Crisis in the fast lane
Germany’s automakers in the wake of the banking crisis – By Gernot Kramper
The automotive industry is the showcase sector of the German economy. Its vehicles are technological leaders: fast and sexy. But the industry is facing production cutbacks and sending workers on mandatory leave. The reason is that the real estate crisis that began in the U.S. is also hitting the car industry.
Every house with a “For Sale” sign in the United States has a car parked outside whose payments the owners also can’t meet. Real estate prices are now at rock bottom. Many homeowners are facing financial ruin and even more are drowning in debt. It’s not just the banks’ mortgage sector business that is suffering but every type of financing.
Car sales are imploding, with the drop in units sold in North America estimated at two million vehicles. BMW is especially vulnerable because the Bavarian car manufacturer holds a relatively strong share of the market there.
And the problem isn’t limited to the U.S. Auto sales in Europe are also set to drop by around one million units. In the EU, countries such as Spain are also in the throes of a real estate crisis and the country’s car market is experiencing the same parallel slump as in the U.S.
Automobile sector sales for individual months of this year are 40 percent below their 2006 volume. The figures are massive and struggling U.S. auto giant GM is not alone. Entire markets are collapsing, not just the turnover of individual companies.
Every car manufacturer is reeling under the impact. Volkswagen’s Seat subsidiary is exposed to the crisis in Spain but Škoda is also reporting problems in the Czech Republic. Volkswagen is being forced to shut down production of its Touareg and Porsche of its Cayenne SUVs. The crisis is also hitting brands that are not heavily invested in the high-prestige, gas-guzzler segment like Opel and Ford, for example. Ultimately, everyone is affected.
Only the South American, Eastern European and Chinese markets could possibly make up the difference. The German auto sector is still spearheading the country’s export industry. Only around one-fourth of its production is sold on the domestic market.
But global sales are already performing much worse than planned. Even China, considered a sales growth guarantee, is faltering as a result of the banking crisis. That is hitting Volkswagen and Audi especially hard because the German car industry’s previous double-digit sales increase in China has slowed significantly.
“Nothing can prevent a downturn in the U.S. and Western Europe in 2009 but if the Chinese and Russian markets go into decline, the automobile business cycle will plummet,” according to Ferdinand Dudenhöffer, an expert on the car industry at the University of Duisburg-Essen. He predicts that the industry won’t be able to avoid further cuts in production. “Manufacturers will curb their planned production by up to 15 percent in the next few months,” he said.
The sector hasn’t really been running smoothly for a long time and the crisis only underscores the problems. Domestic car sales have been stagnating for years in Germany and private sales of new cars are even on the decline. In the next two years, the banking crisis will definitely lead to a slump.
Faced with a global crisis, consumers are refraining from making major purchases. They are only buying if they can’t avoid it. In addition to private restraint, cuts are being made in company car fleets. In a period when employees are being laid off, medium-sized companies in particular prefer to downsize management cars. Employees have to calculate that the company car will be included in any savings program.
There is no “wonder car” that can accelerate out of this crisis, although it is true that gas-guzzlers are more or less impossible to sell, whereas smaller, more economical models are more likely to find buyers. But Dudenhöffer warns that even gas-saving models won’t be able to resuscitate the market.
Although micro-cars like the Smart and the Mini, a British car, are doing well in the U.S., they can’t counter the general tendency. “If you’re going into a recession, you can offer anything you want, whether it’s hybrid or non-hybrid, an electric car, small or big,” said Dudenhöffer. “You simply won’t sell as many units. More appropriate models can mitigate the problem but they won’t prevent it.”
Right now, falling gasoline prices are relieving household budgets. But when fuel prices are moderate or even going down, it actually makes less sense to invest in a new, more economical model. The drop in gas prices is giving the wrong signal. Dudenhöffer believes all the manufacturers should make an even greater effort in the areas of drive design and fuel savings: “When the crisis has eased, it will be important to have ecological models on the market.”
But the car companies are anxious to avoid repeating the “3-liter Lupo” disaster. The car was far ahead of both its time and the price of gas but ultimately nobody wanted to buy it. One thing is certain: Only companies that can keep investing in technologies for the future during the down times will come out on top after the crisis.
BMW, Porsche and Mercedes are among the companies that should benefit from the crisis in the long term. That only serves to reinforce a development that has characterized the German automobile market for the past few years. The premium-segment manufacturers remain stable because the cachet of their brands will continue to attract customers. And the introduction of new, smaller models can expand the range of models downward.
In contrast, the mid-range manufacturers such as Opel and Ford will experience difficulties because they are facing increasing competition from low-cost producers, including Chinese brands. There are no German manufacturers in the low-cost car sector, so the German car industry has not benefited from the worldwide growth in this segment at all.