The automotive industry is experiencing unprecedented changes and Although BMW, Daimler, Audi BMW and Volkswagen have been setting standards in the automotive industry for over a century.
With the increase of startups from China and Silicon Valley, and the rapid development of electric car manufacturers, their hegemonic position is shaking. Welcome to the 20s Report.
Mercedes-Benz plans to lay off more than 15,000 employees to save 1.4 billion euros by 2022. In total, we should expect a loss of 233,000 jobs in the automotive industry in Germany by 2030.
Ferdinand Dudenhoffer at the Automotive Research Center ( CAR ) of the University of Duisburg-Essen says News about subsequent lay-offs in the German automotive industry are beginning to appear more and more often as headlines of Der Spiegel or Die Welt. And are not surprising anymore.
Although, due to climate change, the whole world has been watching development of electric cars for at least a decade now.
the German automakers have come to a similar conclusion only recently. The industry led by Volkswagen believed that it could solve the problem of radical adaptation to new trends in two ways.
Firstly, by creating better, more efficient and more environmentally friendly cars with an improved combustion engine. However, when this plan failed, they bet on fraud. #Dieselgate
Belief in the power of mighty ‘das Auto’ has been questioned so much that the management was forced to see irreversible changes.
Paradoxically, it was Volkswagen’s Dieselgate that pushed German industry in the new direction.
However, before this happened, the German automotive industry had experienced a golden period of growth.
The 2009 recession forced massive layoffs on US car makers. General Motors, Chrysler, or Ford escaped from bankruptcy by cutting their crews to be the bare minimum
In contrast, German magnates: Volkswagen, BMW or Daimler survived the crisis after which they began the employment spree.
In addition, an employee of a car making factory is Germany, euphemistically speaking – is not starving. In recent years, a person employed on the BMW production line, or in Volkswagen’s Porche has received almost 10000 euros of annual bonus. BMW report shows that the company spends over 100000 euros per employee per year, including salary, insurance and social benefits.
Now, however, the industry, experiencing an unprecedented breakthrough, cannot afford such a size and costs. The reason is, of course, tightening the belt resulting from the huge costs of slowly moving away from internal combustion engines. Volkswagen plans to spend whopping 60 billion euros on the development of hybrid, electric and digital technology in the next five year. This is even more difficult as these expenses will not be paid immediately.
For some time, the industry will be required to provide a full range of drive options. The Mercedes board calls in the “peak of complexity.” As a result, VW, BMW or Daimler will continue to generate profits. However, the 10% margin, which has long been the hallmark of German automotive, is coming to an end. Mercedes says a 4% margin is more likely in 2020.
Electric cars did not appear yesterday. Already in 1975 Mercedes presented the first zero-emission van.
A year later Volkswagen introduced the first electric Golf. However, although 40 years have passed, Germans have done little more than that in the meantime.
In 2040, Volkswagen plans to stop the production of all combustion-powered cars. The giant revolution in Wolfsburg began on November 4, 2019 in the Zwickau factory, when serial production of the IS.3 electric model began. A car that in Volkswagen’s eyes is to as iconic as VW Beetle or VW Golf.
Decisions of such kind, like that of Volkswagen’s management, can be noticed in Germany only recently. German companies, until now engaged in manipulating their diesel engines and collecting arguments against autonomous cars, are slowly implementing changes dictated by technology global warming and a change in customer thinking.
In the meantime, in California and China, private and state-owned enterprises developing modern automotive technologies based on an. electric motor grew in strength. Conservative, German manufacturers strongly believed that modern computer and digital technology should only be used as an improvement of the traditional cars they currently manufacture. In other parts of the world, digital technology was seen as a true core of new automotive concepts.
Pioneers of this way of thinking – such as Tesla, see their product as a very efficient computer that is able to perform many activities, including autonomous driving.
The future of the automotive industry is not only electric motors. According to Sajjid Khan, member of management board of CASE ( Connected, Autonomous, Shared, Electric), which is Daimler’s department responsible for innovation, in the future the winners will be the ones who best connect intelligent automotive systems, building autonomous car networks and developing effective car-sharing networks. Thinking about the future, Daimler raised the department budget to over $10 billion in 2019.
As the transportation mindset changes worldwide, players, who are far from classic car manufacturers are also beginning to look into the industry. Alphabet, Google’s parent company, is developing on of the projects planned for “changing the future”, the “Waymo”project. In short, it’s aimed to be the most perfect autonomous driving system in the world.
Waymo white vans are already driving around Google headquarters. For now, the driver operating the vehicle controlled by Waymo was forced to intervene on average every 18,000 km. These are unattainable valued for German giants.
BMW and Mercedes in similar tests of their own autonomous driving systems without human interference were able to travel a maximum of 6 km.
However, a positive for German manufacturers is that Waymo does not plan to build its own vehicle. The company’s business model assumes a comppetely different scenario. John Krafcik, Waymo CEO, claims that the company wants to support the current automotive industry, but also to redirect it.
Specifically, Waymo would like to implement a licenced system that would be located in cars. What does it mean? Krafcik claims that the current car sales model is not working well, neither for the world and for the environment nor for the producers themselves. Most cars stand still most of the time.
Currently, the average American covers 25,000 km a year. While in the Waymo licenced model, the use of vehicles could increase up to 5 times. It would require using fewer cars, but they would be replaced more often.
Such visions put increasing pressure on VW, BMW or Daimler to enter a joint venture with high tech companies such as Waymo, which is currently cooperating with the Fiat Chrysler group. However, the risk of marginalization only to the role of a hardware supplier, due to software dependence, is enormous. That is why German Producers analyzed the acquisition of technology by acquiring shares in Waymo. This was quickly considered improbable, as the company estimated to be worth $ 250 billion at the moment. More than Daimler, Volkswagen and BMW combined.
No one needs to be introduced to Tesla. Initially ridiculed by recognized car manufacturers – Elon Musk from scratch created a company that sets the standards for the cars of the future.
In a factory that was bought back from Toyota, on a area the size of Vatican, in Fremont, California, Musk created ecosystem in which robots create robots.
There, in Shanghai and in Tilburg, Netherlands, Tesla produces over 100,000 electric cars quarterly – more electric cars than VW or Mercedes produce over one year. Although Tesla’s finances fluctuate strongly and the company does not have the production comfort that German hegemons have, the quality of Tesla shocked everyone.
When the Model 3 was released, companies such as VW took the car apart. They have found that their small rival from America is far ahead in many key areas, including more efficient batteries and better network connections.
Musk’s words about wanting Tesla to be a moving computer were not empty. Tesla engineers believe that the car, like a smartphone, can be improved by continuous network updates without having to return the car to the dealer. An example would be shortening the braking distance by uploading a new anti-blocking system algorithm that the owners got through an online update. Some specialists say the Tesla’s computing power is equal to 150 modern computers.
Not to mention the fact that Tesla itself cares about the charging network of its cars. So far, the company has deployed over 14,000 superchargers around the world – quick charging stations for electric cars.
With the largest and fastest growing market in the world, China is also pumping big money into electro mobility. Beijing wants 25% of sold cars to be powered by electricity by 2025. And that’s not a small piece of the pie. 25% of the Chinese car market corresponds to the combined automotive markets of Germany, France and Great Britain.
Furthermore there already 200,000 charging stations for electric cars in Beijing – more than in all European Union countries combined. Electric batteries are supplied by Chinese manufacturers such as BYD and CATL, already one of the largest in the world.
The communist Party partly subsidizes the purchase of electric cars, and their owners do not experience all kinds of restrictions which owners of combustion cars are exposed to.
Astronomical fees for licence plates or driving bans during the week in many cities being some of them. Ultimately, the Chinese plan to ban the sale of combustion cars by 2030.
In addition, Chinese companies are trying to create their own Waymo. The Chinese equivalent of Google – Baidu, together with Alibaba and social media giant Tancent have invested billions in development in the DiDi transport company, as well as start-ups in the electric mobility industry such as NIo and Byton.
However, the Chinese are also trying to go beyond Asia. Geely, the largest car manufacturer in China, plans to conquer foreign markets. The first step was the takeover of the Swedish group Volvo in 2010, which immediately pushed the company forward, as until then it had only produced compacts.
Yet it was just the beginning. In 2013, the Chinese took over the London Taxi Company, the owner of the legendary black cabs. Then they invested 275 million pounds in a factory to build them. In 2018, it was announced that Geely unexpectedly acquired 10% of Daimler shares for EUR 7 billion. As a result, the relationship between the Stuttgart giant and the Chinese investor has become closer.
Daimler and Geely, as a part of a joint venture, announced the construction of a factory in China, where production of fully electrified Smarts will begin in 2022.
The Mercedes daughter company up to this point brought only losses.
Li Shufu, Geely CEO, also claims that the biggest threat to car manufacturers does not come from the automotive industry, but form the sector of highly developed IT companies – Google, Uber or Alibaba. That is why automotive companies should support and not fight each other.
In cooperation with Daimler and Geely, Germans provides technology and an extensive supply chain.
The Chinese have facilitated access to their own internal market. German cars still remain an attractive choice when buying a car with an internal combustion engine in China. They have over 23% market share in this segment.
At the same time, Germans are almost absent in the electric car range. There is no German car on the list of the ten best-selling electric cars in China, and their combined electric market share is 0.4%.
Looking at how strongly electro mobility is pushed in China, this segment will grow the fastest in future.
Imagine a country whose wealth comes directly from the extraction of fossil fuels, but at the same time plans to ban cars that are powered by them within six years.
Norwegians are considered pioneers of electromobility in the world. No other country in the world has more electric cars per citizen. 65% of all new cars sold in Norway are electrics. (timing: 13.39)
For comparison, in Germany it’s only 7%. It is no coincidence that the Oslo political class sees climate change as an opportunity, not a threat. Electric car owners can take advantage of tax breaks, free or cheaper public parking lots and use bus lanes. Charging points or garages are standard.
In Olso alone, where 77% of new registered cars are electric cars, carbon dioxide emissions fell by 9% during the year.
Christina Bu, the general secretary of the Norwegian Electric Vehicle Association, says the Norwegian case is a great example that when prices for electric and combustion cars are leveling out, consumers are more than ready to bet on electric cars.
Daimler, BMW, Volkswagen or Audi still have considerable technological capital that allows them to shape the future of the automotive industry.
However, it seems that in their omnipotence they have missed the moment of key change by a good few years. Increased awareness of climate change has led to an intensification of work on batteries and the efficiency of the electric motor. The electrified engine consists of 100 to 200 parts.
The combustion one is an artwork of even 1400 parts created with the utmost precision – a pearl in the crown of German automotive industry. Mainly the internal combustion engine is a key element of German automotive supply chain, which in Germany employs directly or indirectly 1.7 million people. To make up for lost time, Germany is trying to turn the card over.
The mentioned Volkswagen’s 60 billion euros for the development of electric and hybrid cars is expected to cause 26 million electric cars to leave their factories by 2029. Such drastic changes will definitely have a strong impact on the producers themselves and their sub-contractors, as we are talking about changing the entire supply chains and remodeling the existing ones.
Many smaller companies, under pressure from the giants, will collapse. We must not forget about the role of trade unions, which will also defend their jobs throughout Germany.
At the same time, electric car manufacturers which started from scratch such as Tesla or Chinese BYD can grow without this burden. As if that was not enough, German producers are carefully watched by high tech companies, mainly from the Silicon Valley.
They patiently wait for the moment when they will have no choice but to enter into a cooperation with them in which there is a high probability of marginalization.
Professor Stefan Braztel, from the Center of Automotive Management, believes that German manufacturers have a 50% chance of surviving the battle for the future of the automotive industry. To which he adds that perhaps Germany has become a victim of its own success. The entire automotive industry and political environment felt too comfortable to see the changes and draw the appropriate conclusions.
German economist, prof. Uwe Cantner calls this phenomenon a lock-ip effect. When Germany achieved the status of an innovative leader and trends were reversed, the so-called lock-in effect occurred. This means that the German industry, trapped in the dogmas of the internal combustion engine, was afraid of any changes, because it knew that these would require extremely high conversion expenses.
Karl-Thomas Neumann, former CEO of Opel and Continental, and currently a board member of the American start-up Apex. AI developing autonomous car software, believes that Germany must build a new way of thinking, destroy existing success to achieve new. Many jobs will certainly be lost, but new jobs can be created in their place. One thing is certain – the Germans know how to build a combustion engine or a diesel engine. The question is, does the world still need them?
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