The average passenger car with an internal combustion engine has approximately 30,000 component parts. Mass producing such vehicles requires years of hard-earned experience and extremely costly production plants. Barriers to entry into this industry are accordingly high.
More so than their foreign counterparts, German carmakers have long focused on process innovation, i.e., optimizing production processes, leaving it to component manufacturers to provide product innovation. Furthermore, they are the last bastion of the trade unions, ossified bureaucracies paying exceedingly high wages. Production costs are so high that no-frills models often must be sold near cost price, in the hope that sales of spare parts may later generate some profit. The industry’s business model still largely relies upon the intercontinental export of premium motor vehicles.
The average fully-electric battery electric vehicle (BEV) has around 3,000 component parts and is easy to make, not least because its core component, the battery, is derived from mobile phone batteries. Hence barriers to entry are low. The quality of a BEV is almost entirely determined by the quality of the battery and that of the vehicle’s software. Its production cost greatly depends upon the cost of the battery.
The requirement for any vehicles with internal combustion engines sold in the EU from 2035 onwards exclusively to run on carbon-neutral e-fuels effectively amounts to a sales ban, making BEVs mandatory. Other legislations will follow suit, or have already done so. That does not bode well for Germany’s carmakers, who are ill-suited to managing disruptive change. Likewise, Germany is not competitive as a manufacturing country for BEVs. High wages, high energy costs, decaying infrastructure and a staggering regulatory burden constitute a toxic mix. Perhaps most importantly, software development is not one of Germany’s strengths. For instance, Volkswagen’s IT subsidiary Cariad has had 4,000 people developing “the EV operating system of the future” since 2020, with nothing to show for it so far. By contrast, Tesla currently employs just 200 software engineers.
The ongoing global transition towards BEVs will further shift the balance of power between China and Germany in regard to car production. German carmakers’ first forays into the Chinese market in the 1980s were a bonanza, simply shipping off their obsolete production plants to China and continuing to monetize them. Over the years, they relocated more and more production capacity to China, including the hitherto jealously-guarded premium segment. Thus, they became dependent upon China, to a far greater extent than their competitors. At its peak in 2020, the Chinese market accounted for just under 40% of all cars sold by German manufacturers. This figure dropped to 34.3% in 2023.
At the same time, trade flows in the opposite direction increased sharply: China now has a 25% share of the EU market for BEVs, up from only 3% in 2020. That figure includes not only cars produced by the eight Chinese manufacturers currently serving the EU, but also BEVs made in China by German brands.
Said trend is set to continue, because China is highly competitive in this domain. Chinese companies account for 60% of the EV battery market, in which lithium-ion batteries are the current industry standard. China controls one-third of the world’s lithium supply and has a market share of 67% in refining it. Furthermore, it boasts innumerable IT experts and conducts more research into next-generation battery technologies than any other nation. Demanding domestic consumers ensure that product quality is up to par. There is predatory competition between the 100+ Chinese BEV makers, keeping prices down. Last but not least, German car component manufacturers, each one a hidden champion in its own market niche and globally competitive, are already supplying the Chinese.
At the time of writing, the EU Commission threatens to impose punitive tariffs on Chinese BEV makers. Such tariffs would hurt German carmakers as well, because their subsidiaries in China receive the same state subsidies as their purely Chinese-owned rivals.
For any longer-term predictions, it is not enough to analyse the interplay of market forces and politics, one must also consider technology. Fully autonomous driving is a few years away at most. More than a handy extra feature, it renders private car ownership obsolete. Why would you wish to own a BEV, regularly recharge it, find parking spaces for it and so forth, when you could have one instantly pick you up and drive you wherever you wish to go? Before long, therefore, major carmakers may become mobility providers, relying on a nexus of 5G, IoT and AI technologies to make a fraction of the extant vehicle fleet do more than is currently possible. China’s megacities would be the ideal environment for trialling and perfecting this new mobility paradigm.
Dr. Peter N. Backé
CEO
Kairos Investment
Germany
