Economics Update April 2021 - German industry: Current situation belies structural weaknesses

Industry is currently the most important stabilizing factor in Germany's economic development: after the sharp drop in production of almost 30 percent a year ago, a rapid recovery was achieved; in January, production was still just under 3 percent below the level immediately before the outbreak of the pandemic. The upward trend was recently slowed down primarily by a lack of memory chips for automobile production. German industry is benefiting above all from strong demand from its two most important non-European sales markets: Exports to China are now almost 10 percent higher than before the outbreak of the pandemic, those to the USA only just below.

German automotive industry under pressure

However, if one takes a general look at the situation of the industry, the picture clouds over considerably: A year ago, the industry was already in recession. In the two years before the outbreak of the pandemic, production had fallen by around 7.5 percent. The automotive industry played a particularly large role in this, with production falling by more than 20 percent in these two years. Regardless of the Corona pandemic, the key industry faces four strategic challenges:

1. Germany's share of total production by German automakers has been falling since 2005, from well over 50 percent at the time to less than 30 percent currently (2020). On the one hand, this reflects stagnating domestic demand and a declining market share of German manufacturers in domestic passenger car sales, but it also suggests that Germany is becoming less attractive as a production location. The corporate tax regime, which has remained virtually unchanged for many years, used-up advantages in the development of unit labour costs, high energy prices and education spending that is average at best by international standards are some of the reasons for this.
2. China is increasingly turning from a buyer of German products into a competitive producer of innovative products. The new, electrically powered BMW IX3, for example, is being developed and built in China for the global market. To the extent that China is successful with its strategy of becoming a leader in selected areas itself, the sales potential of German-made products is declining both in China and in global third markets.
3. With the shift to electric drive and the move towards semi-autonomous driving, previous strengths of the German automotive industry, which lay in perfecting internal combustion engines, are being devalued. The companies are facing new types of competitors in the form of Tesla, but also Google and Apple, and will have to reinvent themselves to some extent in order to survive in this competition.
4. Global demand will grow less dynamically in the coming years than in the first 20 years of the century. In the industrialized countries, many markets are saturated, climate protection is likely to make individual mobility considerably more expensive, and there will also be less impetus from the emerging markets.

These challenges are particularly pronounced in the automotive industry, but they also affect other areas of German industry to varying degrees. The fact that the industry will remain a pillar of German economic development in the long term is therefore not a foregone conclusion, but requires considerable efforts on the part of the companies themselves as well as in shaping the framework conditions - with an open outcome.