"We see a deindustrialization of the German car industry"

"Germany's auto industry was a leader in internal combustion engines. But with the electric drive, the leadership role is no longer expected.

In Germany, the car industry is threatened with contraction in the next 15 years, warns the Munich-based Ifo Institute. "We are currently seeing a deindustrialization of the auto industry, which is being brought about by the transition to e-mobility," says a study published on Friday.

The Ifo experts Oliver Falck, Lisandra Flach and Christian Pfaffl point out that there is a lot at stake: In 2021, the industry employed around 900,000 people and, like mechanical engineering, achieved added value of 109 billion euros according to the data from 2018.

Almost half of the European added value in motor vehicle construction is accounted for by Germany, far ahead of France (9 percent) and Great Britain (8.4 percent). At the same time, the vehicle industry in particular is particularly closely intertwined with long supply chains. 60 percent of the production value of the German automotive industry comes from suppliers. 27 percent of the added value of German car production is abroad, mainly in Europe.

"Although the German automotive industry has enjoyed a comparative competitive advantage in the manufacture of combustion engines in recent years, this advantage is less evident when it comes to electric cars," says the study by the Ifo Institute. New companies such as Tesla and stronger competition from other continents are entering the market. So far, China has had “hardly any core competence in automobile production”, but from there new manufacturers of electric cars have been pushing onto the market with great success.

German car manufacturers have invested heavily in China in the past in order to produce for the local market. In the future, the number of electric cars produced in China for the European market – also from factories of German companies such as BMW – is likely to continue to increase. "Thus, China's competence in electric cars is also increasing due to foreign direct investments, which means that China could further expand its market position in this segment."

Problems with digitization

Another challenge for which German car and commercial vehicle groups are not exceptionally well positioned is digitization.

The actual manufacture of cars is becoming less important because software is generating an increasing share of the added value.

According to the Ifo experts, this will result in new opportunities for technology groups in the car market. When it comes to digital issues, they often have a competitive edge over car companies. The car manufacturers are trying to catch up, also with cooperations, but it is still unclear whether the added value will flow to the technology groups in the long term.

For the time being, this market is still dominated by American technology groups, but China is likely to play a role there in the future. The government has set the strategic goal that Chinese demand for consumer electronics in cars and driver assistance systems can be covered exclusively on the domestic market by 2030.

The Ifo Institute reports that in 2019, 447,000 employees in Germany depended directly on combustion technology. The conversion of drive technology will affect more employees than the number of employees who will retire at retirement age. Since 2013, the auto industry has already lost 9 percent of employees in manufacturing occupations. 

On the other hand, the demand for employees with computer science and scientific training will grow.”