To understand the current situation of the German automobile sector, you should turn to this year’s IAA, the leading German automotive fair. The decade-old standard-bearer of the industry has lost a lot of its glamour. Attendance is down, there are fewer exhibitors and, on the opening day, the head of the industry association, Bernhard Mattes, declared his resignation – with no successor in sight. Internal conflicts are joined by sinking sales figures in China, the menace of a hard Brexit and a possible trade war with the United States.
Underlying the present uncertainty are fundamental changes to society and technology, with society becoming increasingly connected, the environment a significant political topic, and the rise of autonomous cars. Currently, no one can confidently say who will win this race for the future and which car makers and suppliers will survive. A fair few experts see serious competition from Asia and the United States up ahead. To put it bluntly: the mood in the industry is bad and the greatest source of adversity is its own government.
Germany’s key industry does not go along with the current “Zeitgeist”, which sees the car – once the symbol for individual mobility, freedom and prosperity – as the ultimate bogeyman. But this populist green thinking ignores technical and economic reality. Renunciation, bans and regulations won’t make Germany a shining beacon for for achieving climate goals but rather an example of how an economic and technological giant can swiftly and decisively deconstruct itself.
So rather than go down this route, Germany should see that the dramatic developments starting to happen in the sector – new propulsion technology, digital road networks, autonomous cars – offer great opportunities for those clever enough to exploit them. If they can’t, Europe and Germany risk falling far behind the United States and China. The resulting competitive disadvantage would be hard to reverse and lead to a substantial loss in wealth.
Driving for a planned automotive economy
The German government does its best to embrace the fashionable green “Zeitgeist”. Diesel cars have been slapped with bans and locked out of inner cities, while aggressive EU CO2 targets will push the widely used combustion engine-powered cars from the roads. Given the plans of the German government to increase the price of fuel, cars driving on petrol and diesel will be most affected. In return, electric cars are being showered with subsidies, both actively with purchase premiums and a range of tax benefits, as well as passively, via money for the required infrastructure.
But such a green planned economy does not reflect the political-economic identity of Germany. The country is a “social market economy”. The basic principle of this is that instead of state control or laissez-faire, the state creates a framework for the economy and is cautious about direct actions. But since the formation of the grand coalition in 2013, made up of the Social and the Christian Democrats in parliament, more and more regulation has gripped the country. The state grows more interventionist rather than providing the space for innovation. Why? Because of an all-encompassing precautionary mentality.
The best example for this is the designation of battery-powered cars. Despite well-known technical problems (and more of that later) politics has apparently made its decision. A big chunk of the German government and the EU-institutions have set their minds upon ending the combustion engine and on a glorious electric future. They plan to do this by using a combination of both carrot and stick, offering incentives in the form of subsidies and setting restrictions such as the EU CO2-fleet target.
This state-made corset gets tighter with every government move. Already it has created an uneven playing field that artificially advantages of e-mobility. At the same time, the German government officially touts its support for free choice and different propulsion technologies. In reality the lion’s share of monetary and ideational support goes to e-mobility. With this policy, Germany shuts itself out from other technological and economic opportunities. Other countries are much less fixated only on e-mobility. Japan for example, like many experts, sees e-mobility only as a transitional solution and favours fuel cells.
It’s clear that battery-powered cars have many advantages. But it is equally clear that e-cars are not perfect and conventional cars not dysfunctional. It’s not for nothing that e-mobility has been pursued since the invention of cars, yet has not seen a breakthrough, while combustion engines have quite literally moved the world.
E-cars are at their best in urban spaces, where their relative lack of emissions and noise, and direct translation of torque, make them a real addition to existing transport options. Yet they also have weaknesses compared to conventional cars: they are short range, have a long charging time and are hampered by the lack of road and technical infrastructure required to make them viable.
Hybrid cars (those with both conventional and e-propulsion) can remedy some of these problems. The solution to the underlying problem though lies not in picking champions but in enabling market forces and innovation, i. e. if they actually embraced being open to technological development than just talked about it. Proponents of green planning may not agree but, even with a sufficient charging infrastructure, conventional cars will still be necessary for years to come. From existing vehicle fleets to heavy goods traffic, combustion engines are often without viable alternatives. Add to this advances with fuel cells or synthetic CO2-neutral fuels and it becomes impossible to say which technology will move us in the future.
What does the state do?
The German government has been busily working on the breakthrough of e-mobility, even against the forces of supply and demand. There’s up to a €4,000 purchase premium for e-cars, introduced in mid-2016 the programme has just been prolonged because there’s still money left over. This so called “environmental bonus” is to be further increased by a reduction in company car tax for e-cars. There are subsidies worth millions being spent on e-busses to charging points. Even the famed experts of German bureaucracy have lost a sense of fiscal oversight in this jungle of financial aid.
Add to this ideational support from the government, when big national targets are announced for the number of cars or charging points to be built in a set year. The proclamations are meant to fill the citizens with belief in the eventual success of the planned green economy. It doesn’t matter if the targets are actually met. The original goal of one million e-cars has been rescheduled from 2020 to 2022, and the government commission “National Platform Future of Mobility” (NPM) has even set a target range of 1.7 to 3.1 Million e-cars by 2025, and the double that again by 2030.
Given the actual market penetration of e-cars, these goals as well as calls for a ban of conventional cars by 2030 are simply illusionary. Bans and regulations are just as harmful to a functioning market as lavish subsidies. The implementation of the EU air quality directive 2008/50/EC in Germany has resulted in a ban for diesel cars, due to the tendency of the assigned environmental offices to measure air quality straight from the exhaust. Even more serious are the two EU CO2-fleet targets for 2021 and 2030. From 2021 onwards, the average CO2 discharge of a car is to be no more than 95 grams per Kilometre. From 2030 this value is to be lowered by an additional 37.5%. To put these goals into perspective, in 2017 Volkswagen had an average of 122 grams per Kilometre.
These values were created in negotiations between EU member states and the EU Parliament. Questions of technical viability were subordinated to political objectives. As a result, it is presumably impossible to achieve these goals with improvements to combustion engines alone. As the calculation of the fleet targets classify only e-cars as emission-free while alternatives such as synthetic fuels do not fall into the same favourable category, car makers have no way around electrification. For some this might be the solution, but it threatens to move Germany to a planned economy under the veil of a Green agenda.
The price of green ideology
The price of these requirements will become apparent over the next years. Price increases for transport, loss of jobs and of wealth. Those underestimating the importance of the automobile sector should read up on the following numbers: €426 billion in sales, over 800,000 directly employed in around 1000 companies and with an average hourly wage of €42. The main loser of this development will therefore be the employed.
E-cars are more expensive than comparable conventional cars. As the margins are especially narrow with cheap small cars, those making them will have an especially hard time. Despite unbroken demand for small conventional cars, models such as the VW up, Ford Ka, Smart or Opel Adam will be phased out and only partly be replaced by more expensive e-variants. Big, heavy cars will be extensively electrified, as the margins make them more attractive for producers and customers are more willing to pay extra.
When it is not supply and demand but politics that decide which cars are being build, we are already in a planned green economy. Traffic won’t get more ecological because small cars are being phased out and upper-range cars are being electrified only to appease some imaginary balance sheet. One particularly apposite example of how car makers cook the books comes from Fiat Chrysler, when they bought the Tesla balance sheet to balance their own petrol-heavy fleet.
The result for the consumer of moving to a green planned economy will be that cars become the exceptionally expensive. Such an economic model will mean that owning and driving a car becomes a luxury and in the mid-term people with small incomes will hardly be able to afford it. For industry too, driving the planned automotive economy towards battery-powered cars will be a risky bet, especially in Germany. Apart from a much lower level of vertical integration, which nullifies the current German advantage in production, China’s control over the necessary resources such as cobalt and rare earths will hinder any German dominance akin to the status quo. Even the big supplier Bosch has announced its retreat from e-mobility and their competitor Continental has called battery production “entrepreneurial negligence”.
With such odds even the subsidies from the government seem to be unable to entice sustained investments in a country with one of the highest energy prices. The deteriorating economic situation is already visible, with the bankruptcy of two supplier firms and cut-backs in personnel and investments by many companies both big and small. According to the ifo-institute over 600,000 jobs are directly linked to combustion engines in Germany. That is about a tenth of all industrial jobs in the country. An outright ban of these engines would damage the economy by the tune of around €48 billion.
The age of a planned green economy begins when the state takes over from supply and demand. Instead of being open to technological development and a mix of different propulsion technologies, battery-powered cars are suddenly – according to the state – the only future for mobility. If Germany wants to benefit from the advantages of e-mobility while avoiding the costs a planned economy, now is the last chance to turn things around.
CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.