For decades, the phrase “Made in Germany” has connoted cutting-edge automotive technology and design. But now German automakers are falling behind in the global race to build more electric cars, and some executives are using a new catchphrase to describe how quickly they need to catch up: “China speed.”
The term reflects the rapid transformation of China’s car industry into a battery-powered juggernaut. And that speed was on display Monday at IAA Mobility, a massive auto show in Munich, where newcomers from China stole the show.
BYD, an all-electric Chinese carmaker that overtook Volkswagen as China’s best-selling brand this year, unveiled a sleek, new sedan and a sport utility vehicle to cheers from the packed crowd.
“I think the Europeans are a bit concerned about how the Chinese will perform in Europe,” said Matthias Schmidt, an independent analyst of the electric-car market based in Berlin.
The show comes at a critical time for the German auto industry, the largest in Europe, and for the German economy more broadly. Once a critical driver of the country’s economy, German automakers have instead become a drag. In June, production in the auto industry shrank 3.5 percent compared to the previous month, weighing on the country’s total industrial production, which fell 1.5 percent.
The difficulty goes beyond the automakers. Economic output in Germany is stagnating, weighed down by high energy and raw materials costs, a lingering effect of Russia’s invasion of Ukraine last year.
Prominent German companies, including Volkswagen and chemical giant BASF, have delayed expansion plans or announced they will build in regions with attractive incentives, including China and North America. Persistently high inflation is eating into the purchasing power of Germans and contributing to pessimism from consumers and businesses.
After Germany’s economy slipped into recession late last year and early this year, its growth was flat from April to June. Last week, the country’s central bank, the Bundesbanksaid that economic output is expected to “more or less stagnate again in the third quarter of 2023.”
We eight advanced economies analyzed by the International Monetary Fund, Germany is the only one expected to shrink this year, leading some economists to recall the specter of the late 1990s when, hampered by record high unemployment and the cost of re amalgamation of East and West Germany, economists declared the country the “sick man” of Europe.
The government in Berlin was quick to respond. Last week, it approved 32 billion euros, or nearly $35 billion, in corporate tax cuts over four years to help revive production.
The government has also proposed cutting Germany’s notorious piles of paperwork for businesses, for example by accepting digital, non-paper, copies of official documents in an attempt to drag it into the digital age. A recent survey of 500 companies showed that fax machines remained the most secure form of communication.
Contrast that with HiPhi (pronounced “hi-fi”), a luxury car company from China founded in 2019. It’s now making the third version of its tech-heavy electric vehicles, with doors that open to pushing a button, and lights outside and inside the doors that can flash and change color. The cars are now on sale in Germany and Norway, starting at 105,000 euros, or $113,000, and are on display at the auto show.
The ability to produce a car so quickly is related to a different approach to the auto business, said Mark Stanton, the company’s chief technology officer.
“The fear of failure is huge and that mentality really gets in the way of your day-to-day process of what you’re doing,” Mr. Stanton said. “We’re totally wiping that out.”
One of the top factors worrying companies in Germany is the persistently high energy prices.
For decades, Germany prided itself on a steady supply of electricity that kept factories making steel and cars running. But the source of that power is natural gas imported into Russia, and the Germans refuse to consider other suppliers.
After Moscow stopped the flow of natural gas to Germany a year ago as a result of Berlin’s support for Ukraine, the price of gas has more than quadrupled, forcing many companies to increase production. Although prices have fallen, they remain nearly twice as high as in 2021.
Whiplash has cost companies that require high energy costs, such as chemical manufacturers, a sense of security for long-term planning, an annual survey of businesses has shown. The study, conducted by the German Chambers of Commerce and Industry, found that confidence in the government’s energy policy is at its lowest point in more than a decade.
“After the energy price shock at the end of last year and the relatively mild winter, companies are very worried about future developments,” said Achim Dercks, the organization’s deputy general manager .
That fear is causing many German industrial companies to reconsider previously planned investments. Earlier this year, Volkswagen decided to scrap plans to build a second battery factory in Germany.
The company is already building a battery factory in Salzgitter, near its headquarters in Wolfsburg, and another in Valencia, Spain. This spring, Volkswagen announced it had chosen Ontario as the site for its first battery plant outside Europe, attracted by lucrative incentives and industrial electricity prices of about one-third which is cheaper than Germany.
A drop in energy prices by just 1 cent per kilowatt-hour could translate into an annual cost difference of up to 100 million euros when producing batteries for electric vehicles, said Oliver Blume, chief Volkswagen executive, in an interview with German public broadcaster ZDF.
“If we look at the prices that are currently being offered to us in North America or in other regions of the world, Germany is far behind,” Mr. Blume said.
Volkswagen is not alone in looking abroad to expand electric vehicle production capacity. Earlier this year, BMW, based in Munich, announced it would invest €800 million in Mexico to develop high-voltage batteries and its new fully electric models. Those cars are expected to go into production in 2025 at the company’s plant in Hungary.
In China, the failure of German automakers to meet growing demand for battery-powered vehicles left a vacuum, which domestic automakers quickly moved to fill, producing affordable and attractive electric cars to take over their home market.
Volkswagen is taking steps to improve its position in China. Last month, it announced it would invest $700 million for a nearly 5 percent stake in XPeng, a Chinese start-up that makes electric vehicles, in an effort to help it meet the demands of the Chinese market.
But now Chinese automakers are focusing on Europe, where gasoline-powered cars will be banned in 12 years.
At Monday’s auto show, traditional German automakers showed plans for expanding production of all-electric vehicles in the coming years, but manufacturers from China revealed new models that they brought to the European market.
“Europe is a strategic market for BYD,” said Michael Shu, managing director of BYD Europe. Last month, he said, his company became the first automaker in the world to deliver five million fully electric or plug-in hybrid vehicles.
Ferdinand Dudenhöffer, director of the Center Automotive Research in Duisburg, Germany, described this year’s auto show as a “Zeitenwende,” or turning point — the same term Chancellor Olaf Scholz used when announcing Germany’s foreign policy shift after being attacked by Ukraine is Russia.
“A Zeitenwende, which sees Europe becoming an interesting market for Chinese electric cars,” he said. “The competition will be tougher.”