UN report puts German automakers in unfamiliar territory

The German auto industry has at times seemed invincible–but not of late. With the EU moving to curb emissions following the recent UN IPCC report on the acceleration of climate change, and technological advantages in China, Japan, and the US, the Germans find themselves in a surprising place: last.

The 2015 Volkswagen emissions scandal, one of the most consequential corporate frauds in recent memory, has quickly become the German auto industry’s second most pressing worry.  

Instead, the recent bombshell climate report from the United Nations’ Intergovernmental Panel on Climate Change has converted one of the manufacturer’s staunchest allies, the German government, threatening the automakers’ ability to wield power domestically. And as the environment becomes an increasingly salient European political priority, the likes of VW, BMW, and Mercedes-Benz will face a bigger challenge: technological competition from China, Japan, and the United States.|

“Quite a shock, and quite concerning”

Although global leaders—the US notably excluded—have already committed to curbing greenhouse emissions in the Paris Climate Agreement, the 6,000-reference IPCC report found that the world will need “rapid and far reaching transitions” in nearly every industry to limit warming to only 1.5 degrees Celsius.  

European policymakers, attempting to negotiate a compromise on emission reductions since the Volkswagen debacle, seized the initiative, with EU environment ministers agreeing on a CO2 reduction target of 15 percent by 2025 and 35 percent by 2030.

Mounting a defense?

German automakers, which make up by far the largest percentage of the 15 million vehicles produced annually in the EU, argued that the agreement threatened the job security of the industry’s more than 800,000 employees.

“Job security is lessened and Germany as an industrial location has been weakened,” said Bernard Mattes, president of the Verband der Automobilindustrie [German Association of the Automobile Industry], to Reuters.

In any prior negotiation on the issue, particularly in 2013, Mattes would have been able to trust his government to push hard for his industry’s interests. But in a stunning tactical move, the German Minister of the Environment, Svenja Schulze, made clear that she supported restrictions in excess of the 30 percent reduction, which was once her official position. With this, Angela Merkel’s government—already standing near the ledge—was only able to secure a 2023 review clause.

Chickens come home to roost

Although we see it in the rearview mirror, it is clear that the emissions scandal has played a role in these most recent developments. After all, the so-called “defeat devices” installed on 11 million Volkswagen cars had a singular purpose: suppress the detected levels of nitrogen oxide and dioxide emissions.

The new CO2 rules rub salt into the wounds of the broader European auto industry, which hoped to increase the production of petrol vehicles to maintain a semblance of worldwide competitive advantage. But the double obstruction could precipitate the reduction of the auto workforce of Volkswagen alone up to 100,000 people in the next decade.

Global competition stepping up

Individual city bans in Hamburg, Stuttgart, Frankfurt, and now Berlin have increased the social and political toxicity of diesel even within German borders. A replacement technology is available, but at additional cost and with trickier hurdles than internal combustion.

The number of available electric vehicles currently stands around three million around the world, with nearly two million in China. And with the power to compel the burgeoning middle class to purchase EVs, the Chinese government—combining its strength in battery and electric engine manufacturing—could unilaterally raise that number in the near future.

Japanese manufacturers, too, have invested heavily in electric batteries, and the introduction of the Toyota Prius in 1997 represented a shift in the way many consumers thought about the viability of hybrid vehicles. According to a recent automobile association report in the country, 19 percent of passenger cars on Japanese roads are hybrids.

Nor can German auto manufacturers expect an easy win over the United States. Despite Tesla’s recent management and legal struggles, the company has produced over 100,000 of its affordable Model 3 vehicles and possesses perhaps the highest concentration of institutional knowledge of electric engines in the world. Factor in the largest battery factory in the world and an American industry rapidly shifting to match Tesla’s velocity, and there can be little doubt that the United States will remain at the fore of electric car production.

What next?

In the boardrooms of automakers across Germany, the question will be the same: What next? The industry is surely at a crossroads, pushed by a European consensus on environmental protection and an inability of its own government to protect its interests.

Of course, it is possible that Volkswagen, BMW, Mercedes-Benz and the others will find a way to maneuver this crisis as they have done so in the past, developing a more robust strategy to defend their production supremacy. But these recent developments indicate that critical decisions on electric vehicles can no longer be held off.

Categories: Economics, Europe

About Author

John R. Hess

John is a first-year master’s student at The Fletcher School of Law and Diplomacy, concentrating in international political economy and business. His areas of expertise include macroeconomics and political risk issues of the European Union. John’s past experience includes legal work in his home state of North Carolina, research with the US Department of State, and government analysis for Lawyers for Human Rights in South Africa. He holds a bachelor’s degree from the University of North Carolina at Chapel Hill and is proficient in German.