What we're seeing here is the result of 10 years of somehow having missed technological progress and innovations. That is clearly something that we can see because it goes beyond the automotive industry, it goes beyond one single company. This changing role of China no longer being just a very welcome export destination but actually being a system rival.
It's an auto industry war room with implications for the whole German economy. The industry is one of the top exporters for the German economy and responsible for 800,000 jobs and worth a whopping 5% of the German economy. To figure out why the government is now getting involved in calling this all-hands-on-deck meeting, we're joined by Carsten Bresky, Chief Economist for Germany at ING. Carsten, thanks for joining us, but tell us how...
bad is the current situation for the German auto industry. Well, the German auto industry is almost in a comparable bad shape as the entire economy. It is not all of a sudden falling off a cliff. But I think what we're seeing here is the result of 10 years of somehow having missed technological progress and innovations, namely the electric mobility, probably also a portion of arrogance, thinking that that things will be fine and that the German automotive industry is simply strong enough to shield off competition and to shield off new technologies.
Then we had clearly higher energy prices. We had supply chain disruptions coming from the pandemic and the war in Ukraine. And on top of that, we have enormously strong competition out of China. And then all these things taken together have made that the German automotive industry has to be lost market chest has seen its production costs increasing and at the same time facing more real serious competition and this is why we're in this current state this is really not the end of the german automotive industry but it's clearly a crucial moment in which we see a formally flourishing industry being in severe problems you mention all these factors at play here and some problems.
I'm wondering, how reliant is Germany on the auto industry? You mentioned the numbers. Give me just one more number.
So we know 4% to 5% of German GDP comes from the automotive industry. But this is not where it stops. If you add to that suppliers, suppliers of suppliers, if you add to that entire infrastructures, Being depending on the automotive industry, just think of where some of these factories are, very often in the middle of nowhere.
So there are really entire cities, villages with their infrastructure being dependent on the automotive industry. So you can easily add all these things up and you get to something like 7, 8, 9 percent of the German economy. So this is not only a symbolic, extremely important sector or industry for the entire economy, it is really just looking at the numbers.
extremely important. And just one final number. Also, when we look at, for example, R&D expenditures of the entire German economy, normally one third of Germany's entire R&D expenditures comes from the automotive industry.
So the automotive industry has always been a source of innovation, a driver of productivity. And if such an important industry is now in problems, the entire German economy is feeling it. You know, we've mentioned some numbers and some of these are really startling.
Profits are down for the first half of the year for some of these legacy car makers. VW saw a 14% loss, BMW down nearly 15%, Mercedes-Benz down 16%. How did this happen? Well, you have longer-term and short-term factors kind of explaining these very bad numbers.
I think the longer-term explanation is one in which most of these German car makers somehow lost track of innovation, maybe also lost track of what the final consumer actually is demanding. We see that in many markets, consumers are no longer just... banking on extremely good technology but they wanted their cars to be something else as well you know and this is digital equipment the big kind of an entertainment um house on on four wheels that is something that i think the german car manufacturers still missed out but then we have the short-term impact and the short-term impact is that that the chinese economy is simply not gaining traction we've seen that the chinese economy since the end of the pandemic somehow is struggling to gain We know that the Chinese consumers are also still feeling the weight of a correcting real estate bubble in China. So weaker demand out of China, pure to cyclical factors, is also explaining the bad numbers for China. Final point, for example, in Germany, last year we had subsidies for people buying electric vehicles.
Well, these subsidies were stopped at the end of last year due to budget constraints by the German government. So without these subsidies, we also saw that this year, for example, the sales of electric vehicles in Germany plummeted. And it is very similar in other European economies as well.
So there is the cyclical component and there is the structural component explaining why German car manufacturers are currently in so many troubles. When it comes to competition with China, you know, is the auto industry the only part of the German economy suffering here? No, of course not. The funny thing is, years ago, Germany tried to engage in something Germany called Industry 4.0. Well, that was an initiative in order to bring German industry, German manufacturing into the 21st century.
Well, the funny thing is, the Chinese did something very similar. And that was called Strategy 2025. So what the Chinese did, they also focused on certain industrial sectors, automotives clearly being one, automotives and electric vehicles clearly being one. But it's also, we talk about all other kind of manufactured goods that China is currently producing. The only difference between China and Germany was that they were kind of trying to follow the same strategy, but one took an enormous amount of money in order to make it happen.
And the other, Germany, tried to do this only with a very small portion of money. And the Chinese investment currently seems to pay out. So we have not only Chinese cars that are able to be fierce competitors to German manufacturers or actually European manufacturers.
We also have, when you look at green technologies, when you look at the steel industry, when you look at other manufactured goods, we do see that China has really become a... severe competitor, not only to Germany, but also to other Western economies. You mentioned other Western economies, and it makes me wonder, has Germany just been slow to adapt here?
What about the rest of Europe? Germany has been slow to adapt, but Germany is also the most exposed to Chinese competition, because Germany used to be, or still is, the industrial powerhouse of Europe. And, you know, other countries in Europe have similar structures. Look at France, look at Italy. They also have, you know, extremely important industrial sectors, automotives as well.
The only thing is they are not equally exposed to China as Germany is. When you look at the numbers, for example, Germany prior to the pandemic used to export 8% of all of its exports to China. Currently, we talk about something like 5% to 6%. of all German exports going to China.
So we already see that the chunk of products going to China has come down. And this has to do with the fact that there is less demand coming out of China due to the cyclical slowdown, but also due to the fact that China is able now to produce similar goods they normally imported from Germany, but at a lower price. This summit that we mentioned between the German economy minister and some auto industry leaders follows news that Volkswagen has terminated a decades-old job security agreement with trade unions in Germany.
And that means for the company, Volkswagen, that plant closures and operational redundancies are on the table for the first time in decades. You know, this had us wondering, are we returning to the bad old days of the 70s, perhaps? That is a very good question.
And the interesting thing is that we're just coming out of a period, of a short-lived period, of a couple of years, in which actually it looked as if unions, employees, had an extremely strong negotiation position in wage settlements, in wage negotiations. Because in so many other countries, there is demographic change. We have labor hoarding.
We have a lack of skilled workers in Germany. So we're just leaving a period in which… workers had been able to finally get higher wage increases. Well, if this now turns around again, and we see this job security is giving up, we see that some parts of industry are clearly subject to structural transition and structural transition very often means that we're going to lose some jobs so we will see that over the coming month and years these these wage negotiations will turn around again and we'll probably see that unions will step down a little bit from asking higher wages and to return to asking for job security i think that is clearly something that we can see because it goes beyond the automotive industry it goes beyond one single company What we're seeing here is that an economy like the German economy that depends on 15, 20 percent of economic performances stem from industry, stem from industrial production. And the automotive industry is not the only industry that is suffering from higher energy prices, higher wage prices, but also this changing role of China no longer being just a very welcome export destination, but actually being a system rival.
a fierce competitor. So there is more and more pressure on the German economy. And I think what we're seeing now is also that, you know, what happens after four years of de facto economic stagnation, after four years of de facto economic stagnation, you will see that, for example, the number of insolvencies goes up.
And we'll also see that the number of unemployment will gradually move up. And all of this is an economic backdrop which argues against. Higher wage growth and it rather argues in favor of like you said again maybe a return of fierce labor worker conflicts but maybe also just a good compromise and the compromise will mean lower wage growth if in return the workers the employees get some kind of job security.
What can the government reasonably do here to support the auto industry in Germany? You had some of these numbers that clearly showed the difference between investment between Germany and China. So what can the government be doing here?
What the German government can definitely not do is support demand out of China for German cars. What the government also cannot do is to stop the rise of electric vehicles coming out of China. That is something the government cannot do. What they can do is to at least provide some short-lived temporary support for the automotive industry.
And something we often hear in this context is the car strap screen. Sure. We had this, I think twice, we had this in the wake of the financial crisis 2009, and we also had this later on in the 2010s. What is this? This is a kind of subsidy for people if they turn in their old car and start buying a certain new car.
Well, you could kind of tailor make this then to electric vehicles, you could tailor make this to electric vehicles made in Germany, and it simply reduces the price. That's a typical subsidy. What the government could also do, which would be a bit more of a longer-term strategy, would, for example, be to give out subsidies if individuals start to get their own charging platforms at home. So to give subsidies for chargers, because this could also then provide new incentives for getting electric vehicles. But this is very short-lived.
This would not make go away. The... structural pressure coming out of Chinese competition.
Another thing that we also hear in this discussion is that, for example, the government should try to extend or even stop European guidelines, European rules, in order to stop producing normal car engines. But that is a European debate. Nothing the German government alone can do about it. Also, we could think in terms of protectionist measures. So maybe, but...
the German government will protect the German car industry against Chinese competition by higher tariffs. But that is also something the German government cannot do alone. So I think what we will get here is maybe some kind of short-term subsidies in order to make life a little bit easier in the shorter run for German car manufacturers, but this will not bring structural relief to the automotive industry. You know, for decades, Nokia thought it was infallible. Then came the iPhone.
There was also the fall of Kodak. Are these German car companies just dinosaurs and the meteor is on the way? I'm not in a position to start singing the swan song on the German automotive industry right now. I think we still have a very strong car automotive industry in Germany. Yes, the numbers do not look as good as they did in the past, but when you look at the absolute numbers, it is not that German car manufacturers no longer sell cars.
They only sell less cars than in the past. The market has become more competitive. There are more players trying to get a now smaller piece of the pie.
But I think we're not yet in a situation in which we can talk about... a complete end of the automotive industry. We've also seen in the past that the German manufacturing industry in general has been able to go through crisis, has been able to re-innovate.
So therefore, I would not too early give up really on German industry in general, nor on the German automotive industry. What is clear is that this is not only a short-term blip. This is not only some kind of short-lived cyclical challenge, but that the German automotive industry, as so many parts of industry, are in for a longer-term structural transition, longer-term structural competition against more players than in the past, and that they really have to do their best in order to survive.
Karsten Breski, he's the chief economist for ING Germany. Thank you so much for joining us. You're welcome. Thanks for having me.