Harald Krüger and Herbert Diess waited for their chance for a long time. For almost seven years, both of them sat on the management board of BMW.
These were exciting times for them as crown princes: almost the entire industry collapsed during the financial crisis, then it experienced a boom unlike any the sector had ever known. While assembly lines in Europe were standing still, China began to rise out of nothing to become the largest car market in the world. The Far East was the destination for shipments of inventory that was lying around like a dead weight in Germany.
Even if the then-head of BMW, Norbert Reithofer, issued emphatic warnings about the “sweet poison” of the Chinese automotive boom, the luxury carmaker continued to sell more and more vehicles there each month. And for that reason, Mr. Reithofer was able to take his leave amid record sales figures when he moved to the supervisory board.
Since May, Harald Krüger has been the head of BMW. And in July, Herbert Diess took over the Volkswagen passenger car division, as the crown prince of company head Martin Winterkorn.
In parallel, however, things also took a turn for the worse in China. The turbocharged growth came to an end, economic growth is slackening, the stock market has crashed and, with its campaign against corruption, the government is making it more difficult to sell luxury cars. Instead of 7 percent, the largest market for cars in the world will grow in 2015 by 3 percent at the most, warns the Chinese automotive industry association. That sounds like a screeching application of brakes.
Already before the stock market crash, things weren't proceeding well. VW's sales up to the end of May were 4 percent below last year's figures.
Nervous tension is spreading in Munich and Wolfsburg, where BMW and VW are headquartered. China is too big for the problems to be denied or ignored. In the meantime, one in four BMWs as well as one in three VWs and Audis are sold in the People’s Republic. Analysts estimate that almost half of annual profits come from the Far East.
Even before the Chinese stock market crash, things weren’t going well. VW’s sales up to the end of May were 4 percent below last year’s figures — and the situation is worsening. VW’s subsidiary Audi reported a decline of almost 6 percent for June. Brilliance, BMW’s joint-venture partner in China, saw a drop in profits of almost 40 percent in the first half of the year.
It is still unclear how all this will be handled in Munich: already at the beginning of the year, BMW had to support its Chinese dealers with nearly €700 million.
The setback in China is a watershed. In Shanghai and Beijing, it was primarily large and elaborately equipped cars that were sold up to now. Customers preferred to pay in cash; it was like a gold rush.
Audi and BMW flooded the premium market, followed by Mercedes, Volvo and Land Rover. In the mass market, VW and General Motors increased their capacities year after year. The consequences have been evident for months: rising rebates and declining margins. Just this week, Land Rover lowered the tag of the entry price model by a whopping $8,000.
The business is changing structurally as well. Because of increasing air pollution, the Beijing government is calling for more alternatively powered engines. Traffic in the cities moves along at a snail’s pace. For people stuck in congestion day after day, a connection to the Internet from their car is more important than the horsepower of the engine. Thus there is massive pressure on the car makers to innovate in fields that they are only now slowly opening up. Electric engines and permanent connection to the Internet are in demand. Here Korean battery manufacturers and Chinese Internet companies dominate. A great deal of money will be required to meet these competitors eye to eye.
It is still an open question as to how hard the landing will be for German carmakers in China. For the head of BMW, Harald Krüger, the downturn comes at a particularly awkward time. Production is just beginning on his company’s new top models, the Seven series — with a proper Internet connection, but initially without a hybrid motor. In the most recent production year, a solid half of the sales of its predecessor occurred in China. Mr. Krüger now has to worry about sending his new flagship into a scarcely calculable rebate battle.
Nor did VW newcomer Herbert Diess reckon with a downturn in sales in China. His unambiguous task is to restructure the core brand Volkswagen, which earns too little money. After the crashes in the United States, Russia and Brazil, China was considered by VW to be a safe haven. If it now slips away, then the pressure for change in Wolfsburg will rise rapidly.
As a result, the expanding crisis in China threatens to overshadow the management shifts in Munich and Wolfsburg. Already with the mid-year figures, Mr. Krüger and Mr. Diess will have to put their cards on the table. But this can also be an opportunity. Leadership changes and crises are known to be the best moments for imposing one’s own profile on a company.
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