How does America’s automotive industry compare to its European counterpart? Innovation, investment and global diversity are key advantages…
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Angela Merkel took it all in stride. When the new US President Donald Trump failed to extend her the usual handshake for the cameras during her state visit, the German chancellor only momentarily looked surprised. Her reaction was more evident when Trump criticized Germany’s export surplus and demanded that the chancellor do more for Germany’s domestic market – and buy more American cars. One of the captains of industry who accompanied Angela Merkel to Washington made an even more pointed comment: BMW CEO Harald Krüger said the company was the largest exporter of vehicles from the US, with the BMW plant in the US exporting more cars abroad than General Motors (GM) and Ford combined. Trump was astonished, and refrained from noting that the Bavarian automaker is planning to open another plant in Mexico. But when it came to US automakers, Trump made it clear he would brook no such investments. GM and Ford obediently backed down.
But a few facts about today’s global automotive industry still appear to have escaped Trump’s notice. For one, Trump has still failed to recognize that many American cars are not built exclusively in the US – and in some cases, are hardly built there at all. During the election campaign, the current US president had already criticized the fact that German executives seem to prefer Mercedes, BMW and Audi, while shunning Cadillac and Chevrolet. But focusing on German executives is beside the point: hardly anyone in Germany drives American. Some have a simple explanation for this – American cars just aren’t all that good.
Indeed, many German drivers demand higher quality standards than their US counterparts. This in part has to do with differences in geography. US highways, which extend for many kilometers with nary a curve or bend, don’t require the same level of automotive agility and stability as the historic districts of European cities, with their narrow streets and sharp corners. The diesel emissions scandal by the Wolfsburg-based Volkswagen company has done massive damage to the reputation of German carmakers in this respect. But European fuel and emissions standards are still more stringent than in the US.
According to experts, this fact will continue to determine the future of the automotive industry worldwide. “All technological innovations come from the luxury class; carmakers who don’t have a presence in the luxury class must rely on mass production,” says Peter Fuss, partner at the Stuttgart office of EY corporate consultants (formerly Ernst & Young). “In the coming years, the focus will be less on expanding production capacities in traditional areas such as engine and transmission manufacturing, and more on the development of new technologies and business models,” Fuss believes. The switch to e-mobility will also transform the value chain and will further shape investment planning, his colleague Oliver Schweizer agrees. One example for this strategic difference is the US automaker General Motors, which is offloading its German subsidiary Opel and is instead focusing on selling budget models in the fast-growing markets outside of Europe. While American automakers may be turning a profit again, the EY experts note, they have not fully recovered from the impact of the finance crisis, during which two of the Detroit Big Three were forced to file for Chapter 11. In the wake of the crisis, Chrysler was acquired by Fiat. GM was only able to recover with a bailout worth billions, courtesy of the American taxpayers. Only Ford succeeded in righting itself largely under its own steam – although not without the help of a generous bailout. In Ford’s case, according to some industry insiders, the automaker’s stronger presence in Europe may also have played a role.
Technological innovations
German automakers, by contrast, have long since gone global. As a result, they were less affected by the financial and economic crisis. Daimler did overextend itself in its merger with Chrysler – a supposed “marriage made in heaven” – but is now back on a solid footing. On the Chinese market, Daimler, BMW and Audi are involved in an exciting three-way battle in the luxury category, while American manufacturers are competing in the mid-range.
This global diversity is one of the major strengths of the German automotive industry, says EY partner Peter Fuss. Even during the financial crisis, German automakers maintained their existing investment in research and development, as well as in modernization and the construction of new plants.
Challenges of e-mobility
Currently, however, the automotive sector is in a holding pattern. This is not because the forecast is grim – rather, it is unclear. There has been political fallout from the diesel scandal, and some cities are considering a ban on diesel engines. It’s still unclear where all this will lead. According to the EY consultants, the outcome could be a renewed push in the area of electro mobility. Should this come to fruition it would raise two further, and important, questions: how quickly will this transformation be accomplished? And who will manufacture the electric motors and battery packs? Fuss believes that this development may have a noticeable impact on the value chain.
This hesitation is also apparent in the figures compiled by the EY consultants. From 2010 to 2015, the 16 largest automakers made substantial investments in either modernization or the construction of new plants, achieving a record investment of €52.5 billion in 2015. This plummeted in the following year, with investment totaling only €16.3 billion in 2016. Between 2010 and 2016, the US was responsible for the largest share of investment, with a total value of €29.5 billion. However, €26.6 billion of that total went into long-overdue modernization of manufacturing plants. New plants were mainly launched by non-US manufacturers, including BMW and Daimler. At €23.4 billion, Germany occupied third place on this list, behind China (at €25.1 billion), whereby a significantly larger share of German investment also went to modernization and expansion measures rather than new plant construction. However, Fuss notes, among German manufacturers, plant construction tends to be an ongoing process. By contrast, nearly €20 of the €25 billion investment in China’s automotive industry was devoted to the construction of new plants, with a significant share of that going to German manufacturers.
According to Peter Fuss, the automotive industry is likely to remain cautious about major investments given the current political upheavals, which include not only the new US president but also the impact of Brexit. “For the time being, carmakers will be proceeding with due caution, maintaining flexibility along their own supply chain, improving their organization, and avoiding unnecessary rigidity when it comes to location and technology,” concludes Peter Fuss.
Klaus Dieter Oehler is financial editor at the daily Stuttgarter Zeitung