German innovation

Facing up to Automotive Reality

car
The car of the future, courtesy of Apple.
  • Why it matters

    Why it matters

    The auto industry is vital to the German economy, but domestic manufacturers are falling behind in innovative technologies.

  • Facts

    Facts

    • About 90 million cars are produced worldwide each year, with Germany contributing almost 6 million.
    • Volkswagen overtook Toyota as the number one automaker in the first half of this year.
    • The car industry turns over €368 billion, or $416 billion, annually, and employs 775,000 people in Germany.
  • Audio

    Audio

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Trends at the International Motor Show in Frankfurt, known as the IAA, include cars that avoid traffic jams and accidents, low-emission engines and a tendency toward bigger and bigger vehicles. But despite current strong sales, automakers are worried about declining demand in key markets.

Were you expecting a report from this year’s show? No. This is actually from the Frankfurt Motor Show in 1995.

The German auto industry has experienced two golden decades since then. Worldwide car production has grown from 50 million to about 90 million vehicles a year, and Germany has seen an increase from 4.7 to 5.9 million. German manufacturers dominate the market for premium vehicles, and VW was the world market leader in the first half of the year.

The German auto industry is taking advantage of the opening of Eastern European markets, where it is building component, engine and assembly plants to bring down its production costs. Thanks to their early investment in China, German automakers managed to secure more than 20 percent of the world’s largest market for automotive sales today.

Some things at this year’s IAA haven’t changed in 20 years. Networked cars are still unable to prevent traffic jams, and people still prefer to buy large, gas-guzzlers instead of small, more environmentally friendly cars.

But one thing has changed. German automakers’ business model is seriously threatened. The internal combustion engine is on its way out and could soon be replaced by electric engines, or perhaps even fuel cells? Self-driving cars have become a potential reality.

Germany would be hard-hit by the decline of its auto industry, and yet such a decline is by no means certain.

This renders German manufacturers’ key strength obsolete: Constantly developing better engines and chassis for customers who want driving to be “fun.”  

The famous Audi slogan “Fortschritt Durch Technik,” or  progress through technology, is beginning to lose its importance, whereas competence in digitization and networking is becoming more and more important.

At the IAA 2015, German manufacturers responded to these changes with the usual reflexes. They are building massive vehicles with up to 600 horsepower – with electric engines.

But that won’t be the answer. The battle for customers has begun, and the Apples and Googles of the world know all too well what the next generation of car buyers wants. They will offer affordable, attractive electric cars, in which the customer can travel in his own digital cocoon without paying attention to traffic.

Others have a better command of the key technologies required to build such vehicles than German automakers. The Germans are left to hope that Asian battery makers or perhaps Bosch will achieve a breakthrough in battery technology.

Toyota, not Daimler, is now introducing the first fuel-cell series-production car in the marketplace. The German auto industry lacks the resolve to seize technological leadership in alternative engines.

Another problem is the weakness of German information and communication technology, which was in the lead only 20 years ago. This is why the German auto industry will have to form joint ventures with companies such as Google and Apple to bring the car of tomorrow onto the market.

The key question is: Who will control the car’s operating system and the data generated on the road? If automakers lose this battle, they will merely be building car bodies around motorized computers in the future.

The risks to the German auto industry are substantial. This creates a cluster risk for the entire economy.

With sales of €368 billion ($416 billion) and 775,000 direct employees, the auto industry is Germany’s largest industrial sector, and its importance continues to grow. Since 1995, it has increased the gross value added of the German economy from 2.8 to 4.0 percent, and its share of industrial workers from 10.9 to 12.8 percent. Without the auto industry, the German economy would have grown by 2 percent less since 1995.

German carmakers and rivals Toyota Hyundai Honda Nissan Fiat Ford GM Renault Peugeot PSA VW Volkswagen Daimler BMW Mercedes Audi Skoda German Carmakers and Rivals-01

 

Germany would be hard hit by the decline of its auto industry, and yet such a decline is by no means certain. The automakers are financially strong and have recognized how elementary the challenges are. Lawmakers should beware of playing the arbiter, with incentives to promote certain engine types, in a market whose future development remains uncertain.

However, the government can create conditions to allow Germany to become a pioneering market for the car of the future. It can promote the expansion of charging stations for electric cars and hydrogen stations, and it can expedite the large comprehensive expansion of broadband networks in the fixed and wireless networks. Otherwise, the vision of the networked, self-driving car cannot become a reality.

 

To contact the author: heilmann@handelsblatt.com

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