Germany’s Electric Vehicle (EV) dilemma

Why the coming electric vehicle revolution threatens to up-end the entire German economic model

While Germany has long been admired as a leader in the clean energy transformation, notably for its package of energy policies termed the “energiewende”, the reality is that German industries have often born the brunt of these changes as have the tax payers. However, while Germany was able to absorb the hits to Siemens, RWE and Eon resulting from power sector reforms, the challenge posed by Electric Vehicles is altogether more serious. In this article I want to outline why, without a major new strategic plan, the global shift towards electric vehicles may not only up-end the entire German automotive industry, but transform the German economy as a whole.

First thing to note is how fast the Global EV market is growing:

It is hard to underestimate just how flat-footed policymakers have been, as have industry analysts, in predicting the uptake of electric vehicles. In fact, the growth has been so rapid that the International Energy Agency (IEA) revised up its original estimates for Global EV demand, such that The EV30@30 Scenario sees 228 million EVs (excluding two- and three-wheelers), mostly Light duty vehicles, in the global fleet by 2030. To contextualise this figure, the current light duty vehicle market is estimated at around 1.2bn, therefore EV’s will account for roughly 20% of global vehicles within the next 12 years[1].

Image 1

In 2013 the world had less than 500,000 EVs on the roads. By 2017 this number had reached 3 million. To reach the IEA target (which many believe is still conservative), the Global EV market will have to grow by an average of more than 12 million sales per year. But that doesn’t look unrealistic, given that the current EV market is growing by between 40%-60% per annum.

Image 2

But that number doesn’t tell the whole story. Current EV growth is not evenly distributed, rather it is heavily skewed towards a few key economies, with China accounting for 50% of Global EV demand, followed by the USA, then Norway[2].

Image 3

Car companies can see the threat:

Whatever your personal views on Elon Musk, it is hard to argue that Tesla has not been a huge driver in explaining why global automotive companies are increasingly focusing on the EV space. As Forbes noted in its summary on the market in 2018:

“Porsche aims at making 50% of its cars electric by 2023. JLR has announced it will shift entirely towards electric and hybrid vehicles by 2020. General Motors, Toyota and Volvo have all declared a target of 1 million in EV sales by 2025. By 2030, Aston Martin expects that EVs will account for 25% of its sales, with the rest of its line up comprising hybrids. By 2025, BMW has stated it will offer 25 electrified vehicles, of which 12 will be fully electric. The Renault Nissan & Mitsubishi alliance intends to offer 12 new EVs by 2022.[3]

However, while manufacturers see the need to pivot towards EV’s they need domestic infrastructure and demand to drive that growth. This is why Germany has a problem.

The German economy literally begins and ends with cars:

The German economic model is based on exports. Germany remains the World’s largest exporter, running a trade surplus in excess of 6% of GDP, and as of 2016, Cars represented 12.3% of the total exports of Germany, followed by Vehicle Parts, which account for 4.63%[4]. To put this another way, according to the German Trade and Investment (GTAI) association, the automotive industry accounted for 10% of German GDP in 2016[5].

Image 4

Source: OEC, 2018[6]

The German car industry also explains the unique model of the German economy. Due to the highly specialised demands of traditional, internal combust engine (ICE) vehicles, automotive manufacturers have traditionally required an extensive range of specialist suppliers. This has not only helped to create the famous German “Mittlestand”, but also to sustain it. This has been essential to ensuring a distribution of wealth and job opportunities across Germany and as a result, the German automotive industry employed 825,500 people in 2018, generating a turnover of Eur 423bn and sustaining over 940 German businesses from OEM’s to parts suppliers.

But EVs are very different. By some estimates, a regular ICE vehicle has around 2,000 moving parts requiring exactly the specialists that Germany have. By contrast, EVs have 20[7]. This dramatic change is estimated to put at least 75,000 German jobs at risk in the car powertrain sector alone, according to research by the Fraunhofer institute[8] (up to 100k if the switch was faster than modelled). But as if losing 10% of the workforce alone wasn’t a concern, the other issue is that future car models won’t make sense to build in Germany at all.

Car manufacturing is driven by domestic demand:

Germany remains a minnow in the Global EV demand scene. It was only ranked 4th in Europe in 2016, and barely scraped 2nd place by new EV sales in 2017.

Image 5To add insult to injury, there were only 28,000 EVs in Germany as of 2016 (from over 2 million globally) and[9] even worse, the most popular EV in Germany isn’t even one of the multiple German brands, its Kia[10].

Image 6

It is perhaps unsurprising then, that given Germanys considerable lag in entering the EV space, a number of leading German manufacturers have decided that they cannot compete with the lead that competitors have built up in parts of the new automotive supply chain. In a particularly embarrassing blow for German Industry, Bosch, “Germany’s biggest and most important supplier of car components[11]”, ruled in March 2018 that it wouldn’t even try and compete with the Chinese and Korean firms that dominate the manufacturing of batteries for electric vehicles[12].

Image 7So what does this mean?

It is clear that Germany has a formidably capable and resourceful industrial base. But it is also clear that the transformation of the EV market has caught Germany’s leading companies badly off-guard. Despite widespread anticipation that German car companies would easily and rapidly overtake Tesla, the initial feedback from the first wave of “Tesla killers” has been disappointing[13].

Time has not run out on Germany to adapt to the disruptive forces roiling the global automotive sector. But Germany is starting from far-behind and the stakes are high. A failure to adapt could mean more than job losses and faltering economic growth. It could mean an end to the German “Mittlestand” and the economic engine that built the modern Germany. What that means in a time of populist politics should give all German politicians pause for serious concern.

 

References

[1] IEA, 2018, https://webstore.iea.org/registerresult/1?returnurl=%2fdownload%2fdirect%2f1045%3ffilename%3dglobal_ev_outlook_2018.pdf

[2] EV sales, 2018, http://www.ev-volumes.com/

[3] Forbes, 2018, https://www.forbes.com/sites/sarwantsingh/2018/04/03/global-electric-vehicle-market-looks-to-fire-on-all-motors-in-2018/#62970a12927f

[4] OEC, 2018, https://atlas.media.mit.edu/en/profile/country/deu/#Exports

[5] GTAI, 2018, https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=2ahUKEwjQjrrMotLdAhWJTt8KHXqQDgAQFjABegQIBRAC&url=https%3A%2F%2Fwww.gtai.de%2FGTAI%2FContent%2FEN%2FInvest%2F_SharedDocs%2FDownloads%2FGTAI%2FIndustry-overviews%2Findustry-overview-automotive-industry-en.pdf&usg=AOvVaw1MoymuoslNxq8CGePOtmYu

[6] OEC, 2018, https://atlas.media.mit.edu/en/visualize/stacked/hs92/export/deu/all/show/1995.2016/

[7] Cnbc, 2018, https://www.cnbc.com/2016/06/14/electric-vehicles-will-soon-be-cheaper-than-regular-cars-because-maintenance-costs-are-lower-says-tony-seba.html

[8] Autonews, 2018, http://europe.autonews.com/article/20180605/ANE/180609877/ev-push-threatens-75000-german-auto-industry-jobs-study-says

[9] EV sales, 2017, http://www.ev-volumes.com/country/germany/

[10] Cleantechnica, 2018, https://cleantechnica.com/2018/05/19/shocking-electric-car-takes-1-in-germanys-april-2018-electric-car-sales-ranking/

[11] The Verge, 2018, https://www.theverge.com/2018/8/15/17685634/germany-car-industry-battery-cells

[12] GTM, 2018, https://www.greentechmedia.com/articles/read/bosch-abandons-ev-battery-manufacturing

[13] FT, 2018, https://www.ft.com/content/3f5ded00-bd7d-11e8-8274-55b72926558f

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