BMW, Daimler, and VW vow to fight in green transport revolution

German carmakers face mobility revolution

If one product symbolises Germany’s post-Second World War rise to being an economic powerhouse, as well as its current export prowess, it is a luxury car made by Mercedes-Benz, BMW, Porsche, or Audi. Vehicles ‘Made in Germany’ are considered hallmarks of reliability and quality across the world. The fate of the car industry in Germany – a nation which prides itself on having invented the automobile, and still resists speed limits on its Autobahns – is often seen as a barometer of the entire country’s economic health.

But the VW emission scandal – dubbed ‘Dieselgate’ – has dealt a heavy blow to German carmakers’ claim to global technological leadership. The timing could not have been worse. Companies are facing a perfect storm created by the ‘mobility megatrends’ of electric engines, autopilot vehicles and carsharing.

“I wonder who would place a bet that the German car industry will emerge as a winner from the pending structural changes? Currently it is an open race and the carmakers are increasingly aware of what is at stake,” says Christian Hochfeld, head of new mobility think tank Agora Verkehrswende*. He adds: “The emissions scandal is a worst-case scenario for the global trust in carmakers – in the meantime not only limited to Germany.”

The row has brought into sharp focus the question: “To what extent are German carmakers still welded to the conventional engine?” It remains a business model which earns the companies phenomenal profits – but faces extinction in the coming decades if the transport sector is to become fossil-free.

The Paris Climate Agreement leaves no room for doubt: Germany will have to cut its emissions to virtually zero in the coming decades in order to keep its commitment to fighting global warming. The cuts must take place in every sector, including transport –where emissions have remained largely constant for 25 years (the CLEW dossier The energy transition and Germany’s transport sector gives an overview of the entire sector, whereas the present dossier focuses on passenger cars).

It is not surprising that Dieselgate has led to a growing chorus of warnings from industry insiders, mobility experts, and politicians alike, that many car managers have been asleep at the wheel and need to wake up to the challenges ahead.

But the crisis has also been a loud wake-up call for German auto manufacturers. BMW, Daimler and VW have now vowed to fight and defend their global leadership position against powerful new competitors such as Google, Apple, Tesla, and Uber.

Germany’s shift to a greener future – the Energiewende – has already wreaked havoc in the energy industry, where old utilities were too slow to adapt to rapidly rising renewable power generation. Companies such as E.ON and RWE put their own survival at stake by resisting change instead of embracing it.

The fate of the utilities should serve as a warning to carmakers as the Energiewende reaches the transport sector. Given the car sector’s enormous size, much more is at stake for the whole country.

The auto industry is a true giant of the German economy: Its 1,300 companies employ more than 800,000 people, according to official statistics. In terms of turnover, it is the largest manufacturing sector, clocking in sales of more than 400 billion euros in 2015.

The question looms large as to whether the iconic firms can continue to blossom in a future mobility world, which might be characterised by fleets of self-driving vehicles powered by electricity.

As Henning Kagermann, chairman of Germany’s National Platform Electric Mobility (NPE), put it: “The crucial question is no longer whether we enter a new mobility era, but what role Germany will play in it.”

The triple megatrend challenge

Most mobility experts agree that three interrelated “megatrends” will transform the industry in the years ahead, each with worrying consequences for traditional carmakers: Stricter environmental regulations, autonomous driving technology, and the rise of the shared economy.

Firstly, stricter environmental regulations which will eventually force the industry to shift from the combustion engine to electric propulsion. The German Federal Environment Agency says the entire “transport sector is required to be effectively greenhouse gas neutral by the year 2050”.

Carmakers’ traditional strengths, such as powerful combustion engines, gearboxes, and so forth, might well become worthless with the arrival of the electric engine.

“Far fewer parts are necessary for an electric engine. Combustion engines have become incredibly complex, but all of that won’t be necessary in the future,” argues car expert Stefan Bratzel from the Center of Automotive Management (CAM). “Fewer parts mean fewer people. The number of jobs could be reduced by a factor of five at least. That’s not only a question for the carmakers, but also for suppliers. Tens of thousands of jobs could be on the line.”

The second megatrend is autonomous driving technology. This is likely to appear gradually in new car models. Opinions vary greatly among experts when these will eventually result in fully self-driving vehicles.

The innovation once more questions the future value of German carmakers’ traditional pride. Autonomous driving is likely to drastically cut the risk of accidents, according to experts – thereby reducing the need for huge car bodies and security features. In addition, self-driving cars will create huge amounts of data, making data management and IT connectivity more crucial. This is also not part of the companies’ classic strengths.

The eventual impact of self-driving vehicles is likely to go well beyond questions of technology. It looks set to reshape mobility lifestyles, as car travel time can be used for activities other than steering a vehicle, with potentially deep repercussions for the industry. “This step will have an enormous impact on the question of what a car really is,” said Nicolai Müller, who is an automobile expert and partner at business consultancy McKinsey.  

The third megatrend is the rise of the shared economy and its impact on the transport sector. This is already underway, with shared car schemes springing up in cities all over the world.

These services might also herald big shifts in lifestyles, enabling a growing share of the population to make do without their own car. As a consequence, the car’s standing as a prestigious status symbol might be undermined further, potentially reducing the number of vehicles sold.

This triple challenge means that the industry is facing a “watershed moment”, according to consultancy Alix Partners. “In the coming years, the automotive industry will face its biggest upheaval since before Henry Ford.”

The diesel engine – carmakers’ “boon and bane”

Since the emissions scandal, the fate of the diesel engine has been a particular focus in the debate about the future of transport.

The car-making industry tends to stress that diesel engines have a better climate footprint than petrol motors, and that conventional engines in general still offer room for further emission reduction.

Matthias Wissmann, head of the German carmakers association VDA, said: “Petrol and diesel still have a significant potential. We expect to increase the efficiency of classic engines by at least 10 to 15 percent in the years ahead.”

The industry is researching synthetic fuels that are “practically climate neutral”, he said, adding: “With fuels like these, diesel and petrol cars would have a long life expectancy.”

But industry expert Bratzel warns this strategy does not promise success for long. “Without electrifying their fleet, carmakers won’t manage to comply with ever-stricter emission limits.”

Mock says the reliance on diesel engines is a particularly troublesome problem for German carmakers because it has been so profitable. “It is the boon and bane for the industry. It’s a typically German development, and earned the carmakers much success in the past. But now it becomes a problem because it won’t be cost effective for long to reduce emissions sufficiently.”

Mock believes that “a fundamental rethink is in progress” at BMW, Daimler, and VW after Dieselgate. He adds: “The scandal put things in motion and forced the carmakers to reconsider where this journey will lead. They now wonder whether the diesel is still a future-proof technology, and whether it is worth investing more money to develop a new generation of engines, or whether the money might be better spent elsewhere. This is currently the big question.”

The auto manufacturers stress that conventional engines will remain an important business pillar for a long time to come because of their global reach. “Even if sales of alternative engines slowly gather pace in regions like China, the US, and Europe, there will be other regions where conventional engines will be needed for different reasons,” says VW’s Fronzek.

Daimler spokesperson Madeleine Herdlitschka agrees: “It will be impossible to electrify everything overnight. There are many different markets, and not everyone will move as fast as Germany and California.” But she adds: “We are on the threshold of the next era in mobility, and it’s clear to everyone in which direction we’re headed.”

A new dawn?

Recent announcements by carmakers and their CEOs suggest the companies are now ready to overcome their reluctance and embrace the mobility challenges in earnest.

In mid-2016, VW announced its “Strategy 2025”, which included a “major electrification initiative”, and also a push into digitalisation and autonomous driving. The company said it expected to sell between two and three million e-cars by 2025 – which would mean around one in four VW cars sold at that date would be electric.

VW CEO Matthias Müller said his company faced the “largest transformation of its history”. He added: “The word evolution is much too weak to describe what lies ahead […] not only automobiles face dramatic changes, but mobility will be defined in a new way.” (For further details on VW’s plans, read the CLEW factsheet Dieselgate forces VW to embrace green mobility)

Experts consider VW’s plan a fundamental shift for the whole industry, not just the company. “If they are serious about their announcements on e-mobility, this is a gigantic step, and could transform the entire market, because VW produces such huge car volumes,” says Mock. 

Within weeks of the VW announcement, Daimler CEO Dieter Zetsche also heralded dramatic changes to move the maker of Mercedes-Benz and Smart cars into the future of mobility.

“Daimler will radically develop into a different company within the next ten years,” Zetsche said. He explained that the company would become a service provider and launch its own sub-brand for e-cars. “The fundamental change has begun,” he added.

A Daimler manager, who did not want to be named, told news agency Reuters shortly after Zetsche’s announcements: “We said before that if you are too early, you lose money. Now the view is if you are too late, you lose the market.” (For more background on Daimler’s plans, consult the CLEW factsheet Reluctant Daimler plans “radical” push into new mobility world)

Many experts still consider BMW the leader in the field of new mobility among German carmakers. It founded the electric sub-brand “i” years ago, and is so far the only German carmaker to have launched an electric vehicle – the “i3” – which was not based on a model originally developed for a combustion engine.

But i3 sales have remained lacklustre, and BMW was torn about whether to accelerate e-car development in early 2016. Following shareholder criticism, CEO Krüger announced in late September that the company would launch the first electric Mini car in 2019, followed by an electric version of the BMW SUV X3. (For details, please refer to the factsheet Early e-car starter BMW plans new mobility sprint.)

Most industry experts agree that senior members of the carmakers’ management have realised they need to move fast to avoid being left behind.

“Recent CEO statements show the future challenges are now top of the agenda,” says McKinsey’s Müller. “There is no doubt about it. It doesn’t show up yet in new car models, but huge amounts of money is funnelled into development capacities.”

Mortal danger offers huge opportunity

But some experts say it is still an open question as to how important a lead in classic vehicle hardware technology will be. “The core competence of the future is the question how the car can be digitised, steered, and integrated into the entire transport network,” says Mock.

The production of battery cells might be another important part of the car’s value chain, and it currently looks unlikely that German carmakers will enter that market. Bratzelargues that the carmakers should join forces in this field. “In the medium and longer term, Germany can’t afford to have an important part of e-mobility’s – and therefore the future car’s – value chain abroad.”

BMW, VW subsidiary Audi, and Daimler already cooperated when they agreed to buy Berlin-based Nokia mapping unit HERE for almost three billion euros in 2015. Digital maps form the basis for driverless cars, and the carmakers wanted to avoid reliance on Google and Apple mapping services.

But it remains an open question how important carmakers’ core strengths will prove to be. The technological figureheads of the German car industry are the engine and vehicle integration, both of which are easier in electric cars.

Similarly, carmakers’ reliance on the premium segment might be a disadvantage in a new mobility world, which might be dominated robotaxis.

Müller says: “In the past, a premium car made in Germany had the brand, power, design and emotion that was honoured the world over. We will have to see whether the future will offer the same opportunities for differentiation.” But he believes the German incumbents’ advantage won’t be lost. “A new powertrain does not mean a vehicle’s other attributes become obsolete. There will also be a premium segment in the new mobility.”

Mock agrees: “Premium does not necessarily mean combustion engine. The premium segment can also be entirely redefined. I’m quite optimistic as far as the German carmakers are concerned. They do not face an abyss. I believe the most probable scenario is that carmakers recognise the transformation and manage to adapt.”

Even though some experts, such as Bratzel, put the chances of German carmakers failing in a new mobility world at 50:50, Müller stresses the companies  should see the expected revolution in a positive light.

“Most people prefer to read danger scenarios. But you can also describe all this in a positive light: An incredible change is underway, which opens up entirely new possibilities for German carmakers in the future.” 


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