German car suppliers struggle to adjust to EV shift

Just five years ago, Andreas Wolf was struggling to convince investors of his plans to turn the Bavarian automotive supplier Vitesco Technologies into a specialist in parts and systems for electric vehicles.

“Nobody believed in it,” the Vitesco CEO said, underscoring just how late the incumbent automotive industry was to realise that combustion engine cars would soon be relegated to a technology of the past.

“There were thousands of arguments why [the era of electric vehicles] would never come,” Wolf said. “It only changed about two years ago.”

It has been a brutal few years for the German car industry, Europe’s largest, employing about 800,000 people. Companies such as BMW, Mercedes-Benz and Volkswagen are scrambling to ramp up EV sales while a growing number of Chinese start-ups announce electric model launches in Europe.

The transition to battery-powered cars has added to the challenges for Germany’s sprawling network of automotive suppliers, already squeezed by the economic downturn, inflation and rising interest rates.

In the three years leading up to 2023, the number of German tier one suppliers with more than 20 employees fell from just under 700 to roughly 615, with more than 30,000 jobs lost in the same period, according to official statistics.

Meanwhile, Vitesco’s early bet on EVs not only made it an outlier among car suppliers, but an attractive target for rivals. Wolf is set to leave the company this year, ahead of the completion of a €3.8bn takeover by fellow automotive supplier Schaeffler.

Some of Germany’s largest companies in the space, such as Schaeffler and Continental have in recent years warned of more than tens of thousands of job cuts, as they try to ramp up investments in future technologies.

Bosch last week announced 1,200 job losses, while ZF Friedrichshafen, which is largely controlled by the south German town whose name it bears, said it was reviewing its operations and in a worst-case scenario, could cut up to 12,000 roles over the next six years.

Much of the cost pressure that suppliers are currently facing comes from needing to invest in EVs at the same time as maintaining share in the legacy combustion engine market. In 2022, German suppliers spent €16bn on research and development — a record sum, according to a report by the PwC-owned consultancy Strategy&.

Suppliers are “double spending on double platforms — everything is double, except for growth or profit,” said Christian Kames, co-head of Lazard’s financial advisory business for Germany, Switzerland and Austria.

Even Vitesco has maintained a large combustion engine business that drives profitability while its electrification technologies division remains lossmaking. But Wolf said he expected profit margins in the range of 7 to 9 per cent in the next few years.

“In 18 months, we are launching 75 new products — we have to develop all that stuff,” he said, adding that although only 11 per cent of the company’s €9bn in 2022 sales were for EV parts, the equivalent figure was nearly three-quarters when it came to new orders.

Margins for legacy automotive suppliers globally, a segment that German companies dominate, have shrunk by an average of three per cent in the five years to 2022, according to a report by Lazard and consultancy Roland Berger.

German suppliers still hold 25 per cent of global market share, but the figure has slipped by three percentage points since 2019, according to the report by Strategy&, which pointed out that most was lost to Asian rivals.

New car models are no longer marketed on their engine capacity, but by software capabilities — a distinctive technological shift away from a German speciality to a field where the country’s car industry has been notoriously slow.

While the number of car suppliers worldwide have risen, thanks to growth in China and the US, Germany’s network of suppliers have continued to lose market share to Chinese rivals.

“Who is the winner and who is the loser is changing,” said Kames, pointing out that more modern suppliers of batteries, semiconductors and automotive software had significantly higher margins than legacy players with an increasing number of them based in Asia.

While most German suppliers have significant businesses in China, they mainly supply the businesses of VW, Mercedes-Benz and BMW. Their customer base has not grown far beyond the German carmakers as Chinese brands such as BYD have grown alongside their own local suppliers that specialise in batteries and software.

For Schaeffler, its merger with Vitesco will offer synergies of €600mn a year, allowing it to invest in both battery-run and combustion engine cars.

The combined group would be able to serve the rapidly growing EV market while providing spare parts for the hundreds of millions of combustion engine cars that are set to remain on roads for decades to come, according to its chief executive Klaus Rosenfeld.

Wolf said that while Vitesco was wrapping up a transformation that started five years ago when “we saw that there was a high likelihood that the combustion engine would die,” many of its German rivals were just embarking on a journey across choppy waters.

“It’s scary and it’s scary for our customers too,” Wolf said. “Are they transitioning fast enough towards electrification, or are they still somehow emotionally bound to those nice revving sounds of the combustion engines?”