November 26th, 2020 by Alex Voigt
I have been known as a strong critic of the German auto industry for many years, but the reality is there is always light and shadows. A “near-death situation,” like Tesla has experienced more than once, may be the start of a glorious success story, and a glorious success might be the start of the end. We have seen many ups and downs in history — over recent decades and in the last century — and in the auto world, the German automotive industry always emerged as a winner in the end.
In an article two years ago, in 2018, when I expressed my concern about the most important industry in the country I was born in, calling Tesla a true threat, people laughed at me and could not imagine that my prediction would ever become reality. Over the last two years, they stopped laughing and many started thinking instead. In retrospect, most of my assumptions have even proven to be conservative, and that should give us an indication about the future
If one thing is certain, it is that only the fittest will survive. What’s true in nature is true for the auto industry in the past and is true in the time of the massive technology transformation today. Having a choice changes everything. What has for the last several years been a choice to buy an American electric vehicle, something most people in Europe dislike even as a thought experiment, will soon be a Made in Germany EV that has the best specifications for the money you can buy today.
A new era will start in 2021 with the launch of the largest automotive factory in Germany, with a 2 million vehicle output, and the largest battery factory worldwide, with up to 250 GWh production capacity. 40,000 employees will work in Berlin in 3 shifts, and with the help of new, innovative, and groundbreaking technology, they will produce and deliver 100% battery electric vehicles (BEVs) that will soon drive 700 or 800 km on a single charge, and later 1,000 km.
That new shiny factory does not belong to one of the 5 famous German automakers, but to the US technology company Tesla. BMW, Daimler, Porsche, Audi, and VW will soon not be the largest automakers in Germany. Let that sink in.
In this article, I will give a short overview of the status and future of the 5 most important and proud German automakers, a brief look at their strategy moving forward. Future promises made will not be taken for granted, because past promises evidently fell short with all of them. As of today, we must assume that the same will happen in the future.
Judge for yourself who has the best chance to be a winner, to survive and succeed, and who may disappear, merge, or be acquired. The only thing that seems to be certain is that the future will look very different from the present.
The Munich automaker has announced a strategy to produce all available drivetrains, serving customers everything they could possibly ask for. This includes internal combustion engine (ICE), plugin hybrid (PHEV), full battery electric (BEV), and hydrogen fuel cell (FC) powertrains. The mantra of not deciding on a certain drivetrain because it is not clear which one will succeed is widely accepted by German politicians and citizens. The approach of offering customers a variety of solutions, and thus making sure there is strong demand for BMW vehicles, sounds meaningful.
With a size of about two million vehicles per year, BMW is limited in its ability to invest in all technologies like a pure player can do. It splits investments, which leaves less room for innovation, and it creates additional costs too. To address increasing production costs, BMW installed a flexible production platform that enables the company to manufacture all drivetrain models on one production line. The approach of allowing high asset utilization with a flexible production structure sounds compelling, but it has the disadvantage that technology compromises need to be made to enable it. BMW BEVs will not have what a pure BEV manufacturer can offer, and costs will be higher.
To become an innovative technology leader for all of these drivetrains is not possible if you have to split R&D investment and compromise on design to reduce costs for a flexible, unified production platform. Not to be a technology leader means you can’t achieve premium prices and margins the BMW organization is used to achieving.
The 7 year old BMW i3 was at its time an innovative BEV, but the BMW Board of Directors stopped the company from expanding further because the margins were lower than for the ICE cars they were accustomed to producing, and profits and margins determine board member bonuses. The i3 needed to improve, and follow-up models have been stalled. The expensive carbon chassis was never intended for truly large volume. As a side effect, frustrated innovative, creative, and smart engineers left BMW, partly founding their own BEV startups in China or the USA.
With just a decade of serious development in new drivetrains, it’s fair to expect that the future will bring dramatic improvements that pure players will be able to materialize and benefit from the most. At that stage, a technology shift from BMW to become a pure BEV manufacturer may be costly, and with decreasing demand for the older and outpaced drivetrains, difficult to finance.
BMW is exposing itself with its strategy to the competition and may still do well in the transition phase, but it could pay a high price on the future for profits they earn today. Short-term profit taking may satisfy shareholders right now, but it is not a sustainable strategy for the future.
Daimler is located in Stuttgart but has a very similar strategy to BMW — it is not deciding on a drivetrain technology yet, instead pursuing a flexible strategy developing and selling all available drivetrains depending on demand. Hydrogen investments have been halted lately, but ICE investments are announced even for 2024, with new engines coming out of the Geely partnership and shareholder in China.
Out of the 170,000 employees, 30,000 are announced to be cut in the coming years, and the high debt rate that Daimler shares with BMW and VW forced the organization to close plants in its trucking unit and cut cost in administration too. The strategy to focus on luxurious vehicles — be they ICE, hybrid, or BEV — aims to improve profits and cash flow, compromising on total revenue and scale effects.
Its shared mobility service provider has been sold, and a partnership announced just last year to work with BMW to develop autonomous driving vehicles was canceled. Investments in autonomous vehicles are stopping despite a huge previous announcement with Bosch. Instead, Daimler aims to develop an in-house operating system for its vehicles via support from Nvidia. It is a huge new technology effort in terms of costs and software that all German automakers are trying to accomplish, despite lacking experience and required software know-how.
The EQC, the only pure BEV today, is a clear miss and has disappointed on all levels. Delivery numbers are the lowest of all German BEVs, and although customers may enjoy the design and interior of a true Mercedes-Benz, the model is not making a difference, a clear fail from an engineering and commercial perspective.
Mercedes-Benz CEO Ola Källenius a few weeks ago announced that Daimler will be a much smaller company in 5 years, which is in line with my previous prediction that all major German automakers will shrink and focus on a profitable niche unless they can design and produce enough competitive BEVs to grow again.
Daimler is right now, given its debt and liabilities, and even more importantly its poor outlook with regards to attractive new BEV models and compelling battery technology, in a high risk of losing control of the organization. Mercedes might be silently controlled by shareholders and partners like Geely in the future. Geely owns about 10% today and might increase that share soon.
Although Porsche belongs to Volkswagen Group, it’s an independent unit that can decide on its destiny. Major strategic decisions are made independently, and Volkswagen Group and Porsche top managers even disagree on certain aspects of the core business. With a strategy that continues to push and develop ICE aand PHEV, and even intends to invest in eFuels, the brand is focusing on its premium segment.
Like the other German OEMs, Porsche is considered as a high-value brand itself that triggers a certain volume of demand just because of its brand value or shiny name. The mantra of the brand has without a doubt guaranteed important demand levers, but the tendency to overestimate the brand value in a world in which BEVs gain more attraction, acceptance, and market share every year is risky for required growth — which is urgently needed to compensate for lower ICE sales. As of now, all German automakers cannibalize their ICE business with every BEV they sell.
The Taycan, as Porsche’s first flagship BEV, has successfully proven the Porsche DNA can be implemented in a BEV. But the model is expensive even for a Porsche and did not live up to all of its technical promises. However, as a first-ever BEV, the engineering team did not fully disappoint — even though many compromises have been made with efficiency, range, and costs. The car won’t be a future cash cow.
Since Porsche is a popular brand for a buyer segment that is willing to pay more than an average consumer for a car, the ability to invest in the future considering the cost-effective partnership with Volkswagen and Audi is a valuable asset. Lower costs are also achieved with the PPE platform that, as a premium standard, is a strategy for high-performance BEVs for Audi as well, while Volkswagen is focused on the medium-and lower-level MEB solution.
Although Porsche has come under pressure in certain important segments already, its customers are loyal. I expect them to shrink in volume, while revenue profits may remain healthy. That will have a stabilizing effect on the company and keep it in its strategy independent from Volkswagen.
Porsche has probably developed the best German BEV yet, and assuming it continues to focus and invest in BEVs, Porsche may establish a new niche again.
The Ingolstadt-headquartered premium automaker is like BMW in a customer segment that attracts Tesla buyers too. Again, ICE, PHEV, and BEVs are on their roadmap, and with that their strategy is slightly closer to Volkswagen than to Porsche.
Audi’s first flagship BEV, the e-tron, is built on an ICE platform and has not lived up to marketing promises. With one of the lowest efficiencies and range levels, Audi did its best to attract buyers through the premium interior and design to attract customers and demand. While the e-tron has been heavily criticized, it gained more traction lately in certain markets with high discounts and cheap offers.
Like the Taycan, the e-tron is a first-of-its-kind in its segment, and despite all its shortcomings, is is liked and loved by a certain consumer segment.
Many e-tron variations are being pushed on the market right now with an accepted financial loss to capture a market share and address the new technology movement. While the variations get slightly better in certain aspects of their performance, the challenges and shortcomings have been built on an ICE platform remain. To address this, Audi has started the Artemis project, internally also called project T for Tesla. Its goal is to develop a world-class and leading BEV in 2024. To accomplish that, Audi partnered with Porsche and uses software development capacity from Volkswagen.
Audi is under pressure to lose further volume and revenue, but has with the etron a first offering on the market that will help them to bridge the next years. The plan to become a technology leader again with the Artemis project in 4 years, which is questionable, simply because the pace of innovation at Tesla is higher than at Audi.
Audi may shrink too, but it has the new CEO Duesmann book, an innovative and open-minded manager on top that made positive decisions already to help the organization moving into the future. The risk level remains high, but as an important part of the Volkswagen Group, I expect them to benefit from the cost reduction they can materialize through VW, a benefit BMW and Daimler do not have.
Volkswagen is located in Wolfsburg and is part of the multi-brand Volkswagen Group while also being a core brand. Having been the largest automaker in 2019, with 11 million units sold, VW has a lot to lose with the ongoing transformation into BEVs. VW is the only German automaker that has defined a clear full BEV strategy and declared that hydrogen, e-fuels, and even hybrids can’t compete. To transform the massive organization with all its assets from ICE into BEV is an epic endeavor, and the outcome is unclear.
The strategy to build a platform called MEB that offers the capacity to build BEVs on a share production line for external automakers too is unique and intended to reduce costs. Also, VW has in a massive way invested in battery technology and is trying to structure and succeed with a software organization of 10,000 employees to build a digitalized car. VW is also trying to use its buying power to reduce costs. Its first plants are now BEV only, and many more are planned.
While the marketing and PR organization did a good job creating the impression VW is a major BEV player, the truth is that VW has equipped former ICE vehicles (eGolf, eUP!) with batteries and sold them. Their specifications have been far below standards, but still good enough for many customers to buy them. The first real Volkswagen BEV, the ID.3 has been sold for just two months now, and compared with the massive PR effort, has so far only seen low volumes.
Considering that the BEV sales numbers are outpacing BEV sales from international ICE competitors who started earlier is a success, but those ICE companies don’t deliver compelling BEVs on a large scale either. To be stronger than a weak manufacturer is not a sign of success.
Like is often the case in multi-unit organizations, adding all independent brands together (with Audi and Porsche) creates the impression of a large BEV market share from VW, but in reality, they are as of today very small compared to market-leading Tesla and other international brands.
The US manufacturer is the blueprint VW is trying to copy, but the legacy ICE business remains a burden financially and is not easy to transform into the electric business, where software is a key value of the future. The Volkswagen Group CEO, Herbert Diess, rightfully admires what his peer Elon Musk has achieved at Tesla in just a decade, and uses him as an example to motivate a highly hierarchical, massive, and slow organization. In an interview in early November, he confirmed that Tesla’s market capitalization is deserved, which gives us deep insights into where he sees future value creation in the automotive industry. Volume in units is, in his opinion, not any longer a measure for size or worth.
Financially, VW has the highest debt of all automakers globally, and adding unfunded pension obligations and other liabilities makes Volkswagen Group vulnerable and weak against external influences, challenges, and investors. With a shareholder structure that includes the Piech and Porsche families as well as the federal state of Lower-Saxony in Germany, it’s unlikely that the German government will let a company that is of systemic importance go down. Volkswagen is too big to fail. Cash flow challenges will likely be mitigated — already today there are indirect incentives, but in the future there may be even be more direct investments.
Although Volkswagen is in a weak position right now, its strategy to go fully into the BEV business is the right approach to overcome the bottleneck, and it may emerge with luck as a valid #2 BEV company globally. That is what I believe CEO Herbert Diess is aiming for, because it’s simply not realistic to become #1.
The transformation will likely require VW to shrink in terms of production units and revenue — as has been announced from Daimler and is anticipated from Porsche, Audi, and BMW — but if VW can design and manufacture compelling BEVs for low cost, for the masses, it should have the opportunity to fall not too far behind.
The 5 famous German automakers are all in a weak position today, and we have not seen anything that gives confidence they will succeed in the future. Most of their efforts are in front of them, not behind, but the most worrisome aspect is their short-term profit and shareholder-focused decisions that hinders all of them from positioning themselves for a successful future.
The real enemy of the German automakers is not Tesla, but their inability and unwillingness to change.
My concerns expressed two years ago not only remain, but have grown.
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