The Global Economic Crisis automotive industry in Germany

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The automotive industry in Germany was strongly knocked by the financial and

economic crisis that emerged in 2008. Production output in the first quarter of 2009 fell

significantly compared with the pre-year period (box 2.10). This reflects the fact that

German car production is mainly export oriented; the German automotive industry depends

on the export market for the majority of its orders.

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Prior to the crisis, sales of new cars were already at a historic low in Germany, and

since spring 2008 production figures were stagnating or slowly declining. According to

figures from PricewaterhouseCoopers, utilization of light vehicle production capacity in

Germany declined from 90 per cent before the crisis (2007) to 75 per cent now.

The current crisis is expected to accelerate in particular three paradigmatic changes

affecting the German automotive industry:

_ new markets developing in emerging economies;

_ new global players, mostly from emerging economies, enter the stage; and

_ new customer expectations are changing the markets.

The crisis hit the German automotive suppliers hard. According to a recent study by

the German Association of Car Manufacturers almost all German automotive suppliers

reported losses in the first quarter of 2009. The suppliers are highly dependent on export

orders, therefore the cutbacks on capital-intensive stock by original equipment

manufacturers (OEMs) led in many cases to a complete cessation of orders. The numbers

of employees have also been significantly reduced by most supplier companies. Temporary

staff and contract workers were the first to go; this in a context where 70 per cent of

employees of German automotive suppliers are on short-term contracts.

Many well-known players in the German automotive industry are in trouble. Daimler

is an example among the car manufacturers (box 2.11).

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Most car manufacturers were not able to disconnect from these negative market

trends, but some OEMs performed better than others. In 2008, only seven car manufacturer

groups had above average car sales and so correspondingly increased their market share.

Only Nissan could increase car registrations, whereas the sales decline of Mazda, BMW,

Volkswagen, Renault, Fiat and Daimler were above average. During the first months of

2009, the low-cost or volume-based OEMs had above average market performance due to

shifts in customer demand, largely towards inexpensive models and fuelled by government

incentive programmes.

Measures to cope with the crisis

In Germany, automotive market trends are ambivalent. In the year 2007, i.e. before

the crisis, passenger car registration had already dropped to its lowest level since

reunification, with 3.15 million registrations. In 2008, another all-time low was reached,

with only 3.09 million cars sold. In 2009, the downturn trend initially continued in

January. But the introduction of a generous scrappage incentive by the German

Government caused car registration to skyrocket (box 2.12). Car sales in February, March

and April increased up to 40 per cent compared with the pre-year-period. Only the mini,

small and lower-middle segments profited from these trends, with sales figures increasing

by up to 120 per cent (mini segment). As expected, the scrappage incentive had practically

no effect on more expensive cars. Consequently, sales of BMW and Mercedes cars further

declined. However, the trend towards increased sales in the low-priced car segments and

an above average reduction in sales in the higher-price segment (except SUVs) was already

perceivable in 2008.

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The scrappage incentive in Germany has therefore been a short-term success in terms

of stabilizing car sales. Low-cost car manufacturers and car retailers in particular have

benefited from the incentive. It can be expected that passenger car registrations in 2009

will increase to at least 3.2 million units.

The mid- and long-term effects of the scrappage incentive are, however, expected to

be strongly negative. According to a recent study, 75 per cent of the purchases can be

accredited to "windfall gains". Car buyers have predominately brought forward their

purchase of a car to profit from the government incentive. Many switched from buying a

two to three-year-old used car to a new or one-year-old car, which in turn reduced the price

level for older cars. Interestingly, despite the government incentive, sales discount levels in

Germany (about 16 per cent) remained high. The distortion of the price signal by high

discount levels and scrappage incentives will have negative effects on customer

expectations in the future.

Whereas car registrations in Germany will increase in 2009, car sales will reach an

all-time low in 2010. This will be due to the abolition of the scrappage incentives, the pullforward

effects in 2009 and the expected increases in unemployment rates in 2010.

Employment implications and human effects of the crisis

The automotive industry in Germany provides direct employment for 750,000

workers. Between 2000 and 2008, employment in the car manufacturers decreased by 6 per

cent. However, the supplier industry in Germany overcompensated for the decline in the

OEM workforce thanks to a shift in value added from OEM to first- and second-tier

suppliers combined with a strong export success of the branch.

The latest data on the crisis show that effects on employment are not that pronounced

at the moment (box 2.13), although the automotive industry has been hit harder than the

manufacturing sector overall. Unemployment in Germany has been cushioned through

short-time working arrangements subsidized by the government.

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There has been a large increase in short-term working in the German manufacturing

sector. Three-quarters of all applications for short-term working in Germany have been in

the manufacturing sector, and the automotive industry is the most prominent employer of

short-term workers.

There are many prognoses on how many employees in the German automotive

industry will become unemployed. Estimates range from 50,000 to 100,000 in the

forthcoming 24 months, which accounts for up to 15 per cent of the employees. However,

quantifying the human effects of the economic crisis is difficult. They are highly

dependent on state incentives and company funds (loans) as well as the point in time and

extent of the recovery of the global economy.

Conclusions on the German automobile industry

The automotive markets in Germany and Western Europe were strongly knocked by

the financial and economic crisis starting in 2008. Sales figures for the three largest

markets - Germany, France and Italy - are however softening the devastating situation in

Europe; new car registrations in France declined only 5 per cent. And thanks to a generous

scrappage incentive, German car sales are already up 18 per cent.

The sales decline in the German industry came very rapidly, was very deep and

affected all regions. The German automotive industry was very vulnerable because of:

_ its massive dependence on exports; and

_ the interdependence of OEMs and suppliers.

Due to the crisis, the trend for further consolidation of car manufacturers will be

accelerated, including in Germany. The consolidation of car manufacturers and the rising

relevance of China and India will have important effects on employment in the German

automotive industry. The human effects of the dramatic decline in production are

significant. Nevertheless, it is important to bear in mind that - independent of the actual

economic crisis - the global car industry is undergoing paradigmatic changes.