How Germany bounced back - German automobile industry

Automotive Industries, Sept, 1998 by Richard Feast

Less than five years ago, German automakers were in the emergency ward. Today, they're back in the Driver's seat.

Where were the Americans, the Japanese and the other Europeans? Nothing better illustrates the remarkable resurgence of the German auto industry than the recent purchase/merger frenzy. Volkswagen bought Rolls-Royce and Lamborghini. Daimler-Benz will merge with Chrysler, and probably will take over Nissan Diesel. More deals are likely to follow.

Germany's auto industry is brimming with confidence and cash -- and even greater ambition. It has leapt vigorously from the hospital bed to which it was confined after its world collapsed in 1993, following the post-reunification boom of the late 1980s and early 1990s. Then total vehicle production plunged 22% within a year -- a fall bigger than after the 1973 oil crisis.

By the mid-1990s, Germany was hobbled by sky-high wage and social costs, heavy taxes, inflexible labor practices, long vacations, short work weeks, dwindling domestic demand, an unfavorable exchange rate and much tougher competition. Many of those problems remain but the obituaries, which were then being prepared, are not required-- at present.

The effects of the re-engineering efforts are becoming evident. They were seen when the automakers published impressive financial results for last year.

Part of that was due to a new strategy that focuses consumer attention on competitive and well-priced new products. "In the past, we often answered questions the customer never asked. We had to charge high prices. While the products and quality were good, we were far away from what the customer really wanted," concedes Bernd Gottschalk, president of Germany's vehicle industry association, the VDA. "Today, we have rediscovered the customer."

It worked. Global demand for the latest BMW 3- and 5-Series, for VW Beetles, Golfs, Passats, and for whole ranges of Audis, Mercedes-Benzes and Porsches is so great that the country's automakers are apt to lament their lack of capacity rather than their excess of it. That's not the situation for most of their rivals these days.

Vehicle production in Germany last year amounted to a 4% increase over the previous year. Exports were at an all-time high. The automotive sector, accounting for one-fifth of the country's exports, ended the year with a trade surplus of $46 billion over the value of imports.

Production this year seems destined to break the 1992 record of 5.19 million. In the first six months, vehicle output advanced to 2.6 million units. Exports were 1.6 million. And yet, only five years ago, German output was at its lowest level in 13 years.

Keeping pace with the orders produces a welcome bonus in a country where unemployment (11.2%) is practically a post-war high. Having shed 100,000 jobs in the downturn, the auto industry is currently one of the few sectors actively recruiting. It created 25,000 jobs last year and another 20,000 in the first four months of this year to stand at almost 700,000. Half were among supplier companies, as OEMs began outsourcing more of their design, engineering and sub-assembly work.

At the same time, German automakers raised investments to unprecedented levels. Collectively, they are pouring DM47 billion ($26.1 billion) into new plant and product over the 1996-98 period, including $9.8 billion this year alone. As with the takeovers, money appears not to be an object. That is, in large measure, because of all the profits generated by the comparatively weak German mark.

While a favorable exchange rate remains crucial to the comeback, the performance could not have been achieved without a more deep-seated overhaul of the way automakers do business. High unemployment led to a slowdown in wage increases and to the widespread adoption of more flexible work practices.

Today, the country's vehicle makers are knee-deep in windfall profits from exports. They cannot be relied on for the long term, though. A stronger mark would expose whether German industry really has changed, or whether the current dazzling performance is masked by exchange rates.

GERMANY: UP AND DOWN IN THE NINETIES

Year   Total production   Car production   Car exports

1997       5,022,900        4,678,000       2,816,700

1995       4,667,400        4,360,200       2,465,200

1993       4,031,800        3,794,500       2,079,100

1991       5,034,400        4,676,700       2,179,600

Source: 179,600

HOW GERMAN AUTOMAKERS STACKED UP LAST YEAR

BMW
Annual sales
Net profit                                          $33.4 billion
Group employees                                      $692 million
Unit sales                                               117,6000
                                                    1.19 million,
                                      of which  672,200 were BMWs

Daimler-Benz                                        $68.9 billion
Annual sales                                         $1.8 billion
Net profit                                                275,000
Group employees                            1.33 million, of which
Unit sales              715,000 were Mercedes-Benz passenger cars

Porsche(*)
Annual sales                                         $2.5 billion
Net profit                                            $55 million
Group employees                                             7,000
Unit sales                                                 38,000

Volkswagen
Annual sales                                        $62.9 billion
Net profit                                           $756 million
Group employees                                           275,000
Unit sales                            4.25 million, of which 2.95
                                 were VWs and 552,000 were Audis.