German Economic Model In Trouble

[USMA81]

There is a downbeat article in the Wall Street Journal today on the significant problems in the German economy and its auto industry. The article contained a lot of depressing data on the stagnation of their economy and the breakdown of their export model, upon which the whole economy is based. Highlighting the exposure to export risk, more than two-thirds of German cars are exported. As recently as 2018 Germany exported about 4.8 million vehicles, but that is now down to about 3.5 million (over the same period, China went from exporting one million vehicles to over six million). More broadly, 43% of the German economy is tied to exports, but shipments of all goods to China, a former growth area for Germany, have fallen significantly and free trade is under pressure worldwide. Industrial output has fallen by 15% since 2018. GDP has flatlined since 2019, the longest period since 1951. Thousands of job cuts are on the table. The article makes the case that the country increasingly has become non-competitive. One example: energy costs are ten times the cost in Texas. Investment in R&D as a percentage of GDP lags the US and is well below South Korea’s investment as a percentage of GDP. I could go on, but you get the idea.

Internal consumption won’t save them. Germans have lower domestic consumption, in part due to high taxes and a high savings rate. A single worker with no kids pays 47.9% in taxes on gross income; the average savings rate is 20% of income. A German economist stated that the politicians are not recognizing the seriousness of the situation, thinking minor tweaks to the export model will be sufficient. It is a “slow motion economic crash,“ according to the article’s authors.

The article told the story of Ingolstadt, where Audi is headquartered. Audi belt tightening has hit the town hard. It certainly caused me to wonder more broadly whether VW (Porsche) will be able to keep investing sufficiently to maintain competitive automotive products. It caused me to wonder if this Macan might be the last Porsche I own, not for lack of desire on my part. I hope the article is wrong.

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[krissrock]

i think they'll be fine. When it omes to EV's they're ahead of quite a few others. and with EV Sales on the rise, and projected to contine i think Porsche will continue to make them and sell them just fine. Things just yo yo sometimes

But i can't really say much about their economy. I don't know much about it... But the US economy probably isn't anymore stable with our leadership rn

 

[USMA81]

I don’t think Porsche is at risk of going out of business any time soon, but the product’s value proposition could be degraded over time if they can’t keep up with the rate at which rivals invest. In an increasingly important area, Germany already isn’t doing well at promoting a strong software-based component of their economy.

On a longer term basis, the situation could be a lot worse than it appears now. As an example, Detroit was once the richest city in the US, perhaps even the world.

Based on the numbers, the US economy is vastly healthier and more stable than Germany. Still, we have our own risk factors: a hugely over-inflated stock market and large fiscal deficits.

 

[Wivenhoe]

As Germany & France really make the rules in the EU, I see a real possibility of there being a serious tariff war - EU slapping even more large tariffs on Chinese and all imported cars to try to protect their car industries. Musk and BMW are ironically taking the EU to court over the existing tariffs on imported Chinese made cars.
The real problem for the EU (and UK) car manufacturers are the ‘fines’ levied on non EV’s that broach the EV Mandate. I believe it’s £ 15k per vehicle below the 24% threshold of EV sales of total sales. The Chinese importers (and Tesla of course) aren’t really affected by it as they import EV’s. Hence, the EU now levying tariffs on Chinese built car, trying to level the playing field.
I think the US will levy heavy tariffs on imported cars and this will cause the EU and UK to slap really heavy tariffs on Tesla.
All in all, I think the global car business is in and will remain in a real difficult place. VW are very heavily exposed to car finance and so the plummeting of residual values will cause massive losses. Most new car sales in the UK are on finance and were based on over optimistic residuals so VW will end up with those cars being handed back at the end and no real market to sell them in. EV’s with delivery mileage are going for up to 40% less than list and the lease companies are dumping EV’s in the market that were company cars bought for tax purposes.
Apologies for the very long post.

 

[platypus]

To balance things out a bit, Porsche went almost bankrupt several times in the past, and they have a stronger brand and more profitable lineup today. Luxury cars will be fine, I think. I'm more worried about the EV transition in Europe, and the social cost that may come with it.

Anyone has good podcasts or articles to recommend on the topic?

 

[USMA81]

Fortune magazine reported today that Audi is considering building vehicles in the US, and that Porsche might follow.

 

[platypus]

That would make a lot of sense considering it's their biggest market and there is a high risk that importing cars is going to get much more expensive soon.

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