german giants at braking point
17/10/2024
BMW, Mercedes & Volkswagen scrambling to recover in their biggest market
William Wilkes Bloomberg
Ryan Xu was a dream customer for Germany’s auto makers. The Guangdong-based entrepreneur and her husband own a Porsche 911 and a Mercedes-Benz G-Class and were among the first buyers of the electric Porsche Taycan.
But her views on German cars have soured as Chinese consumers increasingly favour tech refinement over traditional selling points like horsepower and handling. The software systems in the Taycan, which costs well over $US100,000 ($149,000), were “terrible,” the 36-year-old mother of three said. It was “just an electrified Porsche — and that’s it”.
Her assessment isn’t isolated. As China moves away from combustion-engine cars, Volkswagen, Mercedes-Benz and BMW are struggling to offer electric vehicles that appeal to customers in their largest and most lucrative market, putting $US38 billion of investment on the line.
The latest warning signs came last week, when all three German manufacturers reported slumping third-quarter sales in China. BMW posted its steepest sales drop there in more than four years, a 30 per cent plunge, and Mercedes’ deliveries declined 13 per cent amid poor demand for its priciest cars, including S-Class and Maybach limousines.
Porsche’s sales in China tumbled 19 per cent to its worst third-quarter performance in a decade as global demand for the Taycan nearly halved. Volkswagen — the parent of Porsche and Audi — reported a 15 per cent decline.
“The competitive situation in China is particularly intense,” said Marco Schubert, who oversees sales for VW. After dominating the gas-guzzler era, German manufacturers became complacent, underestimating the threats posed by new rivals and reluctant to abandon the profits generated by big-engine cars.
That allowed Tesla and local manufacturers led by BYD to speed by with tech-savvy and affordable plug-ins, and now China no longer needs or wants them there. “The turning point is happening now for these automakers,” said Stephen Dyer, a Shanghai-based managing director at consultant AlixPartners. “They need to dramatically change their strategy in the market.”
The next challenge is already on display at this week’s Paris auto show, where Chinese manufacturers are stepping up their efforts to take market share in Europe. Companies including BYD and Xpeng will showcase their latest technology at the biggest European car event this year.
BMW chief executive Oliver Zipse, meanwhile, pushed back against Europe’s plan to effectively ban the sale of combustion-engine cars from 2035, arguing it will lead to a “massive shrinking” of the region’s automotive industry.
And at least one response effort didn’t go as planned. The microphone and slide show cut out for several minutes in the midst of Volkswagen’s presentation about future electric vehicles, leaving sales and marketing chief Martin Sander visibly frustrated.
It’s an emotion shared by drivers in China. After dealing with braking and other quality issues, the Xu family sold their Taycan and bought an ET5 from Chinese brand Nio. The car was about a third cheaper than a Mercedes EQE, which Ms Xu also considered, but offered a more luxurious interior design, smooth voice controls, and greeted their kids by name as they climbed in.
“German cars can hardly match” that level of technology, said Ms Xu, who runs a business with her husband. Mercedes, BMW and Audi “can hardly be seen as luxury cars now”.
While German automakers still control nearly 15 per cent of the Chinese market, that’s down from a quarter before the pandemic and worse yet, their share of EVs is less than 10 per cent.
Without a quick turnaround, the slump risks turning into a rout and tipping Germany’s Big Three into an existential fight. As it is, VW, Mercedes and BMW are each only worth about half of BYD’s stock-market value.
Even more than other international peers, Germany’s automakers have gone all in on China. While some rivals have cut their losses, the Germans aren’t giving up, shifting more resources in an effort to claw back market share. But it looks like an uphill fight as Beijing actively seeks to build up its own manufacturers.
Volkswagen plans to play the long game. A spokesperson for the Wolfsburg-based company said the Chinese car market has been marked by steep discounts, and it wouldn’t buy market share at the expense of profitability. The company plans to continue its “in China, for China” strategy to protect its long-term prospects. BMW and Mercedes are also planning to stick with a localisation approach to appeal to buyers there.
The reasons for doubling down are clear. With Europe’s auto market probably past its peak and the US saturated, there’s no viable alternative to China for a similar level of volumes and profits.
That raises concerns given their massive footprint in China. As a group, Germany’s carmakers operate a network of more than 40 factories — more than in their homeland. That’s too much investment to simply give up on — and explains why they oppose the European Union’s plans to levy tariffs on China’s cheap electric cars.
Pulling out of China — as smaller Japanese brands Suzuki Motor Corp and Mitsubishi Motors Corp have done — is almost unthinkable.
And any restructuring would be complicated, given the operations are caught in a complex web of relations with government entities. That puts the focus on developing the kinds of features that Chinese customers want.
Despite the headwinds, the downturn might have been prevented by more forward-looking investment in the Chinese market.
But after decades at the pinnacle of the auto industry, Chinese rivals weren’t taken seriously and local insight was bypassed as decisions were funnelled through boardrooms thousands of kilometres away.
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