The German Automotive Industry

1. Executive Summary: The German automotive industry with about 720,000 jobs is one of the biggest industries and dominant employers in Germany and one of the biggest automotive industries in the world (Herbst, 2009). With brands like Mercedes Benz, Volkswagen, Opel, BMW, Audi and Porsche this industry is major in car manufacturing and technology. According to Taylor (2010) Volkswagen “is the No. 1 automaker in Europe, the No. 1 foreign automaker in China, and currently ranks second in Brazil”. In most cases German cars are more expensive than foreign, especially Asian, imports.

Therefore the client base in that industry has an attractive, above average income. With the price advantage the Asian car industry is also a big competitor. Growth rates are continuing to rise after a massive decline during the worldwide financial crisis. Future development potentialities are renewable energies, electronic cars, and hybrid or hydrogen powered engines.

Potential threats are government regulations on CO2 emissions and a possible general speed limit on the “Autobahn”, the German highway system which would decrease sales for the big German manufacturers and increase sales for cheaper imports. This industry has a lot of growth potential and a lot of development possibilities. Based on the facts the best decision would be to take a client from the German automotive industry. 2. Purpose:

The purpose of this report is to analyze the German automotive industry and conclude whether or not it could be a profitable industry to take on a client in. This conclusion will be drawn up from key facts that will also be provided in the report in order to accurately ensure a quality recommendation.

3. Facts bearing on the Problem: a)Aforementioned Trade Association Headquarters Berlin Association of Automotive Industry

35 Behrenstrasse 10117 Berlin Phone: +49 30 897842-410

The German automotive industry is represented by the Association of Automotive Industry (Verband der Automobilindustrie, VDA) located on 35 Behrenstrasse, Berlin 10117, Germany. They can also be contacted at +49 30 897842-410. This organization has been founded in 1901. They provide information and publications just like annual statistics and research ( and work closely together with manufacturers and suppliers. According to NAIC the automotive industry has a code of 336111.

b)Environmental Scan The German automotive industry could be affected by several trends. Demand for imported cars ascends, as the German middle class shrinks and the gap between rich and poor gets bigger and bigger. People are looking for cars that are affordable to buy but also affordable to own, since gas prices (about $ 7.40 per gallon in Germany) and insurance are quite expensive these days. German brands increased new registrations in 2009 by 12,9 % whereas Hyundai increased by 76.7 %, Fiat by 80.7 % and Dacia even increased the new registrations in 2009 by 23.9 %.

The leading German brand was Opel with 31.9 %. Mercedes even had a decrease by – 13.9%. (Association of Automotive Industry, 2010) These numbers support the fact that small cars are demanded and the big German cars and engines become hardly affordable with an average income. The big German manufacturers followed that trend by introducing smaller cars to their product mix. Mercedes came up with the “Smart”, BMW with the “Mini”, Opel with the “Opel Corsa” and Volkswagen has the “Polo” and other small models.

Ferdinand Dudenhoeffer, a major automobile expert said “For the first time ever, German manufacturers sell more cars in China than in Germany this year. This is a sign that China becomes the center of the automotive industry worldwide.” By 2025 German manufacturers are going to produce over 6 million cars in China annually-more than in Germany. (Dudenhoeffer, 2010) The only country to which German manufacturers recorded an increase in exports in 2009 was China with 37.8 %. Exports to USA dropped by 31.3 %.

Another major trend is renewable energies. Natural resources, such as oil, are limited and become more and more expensive as the supply gets smaller every year. Therefore the automotive industry has to rethink and follow the trend. Manufacturers have to invest their money in research and development now, before they will be left out in the cold in 5, 10 or 20 years when the majority of cars are powered through renewable energy. The German automotive industry is an industry that is growing at a steady rate with some drops during the worldwide financial crisis such as every other industry as well.

Growth rates are on their way up again after economy finally stabilized and the German government provided financial aid for the firms and a program for customers where they would get $3,320 to scrap a car that's at least nine years old and buy a new car instead. (Ewing, 2009) In an industry where the mass majority of the buyers have an above average income for the upper class vehicles such as Mercedes and BMW and an average income for middle class cars such as VW and Opel, economic trends can majorly affect this industry. Sales and new registrations dropped heavily across Europe as well as in the USA during the recession.

As we can see in the chart above, all manufacturers had to register heavy losses in 2008 in car sales across the world. Porsche which only produces luxury cars had to register the biggest drop in car sales both in Europe and in the US. From 2007 to 2008 their car sales got halved in Europe and decreased by 28 % in the US. BMW and VW came off best with a drop of 5 % and 6% respectively in Europe and a decrease of 10 % and 8 % respectively in the US. (Hawranek, 2008) Buying an upper or middle class car was no longer affordable to most people since they had to cut back spending and save money to pay off mortgages and other debts above all.

People hold on tighter to their money and might rather lease a car or buy a smaller one that is cheaper to afford or even sell the car and switch to public transportation where possible. In times like that, having a car is a luxury. It is good to have one, it makes mobility easier but people would rather keep their house and eat well and therefore take the bus or light rail to get to work.

Environmental trends play a huge impact on this economy. As environmental awareness continues to increase we will notice more and more manufacturers focusing on smaller and more effective engines in order to meet environmental concerns and governmental regulations. For many years there were no regulations on CO2 emissions but as environmental trends change this also changed. This environmental trend has majorly affected this industry and the way of thinking towards our environment.

This industry has companies with a large market share. The biggest player is certainly Volkswagen. VW is the biggest car manufacturer in Germany and the entire world. But also BMW, Audi, Porsche and Opel own a big piece of the pie. As already mentioned competition among these companies is tough. One thing that stands out is the German quality. All the manufacturers are aware of that and try to keep quality always on a high level. These companies are established which makes it hard for other firms to get into that market. Potential threats are government regulations on CO2 emissions and a possible general speed limit on the “Autobahn”, the German highway system.

That would decrease sales for the big German manufacturers and increase sales for cheaper imports even more. “Unlike its EU neighbours, Germany applies motorway speed restrictions only in traffic bottlenecks, near road works or in particular circumstances. German car firms such as BMW, Mercedes-Benz and Volkswagen take pride in their high-performance models, seen as symbols of the German export boom. “(BBC Online, 2007)

That would especially affect the German market. But CO2 emissions are also an issue in other countries. Manufacturers have to develop new technologies to reduce CO2 emissions but at the same time keep the big engines and the quality customers regard highly (e.g. Hybrid). This industry requires many different technological types of machinery in order to operate. The rapid speed of technology advancement and also other technological trends will have a major impact on this industry. At the same time jobs from human workers could be taken over from highly developed machines. That would result in a decrease of blue collar worker.

The consumers for the German automotive industry are very diverse. With Porsche, Mercedes, Audi and BMW we have mainly upper class or upper middle class car manufacturers, with Opel and VW also middle to smaller class car manufacturers. Demographic development is an important issue. The bigger families become, especially in China, which has a population of 1,330,141,295 (July 2010 est.) the bigger is the demand for family cars such as SUV’s or trucks. By way of comparison, the whole European Union has a population of about 492,387,344 (July 2010 est.) and about 310,232,863 live in the US which shows what a big and important market China is.

Depending on the sales market it is important to understand demographics. (CIA-The World Factbook, 2010) “A commonly used benchmark to compare the development of the car industry across markets is cars per 1,000 of population. On this measure, China is tied with Belize in 107th place at 10 cars per 1,000. The US leads with 765 cars per 1000. Of course, the US market may not be a fair comparison as it is a mature market with a historically large car population.

A fairer comparison would be a market like Mexico with 138, Russia with 124, and Brazil with 81. Clearly, there appears to be upside growth potential for China. Forecasts of the China market over the next decade anticipate that the passenger vehicle population will grow from 100 – 200%. Global Insight’s base forecast anticipates growth in the passenger vehicle population from 10 – 153 million units from 2005 to 2030.” (Russo, 2009) Financial Forecast:

After the global economy is on the way up, German manufacturers are as well. As the leading economy in Germany the export relies heavily on the automotive industry. However “VDA (Association of Automotive Industry, 2010) said it expects a 21 percent increase in exports this year to 4.15 million cars. It sees production rising 10 percent to 5.45 million.” (The Associated Press, 2010)

Background: The foundation of the German automotive industry was laid in 1885 when Karl Benz invented the first gasoline powered automobile. As a country of technology and inventions, Germany then developed an industry which is today known as the “world’s leading automotive industry, and not just because the car was invented there. The country is also a major automotive production location and sales market.

The automotive industry alone accounted for N235 billion of the manufacturing sector’s N1,300 billion total sales in 2005, not including the sales generated in upstream industry segments, from plastics to steelmaking. Of Germany’s N162 billion export surplus in 2005, the automotive industry alone was responsible for N89 billion.” (Gottschalk, Kalmbach, 2006) Ethical Issues:

Ethical issues arrive in this industry after taking a look at the environmental concerns with regards to CO2 emissions. Companies know that the buyer has to pay more for insurance and taxes if the CO2 emissions are higher than the government allows it to be. Therefore the firms focus on smart and highly developed and more environmentally friendly engines. But at the same time they try to keep up the strength and the superior quality of the engines. 4. Discussion:

After reviewing the facts drawn in this research the income of the client base in the German automotive industry is an attractive one above average for upper class cars and an average one for middle and smaller class cars. Demographics are very diverse. Mercedes, BMW and Audi produce mainly large cars for people with a higher income whereas VW and Opel have a very widespread product mix.

Financial chances are very big. In 2010 manufacturers sold more cars in China than in Germany itself. Asia is a huge market with a lot of potential. “The primary quality battleground, however, will shift from the production plant to the retail sale. More and more surveys, studies, and focus-group comments show that automobile buyers associate quality not only with the product but also with the purchase and service experiences that accompany it— the components of customer satisfaction.”(Juran, Joseph M.; Godfrey, A.Blanton 1998)

5. Conclusion: Based on the facts taking a client in the German automotive industry would be the best decision. With big target markets in Asia growth chances are very good. Technological development implies that this industry will find a way to build environmentally friendly cars powered with renewable energy. This industry is a promising one and definitely worth to take a client in.

6. References

BBC news online. (2007). Merkel resists speed limit push.

CIA-The World Factbook. (2010)

Gottschalk, B., Kalmbach, R. (2006) Mastering Automotive Challenges. GCU Library.

Hawranek, D. (11/25/2008). German auto industry facing the abyss. Spiegel-Online.,1518,592658,00.html

Herbst,M. (2009). How Long Can Germany Keep Auto Jobs? Business Week Online p. 9.

Juran, Joseph M.; Godfrey, A.Blanton. (1998) Quality in the Automotive Industry. GCU Library.

Russo, W. (December 2, 2009). China Auto Trend 8: Rapidly Changing Demographics & Growth of Lower Tier Cities.