In recent years, German automakers have announced bold plans to move to electric vehicles and challenge Tesla’s dominance. Rather, they are just further behind.
Tesla delivered about 890,000 cars in the first half of this year, more electric vehicles than Volkswagen AG, BMW AG, Mercedes-Benz Group AG and Porsche AG combined.
The Germans have struggled as software problems have delayed major models and contributed to sluggish sales in China, the biggest market where Tesla and local champion BYD are vying for the lead. They are also playing second in their home market, where Tesla continues to be the leading EV brand. Investors are due to make announcements from three German companies this week, with Porsche reporting quarterly results on Wednesday, followed by Mercedes and Volkswagen on Thursday.
As Tesla seeks to boost sales volume by aggressively cutting prices, pressure is mounting on traditional manufacturers struggling to keep pace. Tesla’s EV sales outperformed VW by 30 percentage points in the three months to June, extending its lead.
While Germany is embroiled in difficult negotiations with unions over refurbishment of its combustion-era production site, Tesla plans to expand its German factory and is preparing to build a new one in Mexico.
“Tesla is still miles ahead of the German automakers in all major markets,” said Matthias Schmidt, an auto analyst based near Hamburg. “They are under pressure to sell more volumes to achieve the economies of scale needed to make EVs profitable.”
Tesla shares, which have more than doubled this year, fell before the start of U.S. trading on Monday after UBS downgraded the stock to hold equivalent.
German automakers have prospered in the past because hundreds of high-quality local parts makers supplied gearboxes, fuel injectors and crankshafts to complete the production of vehicles that ran on petrol and diesel. Now that the battery has taken over, their “Vorsprung durch Technik” has evaporated.
In Europe’s largest economy, inflationary pressures, a shortage of skilled labor and high energy prices are exacerbating the structural challenges posed by the EV shift. German automakers’ expectations are at their worst since the 2008 financial crisis, according to a study released this month by the Munich-based Ifo Institute.
Germany’s greatest threat is its weakened position in China. For decades Volkswagen, BMW and Mercedes dominated sales of combustion-powered cars in the world’s biggest car market, but these days they’ve fallen behind Chinese brands that have become adept at churning out affordable EVs with technology and software tailored to local tastes. Mercedes slashed prices in China for its flagship electric sedan, the EQS, after disappointing sales performance late last year.
VW in particular has been under pressure, with BYD outperforming it in China in the first quarter. The German manufacturer’s EV sales in China fell in the first half of the year as the market grew by 20%.
With EVs expected to account for 90% of the Chinese market by 2030, there is an urgent need for Germany to accelerate its offering of more competitive EV products. Europe’s largest automaker replaced Audi’s CEO last month. One of the reasons is because they want to stop the brand from declining in the country.
HSBC analysts said in a report earlier this month that China’s current EV leader “will increase its dominance in the market.” “I think they will all be Chinese EV brands, except for Tesla.”
All is not lost. Elon Musk has left a window of opportunity for incumbents looking to catch up with the launch of his last new passenger car, the Model Y, in 2020. Tesla hasn’t redesigned the Model 3 since it went into production six years ago, but work is underway to revamp it.
Meanwhile, BYD has shunned the U.S. market because of trade barriers, and some of China’s smaller EV startups may not survive the industry’s price war.
German companies still make healthy profits selling internal combustion engine models, including in China. Mercedes and BMW aren’t chasing Tesla out of the high-end segment, and are still nearly doubling EV sales year-over-year. Germany’s plans to introduce an EV-specific platform around the mid-2010s to bring down the cost of electric vehicles and load them with new technology could change things.
Volkswagen is preparing in the next few years to produce a small EV priced at under €25,000 as a national car for the electric age. Europe’s largest automaker recently increased its five-year spending plan to 180 billion euros, with more than two-thirds of that going to software and electric vehicles. His ID.7 sedan, which will hit showrooms later this year, features an augmented reality display that projects information into the driver’s field of vision.
Automotive News reports that Mercedes will launch an electric version of its compact CLA sedan in the U.S. next year to better compete with Tesla’s Model 3. The iconic G Wagon is also electrified.
BMW is betting that the base of the Neue Klasse, due around 2025, will help boost sales. The manufacturer aims to cut the battery cost in half compared to the current model and improve the range and charging speed by 30%.
“Germany’s next-generation EV platform could change the game,” Bloomberg Intelligence analyst Michael Dean said. “Then we will see a big backlash from them in China as well.”