Germany

Justin Cox, Director, Global Production

31 January 2020

German car production: Europe’s motor misfires

2019 turned out to be quite a banner year for German car sales, with the market growing by an impressive 5% to reach its highest level since 2009. Not that this generated much excitement amongst the country’s car producers. In stark contrast to domestic sales, Germany’s vehicle output fell by 9% in 2019, closing the year 1 million units below the 2016 result. While there are indications that 2020’s incoming new emissions regulations may have prompted some destocking of high-CO2-emitting models last year, the key reasons for Germany’s spluttering output probably lie elsewhere.

“A combination of ongoing localisation policies (i.e. building where you sell) and legacy model sourcing have arguably left German manufacturers not producing enough of the right model types.”

A country’s vehicle output is highly cyclical, with much relying on the competitiveness of domestically built models, manufacturing sourcing decisions and the performance of key vehicle markets. A combination of ongoing localisation policies (i.e. building where you sell) and legacy model sourcing have arguably left German manufacturers not producing enough of the right model types. For example, between 2016 and 2019, pan-European sales of SUVs more than doubled, whereas German production of the bodystyle slipped by 7%.

Some OEMs fared worse than others, most notably Ford and Opel. Both automakers’ German facilities have been particularly affected by producing mainstream non-SUV models, which have battled against evolving market tastes. This, combined with a high exposure to the contracting UK market, has seen Ford and Opel account for a combined 30% of the annual drop in German production since 2016.

VW Group’s German volume has not escaped unscathed either. Localisation and sourcing decisions have left a rump of conventional models behind, with the Golf, Touran, Sportsvan, Passat and Audi sedans seeing their collective output fall back by over 25% since 2016. Of course, ‘dieselgate’ and a tough transition to WLTP protocols have played their part in hindering the group’s competitiveness.

Layered on top of this has been the recent weakness of key global export markets. LMC Automotive’s European Trade Flow Service identifies the UK, US, China and Italy as Germany’s biggest export destinations, accounting for 18%, 12%, 9% and 6%, respectively, of the country’s total exports in 2019. In aggregate, these markets have contracted by almost 7% since 2016. There is little doubt that this will have compounded the headwinds undermining German production of late.

“the growing scale of domestic investment in electrification and connectivity may ultimately secure the competitiveness and long-term growth of German production.”

However, there are signs that this lull in output may turn out to be a blip and that Germany’s auto industry is merely in a transition phase. While the volume-sapping localisation strategy could prove to be commercially shrewd in this increasingly protectionist trading environment, the growing scale of domestic investment in electrification and connectivity may ultimately secure the competitiveness and long-term growth of German production. Indeed, Tesla’s recently confirmed plan to build a new 500,000-capacity plant just outside Berlin is a reminder that localisation can work both ways.

For 2020, we expect German production to grow by 4%, supported by the ramp-up of new ‘cleaner’ models and some repatriated volume from Mexico. Thereafter, domestic output is set to increase annually through our forecast horizon. But while this appears to be good news for German vehicle manufacturing, this recovery and the required industrial transition are likely to be both costly and operationally painful.