Europe Outlook: Germany faces the ultimate driving challenge

Developments in electric powered cars and autonomous vehicles pose substantial challenges to Germany’s engineering might 

Key points

• The shifts to electric vehicles and autonomous driving present a formidable challenge to the German car industry
• Electric vehicles embody completely different engineering from those powered by internal combustion engines
• Autonomous vehicles raise difficult practical, regulatory and even moral questions
• The German car industry is intent on developing its capabilities in both electric cars and autonomous driving

The ultimate nightmare facing the German car industry is that it will go the way of the iconic Nokia clamshell phone. New technology, such as electric vehicles (EVs), could in this scenario do to German automakers what smartphones did to an older generation of mobile phones. It is even conceivable that new entrants such as Tesla, rather than traditional motor manufacturers, could edge out iconic marques such as BMW, Mercedes and Volkswagen. Or perhaps a new Chinese start-up could come to the fore.

Before dismissing such claims as scaremongering, it is important to recognise that EVs are fundamentally different from those that use internal combustion engines. The switch involves much more than simply replacing a fuel tank with a battery. There is no gearbox or conventional transmission. It is also commonly estimated that EVs have perhaps one-tenth the number of moving parts. But while the mechanics of the car are far simpler, the electronics are more complex. That means some technologies will become less important while others will become more so.

Germany’s famed excellence in mechanical engineering, in both car making and components, could be made redundant by the technological shift. In the nightmare scenario, the traditional German car industry could become a form of stranded asset as electric vehicles make it obsolete.

Benedict Evans, an analyst at Andreesen Horowitz, a venture capital firm in Silicon Valley, has spelt out the consequences on his website. “[It] remakes the car industry and its supplier base (as well as related industries such as machine tools), but it also changes the repair environment, and the life of a vehicle.” He estimates that in the US about half of spending on car maintenance goes on things that are directly attributable to the internal combustion engine.

Given the centrality of the car industry to the German economy the impact of the transition to EVs could be enormous. According to figures from Germany Trade and Invest (GTAI), a federal agency for promoting foreign trade, German automakers produced 15m vehicles in 2015, equivalent to 19% of global production. They were surrounded by a complex network of firms, with Germany accounting for 21 of the world’s top 100 automotive suppliers. 

premium car production by country

Nor are EVs the only substantial threat to traditional German motoring. Driverless cars or autonomous vehicles (AVs) also demands a new set of skills and technology. The kind of software skills more associated with Silicon Valley than Munich, Stuttgart or Wolfsburg are likely to come to the fore.

It should not come as a surprise that experts on the German car industry tend to reject the nightmare scenario. They do readily accept that EVs and AVs are likely to become more important in the years ahead. However, they typically see the shift to these technologies as relatively slow. In addition, they tend to argue that the German car industry is well on the road to adapting to them. There are at least three ripostes to the doom-mongers:

Mechanical vehicles are likely to remain dominant over EVs for years to come. It is much easier to imagine a world in which EVs are dominant than to implement it. There are several challenges to be overcome before they become the prevalent form of vehicle.

Probably the most obvious is the limited range of EVs. For most, it is less than 200km at present. This is probably fine for those who limit themselves to relatively short trips close to where they live. But it presents a significant problem for anyone who regularly drives their car for long or even medium distances.

Those who do drive long distances could struggle to find places to refuel. Even in Germany itself, this can be a problem. “We just don’t have the infrastructure,” says Martin Lück, chief investment strategist for Germany, Austria and Eastern Europe at BlackRock. Of course, this is not an insurmountable barrier but it will take political will and the necessary resources to resolve. “It’s not just a challenge for the carmakers but for the politicians who need to pay for the infrastructure around it,” he says.

philippe houchois

Perhaps less widely recognised is the lack of demand for EVs. Consumers today are generally satisfied with conventional vehicles. “A lot of people assume consumers can seamlessly move from one technology to another without asking too many questions,” says Philippe Houchois, an equity analyst at Jefferies, an investment bank. “The reality is, consumers are reluctant and concerned about technological change. To be blunt, there is no demand for electric cars today.” In his view, hefty subsidies are likely to be needed to incentivise drivers to make the transition.

Michael Muders, a fund manager at Union Investment, points out that the number of cars in emerging economies is likely to increase sharply in the coming years. Since such countries do not generally have the infrastructure for electric vehicles, the overwhelming bulk of these cars are likely to be conventional. This could more than compensate for any fall in sales in the developed world. “The number of combustion engines on the street will be bigger in 25 years than now,” he says.

Even those strongly concerned about carbon emissions are likely to see conventional cars improve in that respect. Fuel consumption per kilometre is likely to decrease, with an associated reduction in emissions. In addition, improved particulate filters are likely to reduce NOx (nitric oxide and nitrogen dioxide) emissions from diesel engines. Conversely, it should be remembered that electric cars are not free of emissions. If the electric powering EVs is generated from a power station using fossil fuels then the associated emissions could be considerable.

michael muders

If there is a lack of demand, there could also be a shortage of supply. Tesla, the California-based company, is struggling to scale up the production of its electric vehicles. It is struggling to produce more than 500 of its Model 3 cars, designed as simpler and more affordable vehicles, per day.

Finally, it should be remembered that there is more than one version of electric car technology. Fuel cells – which produce electricity using the chemical energy of hydrogen or another fuel – are an alternative to batteries. Although the former are less pervasive at present, they could over time become the dominant technology.

Meanwhile, short-term bridging technologies are likely to play a significant role. These include plug-in hybrids which combine a battery along with a conventional engine. “What we are going to see in the near future is a lot more plug-in hybrid vehicles,” says Stefan Di Bitonto, a senior manager at Germany Trade & Invest (GTAI), the economic development agency of the Federal Republic.

None of this is to suggest that these barriers to the dominance of EVs are insurmountable in the long term. No doubt, EV operating ranges will increase, infrastructure will improve, demand will become stronger and supply will be bolstered. The point, though, is that it will take time. That will, in turn, give the German car industry more leeway to respond to the EV challenge.

Autonomous driving is likely to take years to implement. It is also likely to take time before AVs become prominent. In the view of a recent report by S&P Global Ratings, the commercial-scale development of such vehicles is unlikely until 2030 or 2040 (The Road Ahead for Autonomous Vehicles, 14 May 2018).

martin lueck

GTAI’s Di Bitonto takes a similar view. “Autonomous driving lies very, very far in the future,” he says. “It’s not going to happen tomorrow or in five years or in 10 years. You might be looking at 20 years.”

Part of the challenge is technical. Driving an AV along a motorway is relatively simple but things get a lot more complex within cities. Cars and pedestrians move in all sorts of unpredictable directions. “The technology works in many ways but the integration into a complex urban environment is probably the biggest hurdle,” says Houchois of Jefferies.

But the regulatory, cultural and even moral issues are probably more formidable. For example, AVs raise tricky questions about who is culpable in the event of an accident. That, in turn, has an impact on car insurance policies. These are no longer academic, with a driverless Uber car recently killing a pedestrian in Arizona. Rules will have to be drawn up with the new technology in mind. Then there is the question of the public getting used to vehicles in which a human driver is not in control.

The moral dilemmas may not be obvious but they certainly exist. For instance, the Moral Machine study at the Massachusetts Institute of Technology raises a scenario in which a driverless car must choose between letting its two passengers die or killing five pedestrians. Many might conclude that it is better for two people to die than five but who would buy a car that was programmed to sacrifice its passengers in certain circumstances? Clearly that raises all sorts of difficult ethical questions. 

German automakers are already working hard on both sets of technologies. Finally, the nightmare scenario seems to assume that the German car industry is not adapting to the challenge of new technology. On the contrary, it is determinedly working on both EVs and AVs. If there is a question, it is more to do with the pace of adoption.

stefan di bitonto

Arguably the emissions scandal – in which Volkswagen was found to be falsifying the levels of NOx in laboratory tests in its diesel engines – increased the focus on EVs. “Dieselgate has pulled this trend forward by several years,” says Union Investment’s Muders. VW was forced to rethink its organisation and focus more aggressively on EVs. Indeed, VW has announced plans to manufacture its own electric motors as well as substantially increasing its production of electric vehicles.

Jefferies’ Houchois argues that, for Porsche, the high-performance car manufacturer that, in turn, owns VW, electrification could be an opportunity. The higher price of its premium cars may make it easier to make money from EV technology than on cars designed for the volume market.

In relation to AVs, it is not widely known that it started experimenting with the technology way back in the 1980s. So it has already been in development for three decades. It is just that the German automakers are cautious about implementing the system in full before the associated problems have been sorted.

Indeed, premium automakers are already using some of the sensors that are part of AV technology to assist drivers. For example, these are already apparent in the Mercedes S-Class or the BMW 7 Series. “Such technologies are normally implemented in these vehicles first and then you have a trickle-down effect after a while,” says GTAI’s Di Bitonto.

“The technology works in many ways but the integration into a complex urban environment is probably the biggest hurdle” 

Philippe Houchois

Germany’s car industry could well negotiate the shift to the new technologies but success is not guaranteed. There is always the possibility of formidable new competitors seizing the advantage or Germany itself proving not up to the challenge.

The future will not just depend on the car industry itself. More broadly the government will have to play a role in ensure that the necessary skills are in place. In particular, there is likely to be a hefty demand for software engineers. 

The strength of the economy will also play a role in determining Germany’s ability to rise to the challenge. Union Investment’s Muders warns that an economic downturn could harm the ability of automakers to invest sufficiently in the development of the new technologies. “If markets perform poorly, that would be a big risk.”

But perhaps the biggest risk is to what the BMW slogan calls ‘Freude am Fahren’ (the joy of driving). Autonomous driving takes away the pleasure of driving that is particularly important to the premium car brands. “It’s very much about the fun and freedom and this will go away,” says BlackRock’s Lück. “It’s the concept of transport that is changing and that’s the biggest challenge.” 

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