For the past several years, the vaunted German automobile industry has been pelted with bad news. It was rocked by the Diesel Scandal from 2014 onwards, when German automakers installed cheat software to artificially lower emissions from diesel vehicles during tests. This wasn’t done merely by a few engineers who were bad apples, but seems to have been ordered by high level executives.
As if the Diesel Scandal wasn’t costly enough to German automakers, the rapid rise of the electric vehicle maker Tesla, which first overtook the German big three in sales of large luxury cars in the U.S. market with its Tesla Model S, is now heavily cutting into sales of German automakers both in the U.S. and in Europe with the more affordable Tesla Model 3, which is now in full production. Despite the warning signs being clearly visible for numerous years, German auto executives completely dropped the ball and their companies are now lagging approximately five years behind Tesla in EV technology development and related industrial infrastructure.
German automakers aren’t just under pressure from Tesla, however.
China’s 2017 decision to introduce a California-style quota for electric vehicles left German Automakers in a bind, as they currently just plain do not have the capacity to produce the 10% quota of electric vehicles required by Chinese law. These factors have combined to create a perfect storm, where the CEOs of the German automakers have ineptly maneuvered their companies into a position that not only endangers their future as independent companies, but also endangers the economic future of Germany, whose economy is highly dependent on their success.
When vehicle electrification exploded onto the scene with the rise of Tesla, German automakers were ill-prepared. Electric vehicles had been seen by them as more of a novelty item, as something that one would produce as compliance cars for states and countries that demanded it, but something that one did not have to produce in serious numbers. There were some half-hearted efforts to produce EVs, but EV research and production was generally relegated to small departments that carried little importance within the companies. From a short-term economic perspective, this made sense:
Why would traditional automakers want to compete against their own highly profitable products, replacing sales of internal combustion engine vehicles with the huge investments needed for re-tooling factories and setting up production for the batteries needed for a steady ramp-up in EV production?
The lack of vision by the executives of BMW, Mercedes, and Volkswagen was compounded and encouraged by a very cozy relationship with the German government, with the German govt. continually lobbying for lower vehicle emissions standards within the European Union. These factors led to a very dangerous long-term strategy of delay, coupled with willful blindness and arrogant disregard for an upstart, highly-innovative automaker like Tesla, and for the rapid innovations in vehicle electrification, in general.
When the Diesel Scandal hit German automakers, the first cracks started to appear in the isolation chamber that company executives had created for themselves in order to ignore an increasingly technologically-innovative world. Instead of forging ahead and cementing the German reputation for quality products with innovative electric vehicle offerings, they had chosen to attempt to milk a technology headed for a dead-end past the point where it was technologically feasible to do so without cheating on emissions tests. CEOs were forced to resign, yet there still was massive resistance to change. Only when China declared its intention to introduce a California-style system of EV quotas on new vehicles, did the big three German automakers show credible signs of re-thinking their position and accepting the reality of the inevitable, near to mid-term massive wave of vehicle electrification looming on the horizon.
Germany is economically highly dependent on its auto industry: over 800 thousand people are employed in vehicle and vehicle parts production, which constitutes almost 5% of all jobs in Germany. Many of these auto industry jobs are well-paid, in turn supporting many secondary businesses and jobs. If this industry slides into serious trouble, the entire German economy will be in serious danger.
German automakers are also highly dependent on exports, with over two thirds of the vehicles being exported and China rapidly becoming their largest sales market. It is thus unconscionable that they have maneuvered themselves into a position where they are not at the forefront of technological change. In essence, they should be thanking the Chinese Government for introducing the EV quota, as it forces them to finally recognize that the internal combustion engine now is an outdated technology that will rapidly be replaced by far more efficient, cleaner, electric vehicle technology.
While there had previously been half-hearted attempts at vehicle electrification by German automakers, it should now be crystal clear to even the most obstinate auto executives and politicians that there is an urgent, immediate need to forge ahead with all aspects of vehicle electrification. The transition will not be easy, as it involves large-scale re-training of workers and engineers, along with re-tooling of factories and the construction of battery manufacturing facilities or, at the very least, securing enough supplies of batteries to enable mass production of electric vehicles.
There have been lots of announcements about electric vehicles coming from the German Big Three lately, yet there is little to show in electric vehicles designed from the ground up so far, other than the now outdated BMW i3, which has been produced in limited numbers, and the VW Group’s Audi E-Tron SUV, which is geared towards the high-end market. Although all the German automakers say they have massive plans for vehicle electrification by 2022 to 2030, it has become very clear that they are up to 5 years behind Tesla when it comes to EV production capacity, technology, and a viable rapid-charge network for long-distance travel. While Tesla already is dominating world battery production for EVs at its Gigafactory in Nevada and the many Chinese automakers are forging ahead rapidly with electric vehicles and with battery production capacity, German automakers don’t have a single battery production facility worthy of mention up and running yet.
VW is the only German automaker that seems to have finally realized the depth and breadth of the coming changes in the global automobile industry. This change of culture at Volkswagen only took place this year and after two CEOs were replaced within a period of just a few years, however, which was highly unusual for the German automobile industry. The result of previous delay, obfuscation, and foot-dragging is that what has hitherto been one of the world’s largest automakers now also finds itself in a bind and is attempting to play rapid catch up to Tesla by relying heavily on co-operation with Chinese battery manufacturers, which creates a new kind of dependence for VW.
If German auto executives and politicians finally do push for massive and rapid innovation, BMW, Mercedes, and VW still stand a chance. If they continue to drag their feet, however, one or more of the German Big Three will be in serious danger of failing or being gobbled up by a Chinese company, like the Swedish automaker Volvo, which was bought by Chinese investors and is now seeing its production being shifted to China.
History tends to be cruel to major companies that attempt to ignore times of rapid technological change. Kodak executives thought that film would last forever and Nokia executives rested on the laurels of being “the world’s largest mobile phone manufacturer”. Kodak has bascially ceased to exist while Nokia is now a minor player in the mobile phone market. If German automakers don’t adjust rapidly immediately, they will also have their “Kodak Moment” and, in this worst case scenario, Germany would be in serious danger of losing a major portion of its manufacturing base and suffering a crippling blow to its economy, which would reverberate through other European countries, dragging many of them down, as well.
Crossposted at Medium
