"Detroit sends its regards" – Deutsche Bank analysts warn that Germany's good years as a car location could be over

  • In a new study, market analysts at Deutsche Bank Research warn that Germany will not return to its former greatness as an automotive location.
  • They say that the coronavirus pandemic and the associated measures are not the only factors responsible for this. Climate and energy policies, for example, are reducing the capital stock of the metal and chemical industries, which are part of the automotive value chain.
  • "Classic location factors" such as tax burdens, wage levels, and flexibility in working hours have also been deteriorating for years, the analysts write.
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In a new study, Deutsche Bank's think tank warns that Germany may never regain its former greatness as an automotive location. "Detroit sends its regards," the market analysts write. The American Rust Belt is an eerie scenario – it was where suppliers went bankrupt, and as a result, factories were closed, mass unemployment and many ex-employees faced a lack of prospects.

But that is not yet the case in Germany. However, the challenges for the automotive industry and its value chain are enormous, the analysts write. And these are not just the result of the temporary coronavirus crisis and its consequences, but are structural in nature.

CO2 limits make production more expensive for volume manufacturers

Climate regulation, specifically CO2 limits for automotive manufacturers, will force them to produce more electric cars. These are cars that have yet to convince the "average buyer," analysts write. "The latter is mostly still holding back because of high purchase prices, especially in the volume segment, the shorter range, and the lack of charging infrastructure, because of the longer charging time or for other reasons," the study says.

As a result, many governments in Europe, including Germany, are subsidizing the purchase of e-cars. As a result, demand and sales of e-cars – and their share of total vehicle sales compared to internal combustion vehicles – have increased, especially during the coronavirus pandemic. The consequence? First of all, it leads to higher costs (especially investments in the new technology) and declining average returns per vehicle, because the auto industry also often subsidizes the sales of electric cars, market analysts write. Therefore, automotive manufacturers will move production to lower-cost locations in the medium term.

In addition, the supplier industry will be thinned out, including the staff working at suppliers. E-cars would simply require far fewer parts than combustion engines, and much of the production could be automated. The consequence: "Hardly anyone expects the net balance of this structural change to be positive for value creation and employment in the automotive industry in Germany," write the analysts.

New emissions standard makes cars more expensive for ordinary people

The automotive industry would also face higher costs for another reason, namely the planned tightening of European emissions standards to Euro 7. In the volume segment, the cost surcharge per vehicle is likely to be particularly significant. This will put pressure on the production of "cars for the average citizen" in high-wage countries such as Germany, write the market analysts.

Along the value chain, too, climate and energy policy would confront the metal and chemical industries with uncertainties, which will contribute to the fact that the capital stock in these companies has been declining for years. This inhibits investment in innovation and thus jeopardizes the competitiveness of the companies concerned.

Finally, the think tank's analysts note that classic location factors such as tax burden, wage levels and flexibility in working hours have also been developing to the disadvantage of Germany as an automotive location for a number years now.

The mixture of these many factors leads the market analysts to the conclusion that the rest of the automotive industry is significantly better equipped for the change to e-mobility, especially technologically, than Germany and its entire value chain.

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