Chinese Cars Star at Munich Auto Show, Underscoring German Economic Woes

For decades, the phrase “Made in Germany” signaled cutting-edge automotive technology and design. But now German automakers are falling behind in the global race to produce more electric vehicles, and some executives are using a new catchphrase to describe how quickly they need to catch up: “China speed.”

The term reflects the rapid transformation of the Chinese car industry into a battery-powered juggernaut. And that speed was on display Monday at I.A.A. Mobility, a massive auto show in Munich, with newcomers from China stealing the show.

BYD, an all-electric Chinese carmaker that overtook Volkswagen as China’s best-selling brand this year, unveiled a sleek, new sedan and a sport utility vehicle to applause from a packed crowd.

“I think the Europeans are just pretty much petrified of how the Chinese will perform in Europe,” said Matthias Schmidt, an independent analyst of the electric-car market based in Berlin.

The show arrives at a precarious time for the German auto industry, the largest in Europe, and for the German economy more broadly. Once a critical driver of the country’s economy, German automakers have instead become a drag. In June, production in the auto industry shrank by 3.5 percent compared with the previous month, weighing on the country’s overall industrial production, which declined by 1.5 percent.

The doldrums extend beyond automakers. Economic output in Germany is stagnating, weighed down by the high cost of energy and raw materials, a lingering effect of Russia’s invasion of Ukraine last year.

Prominent German companies, including Volkswagen and the chemical giant BASF, have delayed expansion plans or announced that they will build in regions with enticing incentives, including China and North America. Persistently high inflation is eating away at Germans’ purchasing power and contributing to pessimism from consumers and businesses alike.

After Germany’s economy dipped into a recession late last year and early this year, its growth was flat from April to June. Last week, the country’s central bank, the Bundesbank, said that economic output was expected to “more or less stagnate again in the third quarter of 2023.”

Among eight advanced economies studied by the International Monetary Fund, Germany’s was the only one projected to shrink this year, leading some economists to recall the specter of the late 1990s when, hampered by record-high unemployment and the cost of reunifying East and West Germany, economists declared the country the “sick man” of Europe.

The government in Berlin is rushing to respond. Last week, it approved 32 billion euros, or almost $35 billion, in corporate tax cuts over four years to help revive production.

The government also proposed cutting Germany’s notorious mounds of paperwork for businesses, for example by accepting digital, not paper, copies of official documents in an attempt to drag it into the digital age. A recent survey of 500 companies showed that fax machines remained in use as the most secure form of communication.

Compare that to HiPhi (pronounced “hi-fi”), a luxury car company from China that was founded in 2019. It is now producing the third version of its tech-heavy electric vehicles, with doors that glide open at the push of a button, and lights on the outside and inside of the doors that can flash and change colors. The cars are now selling in Germany and Norway, starting at 105,000 euros, or $113,000, and were on display at the auto show.

The ability to produce the car so quickly is linked to a different approach to the auto business, said Mark Stanton, the company’s chief technology officer.

“The fear of failure is huge and that mentality really becomes a roadblock in your everyday process of what you do,” Mr. Stanton said. “We completely wipe that away.”

One of the leading factors worrying companies in Germany is the persistently high price of energy.

For decades, Germany prided itself on its steady supply of power that kept factories producing steel and cars humming. But the source of that power was natural gas piped in from Russia, and Germans refused to consider other suppliers.

After Moscow halted the flow of natural gas to Germany a year ago as a consequence of Berlin’s support for Ukraine, the price of gas more than quadrupled, forcing many companies to scale back production. Although prices have fallen, they remain nearly twice as high as they were in 2021.

The whiplash has cost companies that require high amounts of energy, like chemical makers, a sense of security for long-term planning, an annual survey of businesses showed. The study, conducted by the German Chambers of Commerce and Industry, found that confidence in the government’s energy policy was at its lowest point in more than a decade.

“After the energy price shock at the end of last year and the relatively mild winter, companies are deeply concerned about future developments,” said Achim Dercks, the organization’s deputy general manager.

That fear is causing many German industrial firms to reconsider previously planned investments. Earlier this year, Volkswagen decided to scrap plans to build a second battery factory in Germany.

The company is already building one battery factory in Salzgitter, near its headquarters in Wolfsburg, and another in Valencia, Spain. This spring, Volkswagen announced that it had chosen Ontario as the site for its first battery plant outside Europe, lured by lucrative incentives and industrial power prices roughly one-third cheaper than in Germany.

Lowering energy prices by just 1 cent per kilowatt-hour can translate to an annual difference in cost of up to 100 million euros when producing batteries for electric vehicles, Oliver Blume, Volkswagen’s chief executive, said in an interview with the German public broadcaster ZDF.

“If we look at the prices we are currently being offered in North America or in other regions of the world, Germany is a long way off,” Mr. Blume said.

Volkswagen is not alone in looking abroad to expand its electric vehicle production capacity. Earlier this year, BMW, which is based in Munich, announced it would invest €800 million in Mexico to produce high-voltage batteries and its new fully electric models. Those cars are expected to go into production in 2025 at the company’s plant in Hungary.

In China, German automakers’ failure to meet the growing demand for battery-powered vehicles left a vacuum, which domestic automakers quickly moved to fill, producing affordable and attractive electric cars that are taking over their home market.

Volkswagen is making moves to improve its position in China. Last month, it announced that it would invest $700 million for a nearly 5 percent stake in XPeng, a Chinese start-up that makes electric vehicles, in an effort to help it meet the demands of the Chinese market.

But now Chinese automakers have their eyes on Europe, where gas-fueled cars are to be banned in 12 years.

At the auto show on Monday, traditional German automakers presented plans for expanding production of all-electric vehicles in the coming years, but manufacturers from China revealed new models they were bringing to the European market.

“Europe is a strategic market for BYD,” said Michael Shu, managing director of BYD Europe. Last month, he said, his company became the first automaker in the world to deliver five million fully electric or hybrid plug-in vehicles.

Ferdinand Dudenhöffer, director of the Center Automotive Research in Duisburg, Germany, described this year’s auto show as a “Zeitenwende,” or turning point — the same term used by Chancellor Olaf Scholz when pronouncing Germany’s transition in foreign policy after Russia invaded Ukraine.

“A Zeitenwende, that sees Europe becoming an interesting market for Chinese electric vehicles,” he said. “The competition will be tougher.”

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