Ten years ago, Ferdinand Piëch, father of the Volkswagen empire, wanted to know how Great Wall and other Chinese brands could put snazzy $15,000 SUVs on the road. We dismantled the vehicles and were amazed at the high perceived value in terms of workmanship and design; and at a cost that is 50 percent lower than that of German manufacturers. The profit was up to 15 percent return on sales.
Even today we dismantle Chinese vehicles. But now our clients want to learn how their innovative electric drive and IT technology works in detail. The good Chinese models are far superior to the German competition. At least that applies in China, where local manufacturers also benefit from the Chinese Internet and regulations that are beneficial to local companies. The consequence: For the past five years, German manufacturers have been falling behind massively in precisely the areas where they make around half of their profits.
1. The China business must become independent What needs to be done? The entire value chain must be mapped in China. The IT for the cars, the software and the battery technology have to be developed in China. VW’s cooperation with Horizon Robotics, one of the world’s leading digital companies for AI applications such as autonomous driving, shows how it can work.
The China business should increasingly be managed by the Chinese – right up to the board. Why does none of the German manufacturers have a Chinese board of directors for business in China? It’s different in other industries.
And finally, the Chinese market is so important that business can be run independently there. Including the export of vehicles from China to other regions of the world. That would also reduce the risk of political problems from a new China strategy by the federal government.
2. If you don’t fight back, you’ll be sidelined: Premium is becoming more and more important In February 2011, BMW, Mercedes and VW in China were in a mood of alarm. The strategy of the economic authority NDRC set the goal for the local car brands to increase their market share from 28 percent at the time to 50 percent by 2020 and to 70 percent by 2025. That would only work if the international brands massively lose market share with their joint ventures; At that time, VW had a 20 percent market share. And the Chinese manufacturers would also have to break into the premium segment. That seemed unimaginable at the time.
In 2022, automakers will continue to earn around 60 percent of the $120 billion global profit from premium vehicles. The German manufacturers brought in USD 50 billion of this. But the Chinese brands are attacking.
In the first half of 2022, VW still had a 14 percent market share in China. Mercedes and BMW are still selling very well there, but have gradually lost shares.
And the Chinese? Coming to Europe with their electric cars. In 2022 alone, 15 Chinese brands announced their market entry or have already started. But not with high-volume, inexpensive vehicles. No, they come with stylish premium models, equipped with innovative technology, offered at a confident price.
The consequence: Those who do not counter and counter the strengths of the Chinese will be squeezed out of the market. French and Italian volume manufacturers, but also smaller premium brands such as Volvo or Jaguar will have problems. Stellantis boss Carlos Tavares (64) and Renault boss Luca de Meo (55) have already sounded the alarm in the EU. The way out for the German brands can only be: more premium, more luxury, more innovation.
3. Tradition alone is not enough or: no past without a future Up to now, the history of a brand has been considered a real asset. Tradition, racing history and automotive heritage were more important than the latest digital features. Porsche is constantly adding new derivatives to the production model of the 911. 911 R, Sport Classic, 911 Dakar, 911 ST – each individual model has a historical role model. Strictly limited and therefore correspondingly expensive.
This has worked brilliantly so far. But the young Chinese brands are showing that there is another way. Does the history of the brand development still serve at all, or does it rather hinder? The capital market already rates the traditional brands at a discount. Executives should therefore reinvent their brands in the light of a digital and sustainable lifestyle if they want to keep up. Porsche’s Taycan shows that this can be done. Others, such as Jaguar, have so far been less successful in developing the brand into modern times.
4. You can’t do it alone: Google and Co. finally arrive in the car The relationship between automobile manufacturers and digital corporations such as Apple, Google, Amazon and Microsoft has long been characterized by tension. Some defended themselves against the intrusion of the tech players into their systems and feared for the security of their data. The others only offered their standard.
That could change this year: because anyone who still wants to keep up, just as with the young Chinese as with the electrical market leader Tesla, will hardly be able to do so without help from Silicon Valley. This is especially true when manufacturers like BYD intensify their attack in Europe.
The VW example with the software subsidiary Cariad shows that their own development hardly meets the demands of the market. On the other hand, the digital brands are now specifically tailoring their software to the car brands. While the Google interface with the Google logo still appears on the screens in a Polestar 2, the technology used will not be recognizable in a Mercedes, BMW or VW. At the digital trade fair CES in Las Vegas, Stellantis presented its cockpit development with Amazon, Foxconn and Qualcomm: a scalable operating system that can be updated like a mobile phone and enables deep intervention in vehicle functions.
Google is likely to be number one in Germany. The company combines experience with autonomous vehicle technologies (Waymo) and data linking between vehicle and customer activities via Google on the Internet; that could mean an almost monopolistic competitive edge. Nobody can compete with the map service Google Maps anyway.
5. Sustainability becomes a sales argument The topic of sustainability is becoming more and more important. The brand that radiates credible smart sustainability sets itself apart – even from the new attackers. The electric drive will not replace the internal combustion engine tomorrow. Nor will local value chains become mandatory. But critical questions about raw material mining and trading can become central, just like the comparatively high costs for the electric drive can become an issue again. No politician wants to see the car as an instrument of social tension between high and low earners – especially not when Chinese newcomers take over the market.
When the environmental impact of various technologies becomes transparent through digital tools, this will trigger a new discussion about the “holistic sustainability” of the automobile. And then everyone has to face it – and can score points if they adapt to it in good time.
6. It only works together – also in Europe If Ursula von der Leyen (64), President of the EU Commission, announces a multi-billion dollar program to promote green technology, then the car industry could also benefit. But it takes more. The American auto industry is benefiting from the Inflation Reduction Act, and Chinese manufacturers are also receiving political support. In Europe, on the other hand, the average car has become around 1,100 euros more expensive over the past ten years, due to regulatory requirements alone.
The European car industry has only limited countermeasures. In the dispute over a strategy for drives and IT technology, Volvo and Stellantis left the European automobile association Acea in 2022. Countermeasures must be taken here. Car manufacturers cannot explain their individual industrial policy strategy. The local car companies need Acea in the struggle for better competitive conditions. That already applies. But even more so with the entry of Chinese competitors into Europe.