2019 that had been made at factories in Munich and Regensburg.

The strategy is being pursued by all three automakers: When building new factories, build them abroad, in Asia or North America. Increasingly, cars that will be driven in these growth markets will likely be produced closer to the consumer in places like Shenyang, China or Chattanooga, Tennessee.

 

German factories will increasingly be supplying the European market and that is not likely to grow substantially in the near future.

Last year, 77 percent of cars made in Germany were exported, but that ratio could be set to decline. Domestic factories will increasingly be supplying the European market and that is still pretty volatile and not likely to grow quickly in the near future.

“Production capacity in Europe is going to stagnate over the next 10 years,” said Peter Fuss, an analyst at Ernst & Young in Frankfurt.

According to Mr. Bratzel, the auto industry consultant, German automakers realize now that the market in Europe is going to stagnate at best.

“That is why they have to concentrate on costs now. Otherwise we will be talking about job cuts in a few years,” Mr. Bratzel said.

That could be worrying for the German economy. At the moment the auto sector employs around 750,000 people, almost 15 percent of all those working in manufacturing.

The industry is not just made up of the big carmakers – there are also dozens of smaller suppliers.

“Germany’s advantage as a location is still that manufacturers, suppliers and research all create a homogeneous unit,” Mr. Fuss of Ernst & Young said. “That doesn’t exist anywhere else in the world.”

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