The Dependency of German Automakers on China

In recent years, it may have seemed that the German automotive industry had no alternative to its strong focus on China. It appeared clear that the industry could only grow and achieve good profits if more cars were built and sold there. However, an analysis by Handelsblatt of data from the information service provider Marklines shows a different story. Other car manufacturers have chosen a different strategy. The heavy dependence on the Chinese market is primarily an issue for German manufacturers Volkswagen, BMW, and Mercedes. They have neglected other markets in North America and Europe, resulting in their market shares stagnating or even declining there, despite more cars being sold than before.

In the first half of 2023, 23 percent of globally registered vehicles were sold in China. During the same period, every third car produced by Mercedes was registered in the People's Republic, BMW's share was 35 percent, and VW reached almost 45 percent. Over a ten-year period, German manufacturers have disproportionately increased their dependence compared to their competitors. With the arrival of Chinese brands in Europe, there is now a risk of losing market share there as well.

Politically, pressure could also increase. In mid-September, the European Commission announced plans to consider sanctions against Chinese automakers due to state subsidies for electric vehicles. German manufacturers fear countermeasures.

However, the strategic decision to focus on the rapidly growing Chinese market could prove advantageous in the event of sanctions—at least for VW. "Manufacturers that produce locally in their respective markets would be immune to import tariffs," says Daniel Röska of Bernstein Research. VW produces over 99 percent of all vehicles sold in China locally. No VW built in China is sold in Europe.

Röska, however, is not convinced of the sanctions. Neither is Stefan Bratzel, director of the Center of Automotive Management. "Any restriction of free trade is bad for all manufacturers," he says. VW CEO Oliver Blume recently spoke out clearly against discriminatory markets at an event for the "Stuttgarter Zeitung." They want to face the competition. BMW and Mercedes also do not support sanctions.

The concerns of German car manufacturers stem from a development for which they are responsible. Over the past decade, they have become more dependent on the Chinese market than any other carmakers in the world. However, with the transformation to electric mobility in China, German manufacturers are losing significance. Due to the economically challenging situation, manufacturers are avoiding any potential additional political burden.

The data analysis, however, shows that German manufacturers—especially VW—would be more resilient to possible Chinese sanctions than they present themselves. A counterreaction from the People's Republic to EU sanctions would affect them selectively, while there is a chance that the European production site could benefit.

Until 2019, German manufacturers continuously expanded their market share in China. The Volkswagen Group sold nearly every fifth car in the People's Republic until then. However, the situation changed with the outbreak of the COVID-19 pandemic in 2020. Since then, BMW and Mercedes have stagnated, and Volkswagen has rapidly lost market share.

In Europe and North America, the premium brands have not surpassed the 2012 level. VW has also lost market share in these two markets. Over a ten-year period, Wolfsburg has lost market share worldwide.

The losses are not an industry phenomenon. They exclusively concern VW. Hyundai-Kia, Renault-Nissan, and Toyota have expanded their market presence either in Europe, North America, or in both regions, compensating for their somewhat decreased business in China.

In contrast, German manufacturers have increasingly dedicated themselves to the Chinese market over the past decade. Especially among premium manufacturers, sales shares have dramatically increased, from nine percent for BMW in 2012 to 35 percent in the first half of 2023, and from seven to nearly 31 percent for Mercedes.

The development in North America over the same period exposes the shortcomings of the German car industry. Despite the region's increased share of global sales, the market shares of VW, BMW, and Mercedes have decreased in North America.

A similar situation is observed in Europe. The share of global sales has increased in the first half of the year compared to 2012, but the shares of BMW have decreased from 40 to 35 percent, and Mercedes from 46 to 39 percent.

With rising sales in China, German manufacturers have increased their production capacities there over the past ten years while reducing capacities in Europe. Therefore, there is a mismatch in production similar to sales. Almost 30 percent of all vehicles were manufactured in China worldwide in the first half of 2023. VW's share is 41 percent. In 2022, the share was even over 49 percent.

Compared to 2012, China's share of global production has increased by "only" 13 percentage points, whereas the shares of BMW and Mercedes have each increased by more than 20 percentage points. Except for Tesla, no other non-Chinese brand is as dependent on China in production as the German automotive industry.

The gigantic production capacities established by manufacturers in China create one-sided dependence, but they also protect against the simplest and most effective sanction: import tariffs.

In the first half of 2023, Volkswagen built over 99 percent of the vehicles offered in China. Audi reached nearly 91 percent, followed by BMW with 87 percent and Mercedes with around 80 percent.

However, there are differences between the volume manufacturer VW and the premium brands BMW and Mercedes. The respective import quotas of 13 and 20 percent apply to the most expensive and high-margin vehicles of these brands. BMW's 7 Series and Mercedes S-Class are manufactured in Germany and shipped to the People's Republic.

Registration data for the past year illustrates the outstanding role of German premium brands in imports. Last year, a total of around 770,000 vehicles were imported to China. 456,000 cars were from German manufacturers. Of these 456,000 vehicles, almost 444,000 vehicles were BMW, Mercedes, Audi, and Porsche brands. Thus, the German premium brands alone account for more than half of China's total imports.

The problem: "If tariffs reduce demand for S-Class and 7 Series, it would affect the production facilities in Germany, where these vehicles are manufactured," says Röska. Accordingly, German automotive executives, including Oliver Blume, who is also the CEO of Porsche, are clearly opposed to possible trade barriers.

From a purely business perspective, resistance is understandable. Especially since some German manufacturers, like Tesla, have started to export affordably produced vehicles from China to Europe. BMW with the electric SUV iX3 and soon the VW brand Cupra with the Tavascan could receive a severe blow due to these sanctions.

However, from a political perspective, sanctions could enhance the European location and improve employment prospects. Higher import duties would make local plants of Chinese manufacturers in Europe more likely, according to an analysis by the investment bank UBS. According to Bratzel, it is currently a good negotiating time purely politically. "Chinese manufacturers want or need to expand but can hardly do so in the USA due to local regulations. Therefore, Europe is the most important market for manufacturers outside of China," says automotive expert Bratzel.

Röska is skeptical about this approach. Chinese car manufacturers have long-term strategies for Europe. "With corresponding volumes, they will open plants in Europe. Additional political pressure from the EU is unnecessary," he says.

Source: Handelsblatt