Germany’s economically-essential car manufacturing industry is...

Germany’s economically-essential car manufacturing industry is emergingfrom a scathing period of lockdown, production halts and a slump in sales.

The sector supports tens of thousands of jobs in Germany and exports arevital to the whole country’s economy; but demand has fallen and the industryfaces big challenges in the transition to greener technology, with expertstelling CNBC they fear for its future.

“Carmakers contribute significantly to the German economy. Almost onemillion well-paid jobs depend on this sector, half of them in the prosperoussouth of Germany,” Economist Felix Roesel, who works at Germany’s respected Ifoinstitute, told CNBC Tuesday.

“The economic downturn now challenges thousands of jobs, income and taxrevenues along the full supply chain,” Roesel said, warning that the autoindustry faces big challenges.

“We will certainly see a decline in this industry for a couple ofreasons. Many car makers cannot use their full capacities because manyinternational supply chains are headily disrupted or public health restrictionsstill apply to factories. Car dealers had to close for many weeks during theshutdown. And consumers fearing unemployment and income cuts delay purchases.This is a toxic mix for carmakers.”

Berlin-based auto analyst Matthias Schmidt told CNBC that “the marketwas heading for a slow year – and (was) even on a downward cyclical trajectorybefore corona hit, with the German passenger car market seeing year-on-yearfalls in both January and February of 7.3 and 10.8 percent respectively,” hesaid.

“A trend I see playing out over the next few months could be a marketthat sees strong year-on-year gains in the summer months fueled by governmentpurchase incentives (in whatever form these take) as manufacturers aim to takeadvantage of a summer window of car dealerships being open, a growing appetitefor private mobility post-Covid (and) a push before a possible second coronawave impacts the closing months of the year.”

With fewer people likely traveling over the summer vacation perioddue to the pandemic, the usual slow summer months could look very differentthis year with consumers looking to take advantage of these new offers on the table,he added.

Nonetheless, carmakers could also take advantage of the crisis by usingit to implement job cuts as the industry accelerates moves towards streamliningproduction and focusing on a new era of making electric vehicles.

“Manufacturers could even use this Covid climate situation to makemuch-required job cuts and become more efficient using the pandemic as theperfect excuse to get around powerful unions prepared to fight tooth and nailfor their members,” Schmidt said.

Stimulus measures

The coronavirus pandemic in Europe saw all but essential businesses shutdown for much of March and April, with gradual restrictions being lifted inmid-May in most economies. Germany, for example, allowed car dealerships tore-open in late April and auto giants like Volkswagen restarted production inearly May.

Already under pressure from falling car sales, and then a complete slumpduring the coronavirus lockdown, the country’s car industry was hoping for aid fromthe German government. Last week, aid came, with the coalition of ChancellorAngela Merkel’s Christian Democratic Union (CDU), its Bavarian sister party,the Christian Social Union (CSU) and its Social Democratic Party (SPD)partners, announcing a 130 billion euro ($147 billion) stimulus package for theeconomy.

There was some disappointment at the measures that were announced forthe car industry, however. While the measures included a temporary VAT(value added tax) cut lowering the tax on all goods, including cars, from 19%to 16%, and a 6,000 euro purchase incentive for electric cars costing under40,000 euros (an amount that excludes some premium electric models), industryleaders had also hoped for a scrappage scheme to incentivize the purchase ofnew cars. And while the industry is indeed transitioning to electric models,petrol and diesel models still make up the bulk of production, and purchases.

The biggest losers from the package, according to Naz Masraff, directorof Europe at Eurasia Group, are the German automotive industry and auto-heavyregions, including Bavaria, Baden-Wuerttemberg and Lower Saxony, which are hometo huge BMW, Daimler and Volkswagen production plants respectively.

BMW’s Group Plant inDingolfing, a town in southern Bavaria, is the carmaker’s largest vehicleproduction site in Europe and has a workforce of around 18,000 people plus 800apprentices. Meanwhile, VW’s plant in Wolfsburg is the world’slargest single car-manufacturing complex and the town itself has grown uparound the plant; it employs around 20,000 people.

BMW, VW and Daimler, who are allbehemoths in Germany’s carmaking industry, are all making inroads intoproducing many more electric vehicles though traditional models still make upthe bulk of production. Eurasia Group’s Masraff noted that the Germangovernment measures showed a clear push towards electric vehicles.

“While the package excluded a general cash incentive for purchasing newcars, electric cars are promoted with a doubling of existing subsidies. In thisrespect, it confirms the government’s stance on the future trajectory of theindustry, towards zero-emission vehicles. The lack of a car scrappage schemefor diesel and petrol cars, which the SPD was adamant should not be included inthe final deal, quashes any idea that the combustion engine will be propped upduring the recovery period,” Masraff said in a note following the packageannouncement.

“The doubled electric vehicle purchase premium - now €6000 - showsBerlin is betting on battery power, comfortable in the knowledge that its mainauto titans VW and BMW have already began a substantial shift towards electriccar production.”

Demand for electric vehicles is certainly growing. Data from the EuropeanAutomobile Manufacturers Association (ACEA) in May showed that in the firstquarter of 2020, the electrically-chargeable vehicle segment significantlyincreased its market share, rising to 6.8% from 2.5% in the same period lastyear, although petrol-powered cars still account for more than half of the EUmarket, and diesel cars almost 30% of the market.