Can the German auto industry catch up with Tesla?

The leading innovator on traditional car engine technologies, Germany’s automobile industry has missed the start of the climate change induced race for electric cars. Can and should it catch up?

In 1886, when Karl Benz submitted his patent for the first combustion engine powered vehicle, the German gave rise to a paradigm shift in personal transportation from carriages to modern automobiles. Since then, Germany has been an important constituent of the world’s automobile industry, leading auto exports for many years. Today, roughly 800,000 of its 80 Mio. citizens are employed in the automobile industry making it a significant share of GDP [1]. One can even argue that German automobile exports are impacting Germany’s foreign perception with attributes such as diligence, hard work, innovation, and quality made in Germany.

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When climate change became a more widespread concern in the early 2000s the awareness of the negative effect of gas/diesel fueled cars on the environment sparked a search for alternative drive systems. While it is not yet clear that electric cars are the new paradigm of automobile engines, climate change definitely gave rise to a rethinking of the paradigm of the traditional German combustion engine and within a few years put the future of the German auto industry at risk of losing its position in the market.

The German car industry was stuck in a typical innovators’ dilemma: it had no interest to reinvent itself because it was in such a comfortable position [2]. While the Germans were still arguing over electric vs. natural gas vs. hydrogen powered engines in form of hybrid, plug in or fully fletched alternatives, tech-innovator and car-newbie Elon Musk of Tesla built his first fully fletched electric vehicle with a battery reach that significantly surpassed the German electric car experiments [2]. In 2015, Tesla topped European sales of all German electric vehicles and had significant negative effects on traditional German car sales in the US as customers were shifting towards electric engines [3]. It became apparent that the Germans auto industry had bid itself in the tail by lobbying against stricter regulation on more climate friendly cars.

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The Germans had discounted the possible paradigm shift too much. In their perception traditional engines were significantly superior to the technological advances made in the electric field. This mindset combined with the limited support for electric mobility by German policymakers (relative to some other countries like Norway) and the resulting low uptake of electric car sales in Germany led them to underestimated worldwide demand for cleaner electric cars.

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Since then, much has happened: German auto manufacturers have successfully built electric cars that can compete with Tesla, both in the luxury as well as the economy segment and German policy makers have implemented monetary incentives for purchases of electric vehicles [4]. Most recently, Volkswagen announced plans to become the electric car leader with a goal of achieving 20-25% of its annual sales with electric cars by 2025 [5]. Many observers believe that this mindset shift (even through it comes from a position of weakness because of the emissions scandal) and the unprecedented presence of German electric cars at the Paris Auto Salon in September of this year, marks the entry of the German auto industry in the race for technology leadership of new environmentally friendly car engines [6]. According to Kristina Church, head of the automotive industry desk at Barclays in London: “The time will come when the German carmakers can show their advantages.” [6] over Tesla who is still struggling to ramp up production to a similar scale.

To conclude, I think this example shows how significant the impact of external factors such as climate change can be on established industry paradigms and how an outside company that has embraced this shift has been able to cause great turmoil to the traditional market structure. The coming years will show if electric engines will prevail as the new paradigm and if Tesla can defend its position.

Going forward, regaining control over the market by focusing on environmentally friendly technology should be the Germans’ #1 priority. In the past weeks alone, two proposals made the German news headlines: 1. The German federal council (Bundesrat) proposed European-wide regulation to ban registration of new non-electric cars beyond 2030 [7], and 2. the Chinese industry and information technology ministry published a bill on its website that from 2018 onwards all car manufacturers need to fulfill a certain electric car quota [8]. And this is only the beginning: regardless of whether these two proposals will actually pass, the regulation on the impact of climate change will inevitably increase and the Germans need to prepare for this now, if they want to get back in the game.

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Sources

[1] https://de.statista.com/statistik/daten/studie/30703/umfrage/beschaeftigtenzahl-in-der-automobilindustrie/

[2] https://techcrunch.com/2014/07/26/bmw-vs-tesla-is-a-real-live-innovators-dilemma-battle/

[3] http://www.bloomberg.com/news/articles/2016-05-12/why-tesla-s-mass-market-car-should-scare-mercedes-and-bmw

[4] http://www.wsj.com/articles/germany-to-subsidize-electric-autos-1461768367

[5] http://www.bbc.com/news/business-36548893

[6] https://global.handelsblatt.com/our-magazine/the-germans-are-coming-for-tesla-motors-624915

[7] http://www.spiegel.de/auto/aktuell/bundeslaender-wollen-benzin-und-dieselautos-ab-2030-verbieten-a-1115671.html

[8] http://www.sueddeutsche.de/wirtschaft/e-autos-deutsche-automobilhersteller-sind-entsetzt-ueber-chinesische-elekroquote-1.3228492

Exhibit Sources (in order of appearance)

Cover photo: http://st.motortrend.com/uploads/sites/5/2014/08/2014-BMW-i8-Tesla-Model-S-front-end-in-motion.jpg

https://www.statista.com/chart/1451/germany-is-the-worlds-no-one-automobile-exporter-by-far/

http://www.wsj.com/articles/germany-to-subsidize-electric-autos-1461768367

http://www.forbes.com/sites/niallmccarthy/2015/07/23/norway-leads-the-worlds-market-for-electric-vehicles-infographic/#20d0dc95eed5

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4 thoughts on “Can the German auto industry catch up with Tesla?

  1. Hi Sabine,

    This is a very interesting article – I bet you will enjoy Lee’s article (I did) on U.S. tax subsidies for Tesla cars in the United States. I would be curious about the following:

    (1) How large are the tax subsidies in Germany for electric cars? Do they compare in magnitude to the U.S. version? I do wonder if these types of subsidies would run afoul of international trade agreements given that they can distort purchasing and trade.

    (2) How far behind Tesla are the German auto manufacturers in battery technology and range? If I were BMW or Mercedes, this would be one of my main “keep me up at night” issues in the industry given that – at least in the U.S. – my perception is that BMW and Mercedes don’t even offer a serious luxury car competitor to Tesla and given that Tesla is coming down market with its model S car.

    Taki

  2. German engineering, especially in automotive industry, is among the best in the world. I’m curious about your thoughts on German manufacturers’ ability to duplicate and exceed Tesla’s engineering achievements, especially considering that the technology itself seems to be one of the most significant limiting factors across the industry. Do you think the Germans will catch up faster than Tesla was initially able to achieve the technological advances it has made so far? Will the Germans be able to surpass Tesla’s technology now that they’re “in the game”? Although German engineering is exceptional, considering the historical competitive advantage has been with combustion engines, it seems to me that the success of VW Group, Daimler, and BMW will depend on battery and electric motor innovation in Germany and less on automotive engineering, where they continue to be strong.

  3. Sabine, I agree, great example on how external environmental factors and one outsider firm can shake up a whole industry. I am particularly curious about how the recent scandal around VW manipulating its emission tests will affect this race. As other German car brands are still under suspicion of whether they have followed similar practices, do German brands still stand a chance to position themselves as interested in sustainability?

  4. Interesting article!

    I agree with your criticism of the german auto industry for lagging to respond for innovation in electric cars. However, I want to point out that this might not be necessarily a bad idea. While there are some very good developments in the electric car space, you are never certain that the electric car will be the future, and hence, we cannot with full confidence recommend that the German auto industry should go full force in electric cars. Given the pace of innovation in technology, the next technology that is going to transform transportation might be something else that is yet to be discovered, and that renders electric cars obsolete.

    Hence, I think the lag that happened was very natural, and is potentially a good thing to wait before making such a large bet in order to assess whether this is a long term industry shift vs a short term hyped up trend.

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