Automotive industry successfully escapes its own transformation – by committing suicide.

I’m slowly but surely losing my enthusiasm for the transformation of the automotive industry. Initially, I thought we would see an almost classic technology-driven transformation from combustion to electric and then, more or less simultaneously, from owner-operated, self-driven to autonomous vehicles that can be rented on an hourly basis. Far from it. A commentary.

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The diesel scandal: a debacle of epic proportions

I imagined that existing manufacturers would quickly anticipate developments and that new players would challenge the market. That was naive, I knew that even then. At the moment, however, it looks like it won’t come to that.

Because the problems facing the German automotive industry are huge. And they are largely to blame themselves. For one thing, they made the incredibly stupid mistake of deliberately deceiving their customers. They probably thought that what consumers don’t really feel – namely whether a car emits X or Y amount of emissions – would never really become a problem. If something had been left out somewhere else instead, e.g. a navigation system that no longer works on journeys longer than 20 km, no manufacturer would have gotten away with it.

VW cheated and was caught. Convicted and sentenced to a substantial fine. The company itself has pleaded guilty to fraud. VW CEO Matthias Müller declared: “Volkswagen deeply and sincerely regrets the actions that led to the diesel crisis.” But only in the USA.

Here in Europe, there seems to be something like a parallel world with different laws. VW is trying to get away with it here. Pulling out all the stops. And only sinks itself even deeper. “Deeply and sincerely” is nothing here.

People refuse to stand up with the utmost persistence, to admit in humility, to apologize to Germany and to pay the bill. Many people in Germany resent VW, for example. But not so badly that they won’t buy any more products. Nevertheless, sentiment towards the German automotive industry is worse than ever before.

With the diesel driving bans, the problem for VW is materializing with great speed. It is true that the diesel driving bans are not just about the fraud scandal and certainly not just about the VW Group. But the association chain of fraud ->diesel ->driving bans is becoming more and more entrenched every day. For many Germans, it is now a considerable, concrete disadvantage to have bought such a vehicle. And even worse… In many cases, it is even a disadvantage to have bought a German diesel vehicle at all. Whether it is a fraudulent one or not sometimes no longer matters.

The diesel driving bans could easily have been averted. All VW would have had to do was stand up and take on the retrofitting. That would have been expensive, but nothing that VW couldn’t handle. And it would also have been the only way to cut the monster’s head off.

An unmanageable number of problems

Instead of cleaning up quickly, VW has done itself considerable damage with the approach it has chosen. And I believe that the real problems are only just beginning. The diesel technology can or must be written off. This means hundreds of jobs and the first financial consequences of the, it has to be said, completely ridiculous and embarrassing WLTP chaos.

Political support will continue to crumble and, as I have already written elsewhere, it will fall dramatically as soon as people have to be made redundant on a large scale. The fact that CEO Diess, as happened recently, is already urgently warning that redundancies will become a reality can already be seen as preparation for these redundancies. The fact that in the same statement he virtually blames electromobility is another stupidity on Diess’ part – who obviously believes that the average German consumer is so stupid as to not realize that the majority of VW’s problems are completely self-inflicted. But hey, sunburn is also the sun’s fault, after all.

“Digital Automotive Transformation”

All of this is happening at the worst possible time. The “digital automotive transformation” has long been in full swing and is rapidly gathering pace. On the one hand towards electromobility and on the other towards self-driving cars. In Germany, this is still much less widely accepted than in other countries.

The small and much-smiled-at Tesla has really cleaned up in the luxury segment in its home market of the USA and now also in the mid-range segment – against combustion engines, mind you. And the chances are better than ever that they will do the same in Europe. The Model 3 is already in many European Tesla stores. The fact that Tesla’s next models will be an affordable SUV and a pick-up truck is equally bad news for conventional manufacturers in the USA and Germany. These are the segments that are doing really well.

Fit for what’s coming?

VW should already be at a completely different point. The technical debt in the digital area should already be largely paid off. In concrete terms, this means that the new vehicles should already be completely software-based. And that considerable resources should be devoted to solving the problem of autonomous driving in order to secure a position in the race.

The traditional manufacturers are apparently under the impression that these issues are not so important or that they could simply buy in technology. However, no manufacturer of autonomous driving systems will be so stupid as to simply license this technology to the dinosaurs of the industry if they can create a new ecosystem and new markets instead.

The starkest contrast in this respect is again with Tesla, which is in the process of developing its own computer chips instead of buying them from AI industry leader Nvidia. Apparently because they have recognized that very fundamental and specific technological improvements – in this case also at chip level – are necessary to solve the problem.

The launch of the Audi e-Tron and the Mercedes EQC has shown that catching up and following suit is much more difficult than is generally assumed. I greatly appreciate the efforts of Audi and Mercedes. However, the cars they presented are not nearly as good, let alone revolutionary, as they should be to make a huge impact on the market. This was probably partly intentional, so as not to cannibalize the existing business excessively. But it’s also obvious that they have no cost base at all and therefore no margin base to pull it off on a broad scale.

This is precisely one of the fundamental advantages of electric cars. They are much easier and cheaper to design and build than combustion engines. Provided you have the “cost-rationales” of the batteries under control. It really is that simple.

The German automotive industry has obviously not understood this or assumes that these “cost rationales” can also be influenced by suppliers. I think that is quite possible from a position of dominance. But what if you no longer have this dominance to the same extent and/or the battery market makes no effort at all to submit to this dominance due to exploding demand? The chances of such a scenario occurring are high.

In fact, Tesla is closer to the big manufacturers than is generally perceived. This also has to do with cost leadership and margins. To earn as much money as VW, Tesla only has to sell a quarter of the vehicles worldwide at the same price.

But it is also the case that Tesla can charge much higher prices per vehicle. If I calculate this with the current average VW prices and factor in the fact that Tesla’s average prices will fall significantly, the ratio is still 7:1. This means that for VW to achieve the same gross value added, it has to sell 7 cars. Tesla only one.

If we assume that Tesla will be able to produce around 600k cars next year, the bottom line will already be 40% of VW’s gross value added. I call that pretty close. The new plant in Asia will more than double production capacity and the higher economies of scale will further increase margins for Tesla. All forward-looking metrics look pretty good for Tesla. Looking at VW, the picture is almost completely inverted. At the moment, everything seems to be going against VW.

And we’re not even talking about autonomous driving yet. As soon as a manufacturer achieves a breakthrough here, and from everything I can see, I also see Tesla among the leaders, it could completely turn the entire market for private transportation on its head. Within a few years, mind you. Vehicles will then be needed in much smaller numbers.

Marathon

Unfortunately, it looks like the traditional manufacturers have caught a bad cold and should now run a marathon while still trying to recover. That can’t go well.

End of an era

Germany would do well to mentally abandon the automotive industry as we have known it up to now. I know that sounds impossible to many Germans, and of course I don’t mean that we should simply switch off the lights. No. We should let go of the idea that the automotive industry in Germany will follow the same pattern in the future as it did in the past. Because this industry will no longer exist in the future.

The automotive industry in Germany has long since been replaced by the digital sector in terms of turnover and employment. In terms of value creation anyway. We have an enormous amount of talent and engineering power in the digital sector here. These are the best prerequisites for a digital automotive industry of the future. Unfortunately, at the moment it seems that politicians and established manufacturers are standing in the way of this development. Out of false concern for their raison d’être – and probably out of pure greed for profit. It is obvious that they are getting rid of themselves bit by bit.

Because any convulsive adherence and clinging to the past leads to maximum damage. Unfortunately, not everyone involved is aware of this or, one must conclude, they simply don’t care.