Description of the German automotive industry -
Critical analysis of the types of businesses existing in the industry;
and the government policies impacting on the industry

by

Stephan Osswald

Tutorial class: Thursday 8pm – 9pm
Description of the Description of the German automotive industry (major markets, growth rate, annual expenditure/profits)
Critical analysis of the types of businesses existing in the industry; and the government policies impacting on the industry
Future developments that will impact the industry
Recommendations and justification about how to enter the industry (greenfield investment, strategic alliance, licensing agreement)
Use of analysis tools (SWOT, Porters 5 forces- in appendix and referred to in the body of the report)
Use of references to support assertions (e.g. journal papers, internet resources, textbooks)

1. Introduction... 1

2. Description of the German automotive industry... 1

2.1 Major markets... 2
2.2. Growth rate... 3
2.3 Annual expenditure/profits... 3

3. Government policies impacting on the industry... 4

3.1 The European regulatory environment... 4

3.1.1 Block Exemption... 4
3.1.2 Oil consumption... 4
3.1.3 Clean air... 5
3.1.4 European safety program... 5

3.2 The German regulatory environment... 6

3.2.1 National transport policy... 6
3.2.2 Education and research... 6
3.2.3 Financial support... 6
3.2.4 Fuel taxes... 7

4. Future developments... 7

4.1 Future developments in Europe... 7

4.1.1 Alternative fuels... 7
4.1.2 Old car recycling... 8
4.1.3 Enlargement of the European automotive industry... 8

4.2 Future developments in Germany... 8

4.2.1 Taxation and fiscal policy... 8
4.2.2 German automotive industry is shifting to Eastern Europe... 8
4.2.3 CO₂ emissions... 9

5. Recommendations and justification about how to enter the German automotive industry... 9

6. Conclusion... 10

Reference list... 11

Appendix .. 15

1. Introduction

Nowadays, “Germany is the third largest manufacturing country for passenger cars and commercial vehicles, one in ten of all vehicles produced worldwide comes off a production line in Germany” (VDA 2006, 181). For several decades the automobile industry has been a key sector in the German economy (Hudson and Schamp1995, 93) and the most active (European Commission 2004, 156) and largest Industry in the European Union (European Commission 2004, 174). Germany is host to major car manufacturers, including prestigious brands such as: Audi, BMW, Mercedes, Porsche and Volkswagen. These brands are world famous for their innovation and quality. They are both accepted and popular all over the world (Newsletter German National Tourist Office 2006). This essay will describe the automotive industry in Germany and impact of regulations and policies placed on it from both the European Union and the German government. In particular the major markets, growth rates, annual expenditures/profits of this industry will be considered. Moreover, future impacts will be analysed whilst recommendations and justifications how to enter the industry will be given.

2. Description of the German automotive industry

According to Verband der Automobilindustrie (VDA) the automotive industry in Germany affects the national growth and employment significantly (VDA 2006, 3). In 1990 20% of Germanys GDP stemmed from this sector (VDA 2006, 3). The centre of this industry is located in Baden-Württemberg (EFILWC 2004a, 3). The European Foundation for the Improvement of Living and Working Conditions (EFILWC) says that this area generates more than a quarter of Germany’s annual vehicle sales and is responsible for an export rate of over 50% (2004a, 3). The automotive industry in Germany consists of a small number of “global lead manufacturers with a large number of family-owned small and medium-sized suppliers" (EFILWC 2004a, 2) which are supplying highly engineered systems (Siekman 1999). In 2004, manufacturers of motor vehicles and motor vehicle parts in Germany accounted for 2,500 enterprises and a total workforce of 890,000 in Germany (EFILWC 2004a, 2). In 2005, the automotive sector employed 13.2 percent in Germany (VDA 2006, 177). “Ten years ago it was less than 10 %” (VDA 2006, 177). The German automotive industry created 130,000 jobs during the past ten years in Germany (VDA 2006, 177). Also the German automotive Industry represents 44% of the EU total workforce in this sector (Appendix E) (EFILWC 2004a, 2). Germany’s automotive industry shows a specialisation in auto manufacturing (European Commission 2004, 155) and has been extremely successful (Hudson and Schamp1995, 93-94). Hudson and Schamp assert that the competition between five large independent firms which are located in a “cluster of highly innovative areas”, created this successful development (1995, 93-94). Moreover, the demand conditions in Germany are one of the factors explaining the success in export of German firms (European Commission 2004, 204). Germany’s automotive industry is faced with a challenging demand on the domestic market (Hudson and Schamp, 94). In addition, the number of consumers in the German market is the highest in the EU and theseconsumer were prepared to buy larger, better equipped and higher valued automobiles (Hudson and Schamp, 94). As a result, Germany’s automotive industry shifted into the higher valued automobiles (Hudson and Schamp, 93-94) and established the image of the German automotive industry as high-quality suppliers of vehicles (European Commission 2004, 205).

2.1 Major markets

The majority of trade of European automotive companies happens within the EU (European Commission 2004, 174). The European market is highly competitive with about 40 manufacturers offering products (EFILWC 2004c, 2). The success of the European automotive industry is primarily based on its dominance of a “large, loyal, sophisticated and diversified home market” (European Commission 2004, 191). The car home market in Germany is still marked by continued uncertainty on the part of the private buyer (VDA 2006, 18-19) and relies mostly on the replacement of existing cars (European Commission 2004, 191). However, the home market is a high-wage country and customers will pay a premium price for premium products (VDA 2006, 3). On the other hand, the home market is strongly influenced by the legal framework (European Commission 2004, 205). Due to decelerating growth in the home market, Germany’s automotive brands focused on increasing importance of foreign markets (European Commission 2004, 174). There exists a strong performance of Germany’s brands across all market segments (European Commission 2004, 172) with world market shares above 20 % for cars and buses (European Commission 2004, 172). In addition, Germany has the dominant market position in the world for bus exports (European Commission 2004, 172). As a result of the worldwide trend towards premium vehicles from Germany (VDA 2006, 176) 70.9 percent of the passenger cars are destined for foreign markets (VDA 2006, 35).

2.2. Growth rate

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