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

Term Paper , 2006 , 25 Pages , Grade: 1,3

Economics - Industrial Economics

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” . For several decades the automobile industry has been a key sector in the German economy and the most active and largest Industry in the European Union . 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. 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.

Table of Contents

1. Introduction

2. Description of the German automotive industry
2.1 Major markets
2.2. Growth rate
2.3 Annual expenditure/profits

3. Government policies impacting on the industry
3.1 The European regulatory environment
3.1.1 Block Exemption
3.1.2 Oil consumption
3.1.3 Clean air
3.1.4 European safety program
3.2 The German regulatory environment
3.2.1 National transport policy
3.2.2 Education and research
3.2.3 Financial support
3.2.4 Fuel taxes

4. Future developments
4.1 Future developments in Europe
4.1.1 Alternative fuels
4.1.2 Old car recycling
4.1.3 Enlargement of the European automotive industry
4.2 Future developments in Germany
4.2.1 Taxation and fiscal policy
4.2.2 German automotive industry is shifting to Eastern Europe
4.2.3 CO2 emissions

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

6. Conclusion

Reference list

Appendix

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

The growth rates for the German automotive industry have to be considered for the domestic and international markets. In the last 30 years the number of cars produced in Germany has tripled with an increase of 3 million cars each year (European Commission 2001b, 9). The worldwide production decreased by 3.7% and German production increased by 3% in 2001 (EFILWC 2004a, 13). Every fifth vehicle produced worldwide was produced in a factory operated by a German motor-vehicle group (VDA 2006, 33). Furthermore, the total sales for the German automotive sector rose to 236 billion euros in 2005 (VDA 2006, 176) and a total of 13.5 million passenger cars sold in 2005 worldwide (VDA 2006, 181). As a result, the German automotive industries has managed to more than double its revenues over the past ten years and increase its share the worldwide market from12 percent to nearly 19 percent (VDA 2006, 176). In the past, the domestic demand in the German motor car market, plunged from a peak in 1999 of 3.8 million cars, to a level below 3.3 million in 2002 but this could be compensated by higher exports (EFILWC 2004a, 13).

2.3 Annual expenditure/profits

Over the past five years, the German automotive industry invested a total of 57.5 billion euros within Germany (VDA 2006, 179). This is equivalent to 23.5 percent of the entire investment in German industry (VDA 2006, 179). Moreover, the research and development (R&D) expenditures by German car manufactures account for more than 30 % of total manufacturing R&D expenditures in Germany (European Commission 2004, 158). In 2005, German passenger car and commercial vehicle manufacturers achieved a total business volume (domestic and export) of 159 billion euros (VDA 2006, 177). Two thirds of their sales are achieved abroad (VDA 2006, 177). Financial profits are influenced both the exchange rate fluctuations, particularly between the dollar and the euro (EFILWC 2004a, 12), and by rising labour costs in Germany (VDA 2006, 44) such as costs per man hour (European Commission 2004, 192).

3. Government policies impacting on the industry

The European Commission asserts that “the competitiveness of the automotive industry, and the European economy, depends on a coherent and cost-effective regulatory framework” (Appendix B) (2004, 226). Many of regulations were established as a result of accidents, pollution, noise (EFILWC 2004b, 4) or to promote competition and a better deal for consumers (EFILWC 2004c, 13). On the other hand, motoring is an important source of revenue for all Member States (European Commission 2002, 3). There are a wide range of tax instruments to “ensure significant budgetary receipts from both private and commercial road users” (European Commission 2002, 3).

3.1 The European regulatory environment

3.1.1 Block Exemption

In the past, the block exemption from the European Union set a framework for the “operation of vehicle franchised networks” (Wade 2005) and regulated the “distribution of cars and vehicle services” (European Commission 2004, 209). Consumer groups have complained that in large markets like Germany (Mercado, Welford and Prescott 2001, 426) the prices for identical vehicle models vary by up to 40 % in Europe (Mercado, Welford and Prescott 2001, 426) and that car manufacturers exploit national market differences to boost their own profits (Anon. 2001). To eliminate the market differences the European commission introduced the right to buy a car in a member state where prices are low (Anon. 2001). This opening of the territory invites much more intense competition which impacts on the automotive industry (Appendix B) (Rosenhau and Keipper 2002; Mercado, Welford and Prescott 2001, 426; Wade 2005).

3.1.2 Oil consumption

Oil consumption by the transport sector has risen dramatically in recent years (Appendix D) (Wright 2004, 13). Of this car consumption accounts for a huge part of the oil for which the EU is dependent on imports (EFILWC 2004b, 1). The European Union is trying to reduce the dependence on oil from the current level of 98%, by using alternative fuels, improving the energy efficiency of modes of transport (European Commission 2001b, 10) and by introducing of higher fuel prices (EFILWC 2004e, 2). There must be lower fuel consumption in the future (Freyssenet, Shimizu and Volpato, 180) and it is necessary for the automotive industry to look for alternatives (Freyssenet, Shimizu and Volpato, 75). This fact forces leading manufacturers to do research and engineering into new fuel and power technologies (Mercado, Welford and Prescott 2001, 426).

3.1.3 Clean air

Environmental objectives provided by the Kyoto Protocol (European Commission 2002, 4) forced the use of fiscal measures (taxation) to reduce CO2 emissions from passenger cars and improve fuel economy (European Commission 2002, 3). Fiscal measures (Appendix A) have a potential to support reduction of the average CO2 emitted from vehicles and they are a wide spread incentive to change behaviour of consumers and therefore manufacturers (European Commission 2002, 17). The EU introduced emissions standards which are compulsory for all EU Member States (EFILWC 2004c, 10). Norms and standards are regulations which promote innovations in particular fields (EFILWC 2004a, 16). In addition a labelling scheme was introduced to provide consumers with standardised information based on tests which reflect normal driving conditions (EFILWC 2004b, 5). Moreover the label scheme may be used to ban old, high polluting cars from entering the city centres (Acea 2006, 2). This would indicate that EU-based car manufacturers are forced to reduce CO2 emissions of new cars (EFILWC 2004b, 5).

3.1.4 European safety program

The European safety program is publishing test results to inform consumers about the safety performance of the most popular categories of new cars, with harmonised testing protocols, under conditions representative of different types of crashes (Comission of the European communities 2003, 21). The European Commission provides financial support and takes part in technical decisions, giving incentives to make cars safer and avoid accidents (Comission of the European communities 2003, 21).

3.2 The German regulatory environment

3.2.1 National transport policy

Direct charges for road use are becoming an increasingly attractive option (EFILWC 2004b, 4) in Europe (Downs and Livingstone 2003) and Germany also started, on the 1st of January 2005, to charge a toll for trucks (Blau 2005, 12; Koenig 1999, 16A). Over 800,000 trucks use German highways every day (Blau 2005, 12) and this road transport supplies the government with revenue (VDA 2006, 75).

3.2.2 Education and research

The German Ministry of Education and Research supports the concentration of experience and excellence, with the creation of networks of competence (EFILWC 2004a, 16). Moreover, they established an inter-disciplinary network of universities which are specialized for the automotive industry requirements (EFILWC 2004a, 16). As a result, manufacturers and suppliers are some of the largest industrial customers of German universities graduates (VDA 2006, 17).

3.2.3 Financial support

The German government provides direct or indirect financial support towards business research and development expenditure (EFILWC 2004a, 13). This stimulates research and development expenditures in the German automotive industry (Appendix F). Furthermore, financial support for introducing modern technologies and innovative projects to investors is given (EFILWC 2004a, 16). The German government is also trying to persuade the automobile industry to direct new investments in manufacturing capacity (Bursa 2005) into areas of high unemployment (Hudson and Schamp, 23).

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• College: University of Queensland
• Course: CONTEMPORARY BUSINESS IN EUROPE
• Grade: 1,3
• Author: Stephan Osswald (Author)
• Publication Year: 2006
• Pages: 25
• Catalog Number: V80981
• ISBN (eBook): 9783638874342
• ISBN (Book): 9783638874373
• Language: English
• Tags: Description, German, Critical, CONTEMPORARY, BUSINESS, EUROPE