Asia’s Success, Germany’s Defeat: Automotive Industry

It is clear that the measures taken against the climate crisis can be transformed into projects within the framework of politics and economy. The place where the data provided by natural sciences will be directed towards projects aimed at prevention is politics and economy.

Today, humanity is paying the price for decades of wrong workings in politics and economy. I wrote in the Economics and Society Journal (ITD) that the first modeling of the climate crisis was announced in 1896. I also explained in ITD that electric vehicles have a history dating back 200 years. In the December 2024 issue of ITD, an article titled “Are Electric Vehicles the Savior in the Fight Against the Climate Crisis?” will be published.

My aim with this article is to summarize the developments in the electric vehicle market, which is considered to have a very important place in the fight against the climate crisis. In the electric vehicle market, I also aim to analyze the very deep-rooted developments in the global economy.

My comments on the developments in this article are for the sole purpose of detection. Beyond that, there are many aspects of the developments that I can criticize within the framework of the climate crisis and economic management philosophy.

In line with its policies to decarbonise the European economy, Brussels took steps in 2017 to establish supply chains for the production of batteries for electric vehicles.

Europe has long been keen on the transition to clean energies, with €6 billion allocated from the EU budget to support battery production projects and research and innovation in this area from 2017 to 2023.

The European Union (EU) aims to meet 90% of the batteries used in Europe with domestic production by 2030. However, there are serious problems on the way to achieving this goal.

Europe Depends on Asia for Battery Production

One of the most important points of Brussels' steps was Northvolt, a company founded in 2016. Northvolt recently declared bankruptcy in the US . There are many reasons behind the bankruptcy. However, poor management seems to be the most important factor. Northvolt, which has the capacity to supply batteries to 270,000 vehicles per year, was able to use only 1% of its capacity in 2023.

It is stated that Porsche planned to use Northvolt batteries for the Porsche 718 vehicle models, but due to the difficulties experienced by Northvolt, it turned to South Korea's Samsung SDI and LG Energy Solution (LGES) and China's CATL . On the other hand, BMW, one of Northvolt's shareholders, also terminated its $2 billion supply agreement with Northvolt.

In France, there are efforts to develop battery technology through a startup called Automotive Cells Company (ACC) . The startup is backed by automotive companies Stellantis (owner of Opel, Fiat and Peugeot) and Mercedes-Benz . Fossil-based energy producer TotalEnergies is also involved. TotalEnergies is part of ACC, along with its battery manufacturer subsidiary Saft .

ACC is set to start battery production in 2023. However, it has temporarily halted its expansion plans in Germany and Italy, citing the difficulties in Europe’s electric vehicle market.

The EU countries’ share of the global electric vehicle battery market increased from 3% in 2017 to 17% by the end of 2023. However, the leadership in battery production is in Asia. Asian companies, including CATL , BYD , LG Energy Solution (LGES) and SK On , account for 70% of the global electric vehicle battery market. Chinese and Korean companies are involved in the construction and design of some 30 battery production facilities planned to be built in Europe.

LGES has a factory in Poland, SK On has a factory in Hungary, CATL has a factory in Germany and a new factory will start production in Hungary in 2025.

Europe is organized under the organization called Batteries European Partnership Association (BEPA) . With 236 members from 25 countries, including Turkey, there are also studies under this organization to create supply chains in battery production.

Across Europe, the automotive sector employs 14 million people. That's more than the population of Belgium, the Czech Republic, Sweden, Portugal and many other European countries combined. The European automotive sector accounts for 7% of the EU's total GDP.

Europe's dependence on Asia, especially China, for the supply of raw materials, intermediate goods and technology is the most important problem of the sector. After that, one of the most important elements in Europe's competition with Asia is Europe's high costs and Asia's relatively low costs.

In Europe, demand for vehicles from European EV manufacturers is lower than that of Asian EV manufacturers. China has managed to produce high-quality EVs at controlled costs. Chinese brands such as BYD, Nio , SAIC , Great Wall and Chery have the ability to produce higher-quality vehicles than Europe at an average of 30% lower cost. The cost of batteries plays a major role in the cost advantage.

The question raised by the above lines is whether the EU should compete or cooperate with Asia. The German Association of the Automotive Industry emphasizes a competitive environment where there will be no trade losses by keeping dialogue channels open. On the other hand, there are those who think that Europe has no choice but to cooperate with China, especially in battery production.

Volkswagen Crisis

In the automotive sector, Germany's automotive companies, which form the backbone of the EU, have been experiencing difficulties recently.

In September 2024, Volkswagen (VW), which employs 300,000 people in Germany alone, intended to close its first factory in its 87-year history, a striking example of the difficulties experienced by the automotive sector in Europe.

In VW’s case, there has not been enough progress in the software field, which is important for electric vehicles. VW is planning to invest $5 billion in a software project it has undertaken in partnership with Rivian , and when it failed to get results from the project, it is turning to China’s Xpeng company. With the VW-Xpeng collaboration, it is expected that VW will reduce its vehicle launch time by 30% and its costs by 40% by 2026. VW believes that it needs to reduce costs in order to compete with China and Asia in general.

Cost reduction operations are seen by the company's management as one of the most important challenges facing VW. In this context, both the layoffs of 30,000 people and a reduction in wages by 10% to 18% are on the agenda. The targeted cost reduction amount is €4 billion .

China has a special importance in VW's operations. VW sold 4.2 million vehicles in China in 2019, but only 3.2 million in 2023. Thus, its market share in China, which was 19.5% in 2020, fell to 14.5% in 2023.

VW is still the leader in internal combustion vehicle sales in China. However, 50% of vehicle sales in China now consist of electric vehicles. VW's position in China is seventh in electric vehicles. Moreover, VW established a company called PowerCo for battery production in July 2022. Production takes place in Germany, Spain and Canada. Despite this, Chinese competitors have rapidly increased their share of China's electric vehicle market.

In China, the share of foreign companies in the automotive sector fell from 64% in 2020 to 37% in 2023. Foreign companies are being replaced by China-based companies.

Photo: BYD store, Stuttgart, November 2024. (Arda Tunca)

VW announced a 64% decrease in profits at the end of the third quarter of 2024 compared to the same period last year. The main reason for this significant decrease is the weakening sales in the Chinese market. The slowdown in the Chinese economy is also effective behind the weakening sales. However, losing market share is directly related to how successfully a company can manage its own field of activity.

Germany's Deindustrialization Problem

The German economy has been experiencing significant problems for some time now. German industries, which created the German miracle after World War II, are either reducing their investment levels in the country or are not making new investments.

Miele has announced that it will shift part of its production to Poland in February 2024. This means the loss of 700 jobs in Gütersloh , the firm’s 125-year-old headquarters.

Continental announced that it will cut 7,000 jobs and close some of its production facilities.

Michelin also said it would lay off 1,500 people and close some of its factories in Germany.

ZF Friedrichshafen , a major parts supplier to the automotive industry, announced that it will lay off 14,000 people in July 2024.

On November 25, 2024, Thyssenkrupp, one of the giants of Germany's industrial history, announced that it would reduce the workforce of the company's steel business by 40%. The statement means that 11,000 people will lose their jobs by 2030. The reason for the decision is low-priced products imported from China and the excess supply in the European market.

Another German giant, Bosch, the world's largest automotive spare parts manufacturer, first announced that it would lay off 5,500 people . Then, it announced that it would reduce the working hours and wages of an additional 10,000 employees.

Data from sectors other than the automotive sector also show that major manufacturers, who have provided the German economy with strong foundations, are willing to reduce the level of their investments in Germany. One of the main reasons behind this desire is the heavy bureaucracy in Germany. Another important reason is that Germany has fallen far behind the US and many Asian countries in terms of digitalization.

In the "deindustrialization" process that Germany is experiencing, in addition to falling behind in bureaucracy and digitalization, there are also the effects of the international conjuncture. We are in a period where protectionism is on the rise in international trade.

There are concerns in the US that US tariffs and quotas will be increased, especially for China, when Trump becomes president again in January 2025. However, the EU is also likely to be affected by these developments, which will have a negative impact on international trade.

It may be natural for Germany, which was once integrated into the global economy with its high value-added products and had a high foreign trade surplus, to struggle against protectionist tendencies. However, the difficulties it faces in the face of this development are largely due to poor management. In fact, the main reason for the collapse of the coalition government led by Olaf Scholz and Germany's early elections on February 23, 2025 is poor management in all areas and the negative effects it causes on the economy.

Potential Risk Awaiting the German Economy: Trump

In addition to the economic difficulties Germany is experiencing, it is also facing political instability. It is not known how long it will take to form a new government after the elections. Because when you look at Germany's political map, it is likely that a coalition government will be formed. Under these conditions, new international trade barriers that may arise with Trump will pose potential risks for Germany.

By 2023, 10% of Germany's total exports were to the US. Since 2015, the US has become Germany's largest trading partner, ahead of France. China's decreasing interest in German products was another factor that pushed Germany towards closer trade with the US. The Western embargo on Russia also had a negative impact on Germany's exports.

With the effects mentioned in the above paragraph, Germany's trade surplus with the US will reach €63.3 billion in 2023. This represents a record for Germany against the US. There is a risk of increasing concentration in German exports.

Trump said before the November 5, 2024 elections that the US would impose tariffs of up to 20% on imports from countries other than China.

Finally, Trump announced that 25% tariffs would be imposed on imports from Mexico and Canada, and an additional 10% on imports from China. There was no assessment of Europe in Trump's statements on November 26, 2024. However, it is certainly unclear whether a statement will be made regarding Europe later.

A study by the Ifo Institute found that if the US imposed 20% tariffs on all its trading partners, German exports to the US would fall by 15% and the German economy would face a loss of €33 billion.

13% of German automotive exports reach the US. 22% of German pharmaceutical exports are also directed to the US. Germany's current industrial production is still 10% below the production level before the Covid-19 crisis (December 2019). Therefore, Trump's potential tariffs do not contain any positive messages for Germany.

Another aspect of potential tariff barriers to Europe applies to German companies manufacturing in the US. Half of the 900,000 vehicles that VW, Mercedes-Benz and BMW produce in the US annually are exported outside the US. If Trump also imposes tariff barriers on Europe and Berlin takes a counter-move, there will be no positive developments for German companies in the US either.

Conclusion

China’s major development moves mean major challenges for Europe. The EU has fallen behind in global competition. Indeed, former European Central Bank President Draghi’s warnings a while ago also drew attention to these challenges and explained that new investment moves were inevitable. However, the European Union has a very important problem of not being able to be a “union” for years.

The issue of heavy bureaucracy and bad management is not only a problem for Germany, but for Europe in general. Organization, coordination and rapid decision-making mechanisms required by the age do not work efficiently in Europe. Despite the problems it has experienced, China has become the world's innovation center, especially in certain areas. The automotive sector is an area where this can be followed very concretely.

Germany had a very unsuccessful period under the leadership of Olaf Scholz and the major failure in the economy was the main reason for the fall of the coalition government. Germany pushed its own companies away from Germany and also pushed away those who intended to invest in Germany.

China's adaptation to high technology and its intention to use technology to combat the problem of an aging population are also far ahead of Europe.

A weakened Europe is not good news for the planet as Trump prepares to return to the White House.