At the BMW Welt showroom in Munich, March 2021.
Andreas Gebert—Bloomberg/Getty Images
Underpinning the narrative of a stagnating German industrial engine is its precarious automotive market. The sector accounts for 4% of Germany’s economy, but it’s effectively 6% when factoring in the other companies in the supply chain.
The automotive sector has been the jewel in Germany’s economic crown for several years and has historically ridden out previous globalization headwinds. Automotive companies made up an eighth of German companies represented on the Fortune 500 Europe in 2024 as a result.
But again, a change of fortune in China is blunting Germany’s economic edge. Vehicles remain the main driver of Germany’s exports to China, but those exports are increasingly under threat.
China has caught the Western world off guard with its offering of bargain electric vehicles, with BYD leading the charge on the continent while gaining market share quickly in its native land.
The European Commission is set to launch expanded tariffs that would see some Chinese suppliers slapped with fees close to 50% following an investigation into anticompetitive subsidies from the Chinese government. Germany opposed these fresh tariffs amid fears of retaliation from a key export market for the country.
BMW cut its 2024 profit guidance in September, citing a costly braking system recall and slowing demand in China. Mercedes-Benz shares fell when it announced a similar guidance cut in the same month, also mentioning falling demand in China.
Germany’s automakers, however, are in a more serious bind: People are losing interest in their cars. German carmakers bet big on the EV revolution, if later than competitors, and have been left puzzled by slowing growth after initial widespread uptake.
The solution for Volkswagen, Europe’s biggest company by revenue (it’s at the top of this year’s Fortune 500 Europe) and Germany’s biggest employer, is to dig into its cost base.
Volkswagen promised €10 billion in cost cuts in December last year, paving the way for a grisly battle with its powerful works council and threats of its first-ever German plant closure.
That could filter back into the German economy in the shape of job cuts.
“China has become a nightmare for Germany,” Felipe Munoz, global analyst at JATO Dynamics, told Fortune.
Munoz thinks Germany’s strong unions will probably minimize job cuts at Volkswagen. But this could point to a new reality for Germany’s workers.
Capital Economics’ Kenningham said: “The fear of losing your job will always be there, and I think there’s less benefits associated with them.”
How do they fix it?
There are few easy options for Germany to climb out of its structural and cyclical holes and hold on to its spot as Europe’s biggest economy.
Structural reforms are a necessity, but as the de facto leader of the EU, overhauling trade or introducing widespread subsidies is unlikely. The country has made changes to introduce high-skill immigration from outside the EU, but sweeping reforms here are unlikely in a hot political environment.
“There is a high risk that Germany wakes up too late.”
Carsten Brzeski, global head of macro for ING Research
Finding new export partners is another urgency for Germany. However, ING’s Brzeski doesn’t predict another country will expand like China did 20 years ago. Downside risks are more likely, including the potential for major import tariffs if Donald Trump is reelected as U.S. president this November.
Germany’s three-pronged coalition government is not well suited to enacting sweeping reforms owing to the dueling interests of the governing parties. The country has also seen growing popularity for parties on the left and right of the political spectrum.
While it’s unlikely a far-right or far-left government will rise to power, their increasing vote share will make it harder for the ruling coalition parties to enact changes, particularly to things like innovation.
Germany can take solace in the fact that despite its current troubles, it’s still the biggest economy in Europe. And while revenues for Fortune 500 Europe companies declined last year, profits for businesses on the list increased by 12.2%.
“Germany has shown in the past that it can survive a crisis and structural reforms,” says Brzeski.
“There is a high risk that Germany wakes up too late, but it remains the largest economy in Europe. There is still relatively good infrastructure, so it still has the potential to be stronger 10 years from now than it is right now.”
Source link : https://fortune.com/europe/2024/10/22/germany-fortune-500-europe/
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Publish date : 2024-10-23 03:30:00
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