The business conditions in the German automotive industry are clearly deteriorating. In the Q1’18, this contributed to a reduction in the rate of growth of Polish exports.
The German automotive industry is the largest European exporter. This is due to the fact that Germany is by far the largest producer and exporter of cars in Europe — and at the same time the third largest manufacturer in the world, after China and Japan. It is also due to the strong international production links created by the largest German automotive companies. In addition to the 26 factories producing passenger cars and light commercial vehicles in Germany, the three major German automotive groups (BMW, Daimler and Volkswagen) have 18 car factories in 10 countries within the European Union. In 2017, German factories produced 5.6 million passenger cars, 4.4 million of which were exported (i.e. almost 80 per cent). Additionally, the production in European branches reached almost 3 million vehicles, and in non-European countries — over 6 million vehicles.
The high competitiveness of the German automotive industry is manifested, among other things, in the high geographical diversification of its exports. According to Eurostat data, in 2017 the most important exports destinations of German car factories included the United States (15 per cent), the United Kingdom (13 per cent) and China (9 per cent). Meanwhile, the Eurozone countries accounted for less than 30 per cent of the value of vehicle exports.
The Asian market has been the fastest growing export market in recent years. Cars manufactured in Germany are the most important item on the list of major goods exported by the countries of the European Union to the two largest markets in the world — the United States and China (they account for 6 per cent and 7 per cent of EU exports to these countries, respectively).
Due to its size, the German car industry has a significant impact on the economic situation in the European industry. The growth in the exports of automotive parts was strongly influenced by the steadily increasing production of cars in Germany. The production of vehicles grew steadily in 2013-2016, primarily on the back of the demand for German cars around the world.
Clearly weaker economic activity
In 2017, the production of cars in Germany decreased by over 100,000 units compared to 2016. This was mainly caused by the decline in exports to the United States (by 55,000 units) and the United Kingdom (by over 30,000 units).
In June 2018, the Volkswagen Group announced in its press release that it has to pay a EUR1bn of penalty in connection with the so-called emissions scandal (selling cars with software falsifying the tests of exhaust emissions from diesel engines). The penalty includes a fine of EUR5m and the disgorgement (repayment) of economic benefits in the amount of EUR995m. Between 2007 and 2015, Volkswagen sold 10.7 million vehicles worldwide with diesel engines equipped with the illegal software.
The company has pleaded guilty to the fraud (the company’s authorities claim that lower-level employees were responsible), accepted the penalty and does not intend to appeal. Previously the car manufacturer paid USD4.3bn as part of a settlement with the United States government and entered into a settlement agreement with the local drivers, dealerships and state authorities for a total amount of USD25bn.
One the one hand, the demand for German cars was affected by the beginning of the process of withdrawal from cars with diesel engines, which is a consequence of the emissions scandal that involved the largest German manufacturers. On the other hand, the decline in production in Germany was influenced by the acquisition of Opel’s factories in Rüsselsheim and Eisenach by the PSA Peugeot Citroën Group.
The downward trend in the German automotive sector was reinforced at the beginning of 2018. According to data from the German Association of the Automotive Industry (Verband der Automobilindustrie, VDA), both exports and production levels were the lowest since 2013 (on the basis of data for the Q1). The number of exported cars decreased by 7 per cent compared to the Q1’17. This weakened the rate of growth of total German exports. According to estimates of the Statistisches Bundesamt, in the Q1’18 the rate of growth of German exports fell to 3 per cent y/y (and was therefore almost twice lower than in the Q4’17), and exports dropped by 1 per cent q/q.
Meanwhile, the German automotive corporations are facing an increasing number of other issues. One of the biggest of these problems is Brexit. German automotive companies are among the biggest foreign investors in the United Kingdom. Additionally, the British market is one of the most important export destinations for cars manufactured in Germany. The possible introduction of customs duties in the trade exchange between the European Union and the United Kingdom will negatively affect the competitiveness of German automotive exports and will call into question the effectiveness of the mutual British-German production networks.
The increases in import duties in the United States for steel and aluminum coming, among others, from the European Union, will also negatively impact the situation of German car manufacturers. In recent years German car makers have gradually increased production in the United States. In 2017, their production exceeded 800,000 units, more than half of which are exported to Europe, Asia and other parts of the world. The increase in steel and aluminum prices on the American market, as a result of President Donald Trump’s decision, will lead to a significant increase in the cost of car production in the United States.
The increasingly protectionist nature of the trade policy pursued by the American administration raises concerns that the United States will also raise duties on cars imported from Europe. Of course, this would hit Germany’s car makers the most, but as a result of the very extensive supply networks, most European economies would suffer measurable losses. At present, the United States applies a 3 per cent tariff rate on the imports of cars from the EU. Until recently, European car manufacturers were expecting duty-free access to the American market, which would be guaranteed if the Transatlantic Trade and Investment Partnership between the United States and the European Union entered into force.
Negative consequences for Polish exports
The situation in the German automotive industry has a strong impact on the region of Central and Southeast Europe (CSE). There are seven car factories operating there that belong to German automotive groups, and the countries of the region are now the most important suppliers of components for German factories. In 2017, more than 50 per cent of the value of imports of automotive parts came from the CSE countries. The largest suppliers of automotive parts to Germany currently include the Czech Republic, Hungary and Poland. Significant changes in the sourcing of parts for German factories were one of the elements of the strategy adopted by the German companies. It increased the competitiveness of German cars, among other things, as a result of the reduced production costs.
Poland is the biggest exporter of automotive parts in the region. In 2017, the value of such exports reached nearly EUR16bn, and this was the biggest category in Polish exports. The export of parts accounts for almost 60 per cent of the total exports of the automotive sector and for almost 8 per cent of total Polish exports. The Polish manufacturers of parts and components have been very successful in the present decade — the sector has been establishing a new sales record every year since 2013. In 2017, Poland was the third largest exporter of automotive parts in the EU, following Germany and France. In 2017, the country accounted for 7 per cent of the export of car parts by the countries of the EU. Outside of Germany (which accounts for 1/3 of the sales to foreign markets), the main recipients of exports of parts originating from Poland are the car factories operating in the Czech Republic.
The problems faced by German car manufacturers will have an impact on the situation of suppliers from the CSE countries. The Polish exports of automotive parts slowed down at the beginning of 2018, which primarily resulted from a reduction in the exports of diesel engines. In 2017, diesel engines accounted for over 75 per cent of all car engines manufactured in Poland. The exports of the remaining automotive parts recorded a slower growth rate than the one observed in 2017. Together with a clear decline in car exports, this contributed to a decline in the rate of growth of total Polish exports in the Q1’18.