Plunging exports just part of Germany's problem

The year was 1996. Helmut Kohl still ran Germany as chancellor. The country was the three-time champion of European soccer. And Mercedes-Benz was constructing an assembly plant in Alabama, its first ever outside of Germany.

That also was the last time Germany's auto factories made fewer than the 4.66 million light vehicles they produced last year.

A combination of issues — some of them temporary, some of them long term — have Germany's auto manufacturing base in an unfamiliar decline.

Industry leaders there are wondering whether the volume trend is the look of a new normal for the next generation, or whether it is actually an industrial emergency that the government should step in and help fix.

"It's crucial that politicians start improving underlying business conditions rather than just announcing them," Bernhard Mattes, the German auto industry's former chief political lobbyist, warned before stepping down as VDA boss at the end of last year.

Some companies are calling on national and regional policymakers to improve competitive factors, such as by reducing the high cost of electricity for automakers and cutting their above-average tax burdens.

Last year, industry volume declined 9 percent, following an equally deep drop in 2018, combining to shave roughly 1 million off the country's total vehicle output in just 24 months.

What makes the decrease in production particularly peculiar is that German domestic retail sales hit a 20-year high in 2019, if one excludes a brief sales boom in 2009 caused by government scrapping incentives to energize demand during the global financial crisis.

Demand last year was even stronger than in 2006, when customers rushed to buy cars before Germany enacted its largest tax hike in more than 70 years.

What's going on?

Plenty.

The rise of protectionist trade friction, ranging from the U.S.-China trade war to uncertainty over Brexit, has hit German vehicle exports. In addition, a change in Europe's homologation rules resulted in production delays as many popular models awaited regulatory approval. Meanwhile, a chaotic ramp-up of the eighth-generation of the high-volume Golf most likely prevented tens of thousands of cars from leaving Volkswagen's Wolfsburg factory last year.

But VW Group, Daimler and BMW all remained solidly profitable and each posted record retail sales in 2019. And LMC Automotive Production Forecasting Director Justin Cox believes the production decline suggests something else going on.

"This sharp drop in production is unusual in that it is not resulting from a shock," Cox said, referring to events such as the earthquake-tsunami-nuclear power plant accident that brought down Japan's auto production in 2011.

In cases such as those, Cox pointed out, factory production typically snaps back as consumers return to their earlier vehicle-purchasing plans. By contrast, he says, Germany's two consecutive years of sharp decline is suspicious.

"Germany didn't experience some black swan event," Cox he said. "It's almost by design."

He believes weak export markets are only partly to blame for the output decline. Cox argues that automakers and suppliers are using the slowdown as an excuse to reduce their German footprints and better balance their geographical exposure in preparation for the costly switch to electric vehicles that will require far fewer workers on the assembly line.

Volkmar Denner, CEO of Robert Bosch, warned that the industry's shift to EVs will be a challenge for Germany's work force. By his count, Bosch will need only one-tenth the number of employees to build an electric motor, compared with the number needed to turn out a diesel injection system.

Given the extensive job protections granted under German law, and the fact that auto workers in the country earn the highest average wage globally, at nearly $60 an hour, automakers and suppliers are acting now.

Daimler and Audi announced last November the elimination of roughly 20,000 jobs, predominantly in their home market, where job cuts can be done only voluntarily.

Two months earlier, supplier Continental said it planned to reduce its domestic staff by 7,000 over this decade. It blamed its decision on the shift away from gasoline and diesel powertrains toward battery-powered vehicles.

"We have maybe three years before the electric vehicle value chain is put in place, and unions know that they need to act now," a senior executive at a major German carmaker told Automotive News Europe, adding that more labor conflicts loom.

"The greater the share of jobs they can secure, the harder it will be for us to roll this back later, since local politicians will immediately be knocking on our doors as soon as one whiff of an upcoming plant closure gets out."

The plunge in exports figured keenly in the industry decline, since three of every four cars manufactured in Germany are shipped to customers abroad. The single biggest destination for German-built cars has been the U.K. And there, amid economic anxieties surrounding Brexit, total vehicle sales fell by 230,000 last year.

At the same time, emerging economies also have contracted.

In 2019, for the second year in a row, car sales declined in China. That trend has dragged down demand for upscale models such as Mercedes' flagship S-class sedan that are imported from Germany. Similarly, sales in Turkey, a key market for the Volkswagen Passat sedan, fell by 23 percent last year.

What is unclear, however, is which phenomenon came first.

Did the weakness in export markets trigger a production slump, or vice-versa? Customer orders for German-built models declined at less than half the actual rate of shipments last year, suggesting a conscious decision to trim back inventories.

Automakers are not necessarily producing fewer vehicles, they are just producing fewer of them in Germany. VW, Daimler and BMW have shifted more production overseas to better serve local markets and protect against currency fluctuations.

BMW started building the popular 3-series sedan in Mexico last year, a model that was previously exported to the U.S. from Germany.

VW, which has prioritized profit margins over volume, is mulling whether to build a plant in Turkey at a cost of about $1.1 billion, intended to improve its competitiveness in that market where sales of the German-made Passat and Golf dropped by half. The proposed plant would serve as a natural hedge against the weak lira.

The new outlook on export strategies is also hitting non-German brands in Germany. Ford Motor Co. has struggled, according to Cox. The U.S. carmaker ended production in Saarlouis of the C-Max and Grand C-Max in response to a sharp decline in demand for minivans. Neither of Ford's two German factories produce SUVs, which remain a favorite of buyers around the world.

Similarly, Opel has been challenged to maintain output at its plant in Rüsselsheim, which lags manufacturing cost parity with a sibling plant in Sochaux, France, by at least 60 percent, PSA CEO Carlos Tavares said. In January, with an aim of cutting 2,100 jobs, Opel announced plans to reopen a voluntary leave program for employees at plants in Rüsselsheim, Eisenach and Kaiserslautern.

Ford and Opel account for 30 percent of the annual drop in German vehicle production since 2016, according to Cox. He forecasts a bottoming out for production, with a 4 percent gain in output for this year helped by the actions taken by automakers in Germany.

Despite that hopeful note, German exports fell an additional 11 percent in January, impacting production once more.

But Germany's problems may reflect an overall industry trend.

Denner said he is positioning Bosch for a long drought, forecasting that automakers worldwide will build just 89 million cars in 2020. That would represent 8 million fewer vehicles than the industry produced three years earlier.

"We do not forecast a rise in global automobile production before 2025," Denner told reporters in January. "It's possible that we have already passed the peak in terms of car production."