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News : EU Economy Last Updated: Feb 14, 2011 - 1:41 AM

Germany’s car industry: Driver and beneficiary of globalisation
By Finfacts Team
Feb 11, 2011 - 3:27 AM

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Source: Deutsche Bank Research
Germany’s car industry is on a roll and last month Finfacts reported that demand for European cars in China this year is expected to be 25 times 2005 levels. Germany is home to Europe's biggest car manufacturer, Volkswagen, and is both a driver and  beneficiary of globalisation, according to Deutsche Bank Research (DBR).China's People's Daily reported last month that Volkswagen plans the biggest-ever investment in China by a carmaker over the next five years as it spends €10.6bn to consolidate and further expand its leading position.

DBR economist, Eric Heymann, says in a commentary that last year saw the German car industry produce more cars on foreign soil than in Germany for the first time. He says this is one element of a rigorous globalisation strategy that has helped the industry to not only maintain its market share in all major car markets but even to gain market share in most of them. The expansion in foreign production has been accompanied by the successful development of domestic facilities, which is affirmed by a large export share.

Heymann says in posting growth of more than 25% in 2010 the German automobile industry produced more cars abroad than in its German factories for the first time in its history; in 1995 just one-third of vehicles were produced outside Germany. This is the logical consequence of the rigorous globalisation strategy that the sector has pursued over recent decades. There have been four main reasons for this development and they continue to apply:

  • Firstly, the automobile industry can benefit from favourable local conditions in many foreign markets - - for instance from wage costs that are lower in eastern Europe and Asia than in Germany.

  • Secondly, experience shows that foreign markets can be opened up more easily if a firm has its own local production and distribution facilities; gauging local customer preferences then becomes easier, for example. Shipping costs are also reduced.

  • Thirdly, tariff and non-tariff trade barriers promote foreign production. Several countries impose local content regulations as a quid pro quo for market entry; customs duties are also avoided.

  • And fourthly, production facilities in foreign locations provide natural hedging against exchange rate fluctuations.

In recent years the fast-growing countries have become more important production locations for the German car industry. In the middle of the past decade Spain was the most important production location for Germany. In the meantime China has become the runaway leader, producing nearly 1.7m cars per year. Brazil follows in second place. Mexico, the US and South Africa are three more non-European countries in the Top 10 ranking of the most important production locations of German carmakers.

Market share gains in all major markets

Source: Deutsche Bank Research
Heymann says if the success of an industry is judged by its market share in the most important markets, then the strategy of German carmakers has proved to be a success. In all major markets German carmakers have at the very least maintained their market share at a high level (EU), and in most cases even increased them (in China, the US and India for instance). Of course this has not only been driven by increasing production in the respective markets.

Germany has an enviable reputation for the quality of its engineering and its cars.

Nevertheless, Heymann says a comparison with its European competitors shows that beefing up production facilities located abroad is a major component of a successful globalisation strategy for German automakers. French or Italian automakers, for instance, have little or no presence in many markets outside Europe -- either with their own production plants or in the sales statistics.

Foreign activities and growth in Germany are not mutually exclusive

The economist says the German car industry’s above-average increase in production at its foreign plants has not been accompanied by a decline in domestic output - - the opposite in fact: unit car production in Germany has risen by 27% over the last 15 years; the growth rate has slowed, however, since 2000. With output of more than 5m cars Germany remains among the biggest carmaking nations. According to the automobile industry production index, which also logs the qualitative growth as well as the output of carparts suppliers, the increase since 1995 comes to no less than around 66%. Domestic German carparts suppliers benefit in no small measure from the expansion strategy of their clients abroad.

Heymann  says the fact that Germany is internationally competitive as a production location is illustrated by the carmakers’ high export share of over 70%. In addition, German factories have managed to beat off in-house competition for contracts again and again. One factor in this case is that German carmakers over recent years have increased the share of imported inputs at their domestic facilities; this is another component of a successful globalisation strategy.

The economist says that of course the competitive pressure in the international car industry remains intense on account of global overcapacity. This applies to the volume segment above all. In this segment in particular it is high-wage countries like Germany that are at a strategic disadvantage. Such countries have to make up for this by offering innovative products - - in the areas of the safety and energy efficiency, for example - - and by constantly boosting productivity at all stages of the value chain. If Germany manages to do this, then it will also have long-term prospects for a successful future as a carmaking location. Nonetheless, German carmakers’ foreign manufacturing is likely to continue expanding faster than domestic production going forward.

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