German Carmakers Ponder Solutions at a Difficult Time

Like most other industries, the automobile and auto parts industry was seriously affected during the rail workers strike in Germany last November. The strike brought operations at many auto companies to a standstill due to delays in auto part deliveries.

The strike, which was called the largest ever in Germany, was called to protest the German government's salary and pension reform plan, which proposed an average 4.5% rise in the salaries of rail workers, compared to the 30% rise sought by the GDL train drivers union.

The GDL's salary demand seems excessive at a time when many other sectors of German economy are slowing. The rising euro and soaring price of oil have put the German economy under heavy inflationary pressure and gutted the consumer confidence index, which fell to 4.9 in November 2007. The inflation rate is expected to clock in at about 3% in 2007, and in November, the German government lowered its economic growth forecast for 2008 from 2.4% to 2%. This signals that the sluggish economy may continue, or worsen, in the year ahead.

The general weakening of the business environment has inevitably been felt in the automobile and auto parts industry as well. The situation facing German auto parts suppliers is increasingly resembling that across the Atlantic, where a succession of auto parts suppliers has filed bankruptcy due to competition from Asian imports.

Harsh international competition amid a difficult economic time has added pressure on the operations of German auto parts companies. A German autoworker cited in a recent AP report noted that, "The pressure to perform for new markets around the globe is constantly getting more intense... The carmakers used to hire workers on fixed-term contracts before, today they try to get by with cheaper temp workers."

Mounting Competitive Pressure

In a sign of the hardships facing German auto parts makers in recent years, India's Tata AutoComp System (TACO) acquired German auto parts manufacturer Wundsch Weidinger in September 2005. The buyout revealed two trends in the international auto parts market. First, business groups in newly emerging countries are becoming powerful enough to take over counterparts in advanced countries to expand globally. Second, the tough battle against Asian competitors has extended from the U.S. to the European continent, where consumers generally require a relatively higher quality of goods.

TACO spent 12 million euros to acquire Wundsch Weidinger, a producer of plastic parts and systems for the automobile industry. The German maker subsequently filed for bankruptcy in March 2005 and it has since been renamed as TACO Kunstosf Technik Gmbh. Today it supplies a much wider range of auto parts for both international and domestic automakers such Audi, BMW, DaimlerChrysler, Ford, and Volkswagen.

Wundsch Weidinger has not been alone in suffering financial problems. Roughly at the same time, Continental AG, the second largest European auto parts supplier after Bosch, laid off a quarter of its 1,200 workers and demanded deep concessions from those who remained at the company. Continental once enjoyed surging profits and soaring stock price when its American counterpart Delphi struggled to stave off financial ruins a couple of years ago. Now, it's in a similar situation.

In an attempt to reduce cost and expand business networks, Continent AG opened a new electronic car parts facility in Costa Rica last October. It expects to invest approximately US$61 (approximately 317,200 million colones) in its first year of operations. It chose Costa Rica in part for its proximity to the United States as it plans to take the advantage of Costa Rica's favorable tariffs on exports to the U.S. and other countries in the American continent under the Central American Free Trade Agreement (CAFTA). Costa Rica is the third Latin American country in which Continental has established operations, in addition to those in Mexico and Brazil.

Weakness and Strength

Germany retains the crown as the world's top carmaker despite the economic drag of integrating West and East Germany. It took a lead over other countries in introducing environmentally friendly diesel powered automobiles. However, the German automotive industry is now coming under criticism for its inability to produce engines with lower carbon dioxide emissions.

In a survey conducted by the European Tansport and Environment (T&E) in 2006, German carmakers lost their lead to French, Italian, and Japanese rivals in terms of fuel efficiency and emissions reduction. According to the T&E, the average amount of the emissions generated by German-made cars, except those produced by BMW, has been increasing. If this is not corrected, German automobiles will have trouble meeting EU requirement that the carbon dioxide emissions of new cars be reduced to 120 grams per kilometer or less by 2012.

Bernd Gottschalk, president of the German Association of the Automotive Industry (VDA), came out in opposition against the requirement, arguing that "a rigid directive would constitute a sanction against the superior quality cars of the German industry." It's reported that German carmakers continue manufacturing traditional engines with high fuel consumption and high emissions. The Porsche Carrera, for example, emits 300 grams of CO2 per kilometer, compared to a national average of 172 grams/km.

Besides emission control problem, German carmakers have been suffering a decline in sales and profits for several consecutive years. Volkswagen, in reaction to slowing business, planned to cut its annual production cost by 30%, or two billion euros, by 2011. Opel, which admitted it misjudged the market and failed to hit the brakes on production earlier, also has plans to cut labor costs.

Automotive analysts commented that oversupply has lingered for years on the German car market where economic growth has been sluggish, consumer spending depressed, and the number of new car registrations has fallen for several consecutive years.

They blamed the weakening economic situation as a major reason for the fall in sales and profits of German automakers in recent years, and believe German carmakers will find ways to move up as soon as the economy improves, drawing on their advanced technology, more self-reliant workers, and reputation for making the best quality cars in the world.