The Tesla Shock

"Witch hunt against the Automobile"

The recent series of scandals (diesel scandal, accusation of cartel formation) which have strongly damaged the international image of Germany's automobile industry have become a topic of dispute in the government coalition during the hot phase of the German parliamentary election campaign. When, in an interview, Chancellor Angela Merkel cautiously spoke in favor of the automobile industry abandoning the combustion engine, she was sharply attacked by her CSU coalition partner. Unlike the British and French governments, Merkel, in spite of her timid criticism, did not want to set a binding exit time frame for this climate-damaging technology, explicitly declaring that she "could not yet name a precise year." However, CSU Chairman Horst Seehofer immediately declared that, for his party, maintaining the diesel would be a prerequisite for forming a future coalition government.[1] Prohibiting the combustion engine would "strike at the roots of our prosperity," Seehofer claimed. In the discussion of the diesel scandal, Germany is about to "completely loose its head" and start a "witch hunt against the automobile, itself."

Protecting the Industry

The German government appears to continue its policy, aimed simply at imposing the automobile industry's interests at the domestic and international levels. German car producers' manipulation of diesel vehicles' emissions data, which has led to the first prison sentences for VW employees,[2] will have no serious consequences in Germany for those responsible. This had become evident, when the government made no mention of possible sanctions or serious constraints for the car companies, at a crisis summit in Berlin between the German government and executives of the automobile industry. They merely agreed to "optimize" the diesel vehicles' pollutant emissions by updating their software. The automobile industry has been able to prevent bans on diesels or even diesel recall obligations. With its passivity, the German government is "protecting" the car manufacturers, according to media commentaries.[3]

China Under Pressure

Over the past few years, Berlin has become particularly active, when the German auto industry's direct interests were endangered. The most recent example was in China in late spring 2017, when German pressure compelled the political leadership of the world's largest car market to postpone the planned 2018 introduction of a quota for electrical vehicles.[4] Chancellor Merkel had been able to "persuade" China's Primier Li Keqiang, to postpone, for a year, the introduction of the obligation on all car manufacturers in the People's Republic of China that a quota of 8 percent of their cars must be electric powered. This measure, with which Beijing sought to reduce greenhouse gas emissions, has now been postponed until 2019, because the German car producers on the Chinese market were unable to meet the quota - which was scheduled to be increased to 12 percent by 2020. Since the European Union - particularly the euro zone - is an important market for Chinese products, Berlin had sufficient leverage to impose the delay. Merkel said that she wanted to be sure that German carmakers would continue to enjoy good conditions in China. The media is interpreting China's electric car quota as an attack on the German auto industry, to undercut its strong position on the Chinese market.

"Alliance Against CO2 Limits"

Up to now, Berlin has also successfully torpedoed the EU's climate policy standards on reducing automobile pollution, if these were seen as an obstacle to the German auto industry's competitiveness. In October 2013, Berlin - in cooperation with London - succeeded in preventing a European-wide CO2 directive for automobiles. Negotiations for this directive had taken a number of years to reach the agreement. Media commentaries point to a classical "horse trade" between German and British diplomats in a "European alliance against CO2 limits," wherein Berlin promised the British financial sector "concessions in the EU Banking Union."[5] In return, London would vote in favor of weakening the CO2 directive, which essentially stipulated that, beginning in 2020, new cars may only be permitted to emit 95 grams of CO2 /Km and, starting 2025, the amount must be further reduced. Now, the limits will not apply before 2024, and tighter restrictions have not been planned. The reason is that, on the average, the German auto manufacturers' fleet uses manifestly more gas than the fleets of their French and Italian competitors, thereby producing more pollution. On October 9, 2013, following the German government's intervention, a generous donation of €690,000 from the owners of the BMW company, the Quandt family, was transferred to the account of the CDU party headquarters.[6]

Germany's Key Sector

The automobile industry assumes a key position in Germany's export-oriented economic strategy, which aims at the highest possible export surpluses. In 2012, automobile manufacturers generated around 17.3 percent of Germany's exports, thereby, accounting for around two-thirds of its trade surpluses.[7]

Technological Backlog

However, it seems that the export-oriented economic strategy - wherein the German state merely serves as a political agent to the business interests of the car manufacturers - has reached its limits. The German auto industry's lobbying policies may have been too much of a success. Lacking a compulsion for innovation - thanks to German government interventions, to achieve their short-term, profit-maximizing objectives - the automobile companies have developed a technological backlog vis à vis their foreign competitors. The US media, for example, recently noted that, whereas the electric car manufacturer Tesla Motors is delivering its first mass-produced model 3 - whose advance orders mean capacity production until the end of 2018 - Germany's politicians are fighting to maintain an archaic technology. "Britain and France want to end the sale of diesel cars. Madrid and Athens are banning them entirely. Automakers like Volvo are switching to electric engines." However, as others have "increased investment in electric cars, German auto executives and political leaders appeared determined" to hold on to diesel.[8]

A New iPhone Moment

The British financial press diagnosed that the German manufacturers are suffering "a Tesla shock," in which the German industry has strategically accumulated a technological backlog, which it can hardly overcome. There is plenty of demand for the new Tesla 3; the question is whether they can produce them all. German companies have the converse problem: "they are good at making diesel cars but who wants one?"[9] Germany’s carmakers face their "iPhone moment," where they are confronted with a US company selling "an elegant device based on superior technology," forcing them out of the market, like BlackBerry and Nokia had suffered just a few years ago. Tesla is seizing the halo from Germany’s iconic industry; diesel is dying and the only question is how long it will take. In the meantime, asset managers have begun banning investments in German carmakers from some of their funds. They prefer to wait at least until after the investigation of alleged industry collusion is finished.[10]

[1] Seehofer macht Festhalten am Diesel zur Koalitionsbedingung. zeit.de 26.08.2017.
[2] VW engineer sent to the clink for three years for emissions-busting code. theregister.co.uk 25.08.2017.
[3] Bundesregierung will Autoindustrie schonen. spiegel.de 02.08.2017.
[4] China makes concessions to Germany on electric car quotas. reuters.com 01.06.2017.
[5] Merkel schmiedet europäische Allianz gegen CO2-Grenzwerte. www.spiegel.de 13.10.2013.
[6] CDU erhält Riesenspende von BMW-Großaktionären. spiegel.de 15.10.2013.
[7] Tomasz Konicz: Neue Normalität. konkret 12/2013.
[8] Melissa Eddy, Jack Ewing: As Europe Sours on Diesel, Germany Fights to Save It. nytimes.com 02.08.2017.
[9] Germany's carmakers feel the Tesla shock. ft.com 02.08.2017.
[10] Asset managers ban investments in German carmakers. ft.com 20.08.2017.