FYI: German automakers face challenges as the rise of software-defined vehicles shifts market dynamics, forcing them to ramp up digital transformation.
Germany’s Automakers Losing Edge in Global Market
Despite its storied automotive legacy, Germany’s once-dominant position in the car industry faces unprecedented challenges. Volkswagen, Germany’s flagship marque, ceded its sales leadership in China to BYD last year, while Tesla outperformed Mercedes-Benz, BMW, and Audi in the U.S. luxury segment. German carmakers are now grappling with increased competition from Chinese automakers in Europe, leading to calls for protectionism within the country and at the European Union level.
Economic Implications of a Declining Auto Industry
The German auto industry, boasting over USD 450 billion in turnover and employing more than 786,000 people, stands as the nation’s leading export sector and a significant soft power contributor. A decline in this sector’s competitiveness poses considerable risks to Germany’s economic future, potentially worsening geopolitical and social issues.
Trade Barriers or Technological Advancement?
Will raising trade barriers suffice to protect German carmakers? The growth of their rivals hinges less on subsidies and more on advancements in software, digitalization, and artificial intelligence (AI)—fields where German automakers have shown vulnerabilities. According to the Wards Intelligence Software-Defined Vehicles (SDV) Rankings, none of the German brands ranked among the top performers. Top spots were claimed by digital natives like Tesla, Lucid, Rivian, and NIO. Mercedes-Benz was the highest-ranking German company at seventh, with BMW and Volkswagen Group trailing at tenth and eleventh respectively.
"All leaders are digitally native, adopting a software-first approach throughout their organizations," the report underscored. "Their clean slate allows them to move faster and adapt more quickly to market dynamics and customer preferences, effectively shaping trends and expectations."
Investing in Digital Solutions
German brands are heavily investing in software solutions, focusing on connectivity, safety, infotainment, advanced driver assistance systems (ADAS), and autonomous mobility. Yet, Volkswagen’s tech division, Cariad, highlights the steep learning curve they face. Established to accelerate VW’s digital transformation, Cariad has had struggles, losing over USD 2.5 billion in 2023 and delaying model launches from Audi and Porsche. Former CEO Herbert Diess stepped down partly due to Cariad’s shortcomings. His successor, Oliver Blume, has reorganized Cariad and pushed for a USD 5 billion investment in Rivian for SDV expertise, signaling the necessity but also the lag in German capabilities in the digital realm.
Structural Deficits in Digitalization
Germany’s overall digital stagnation also weighs heavily on its car industry. In the European Union’s Digital Economy and Society Index (DESI), Germany ranked 19th in digital skills, 21st in internet take-up, 22nd in digital public services for businesses, and 13th in AI, cloud computing, and data analytics. Alarmingly, just 23 percent of Germans foresee major progress in digital domains in the coming years, according to the European Centre for Digital Competitiveness.
The Future Value of Software-Defined Vehicles
German automakers must prioritize mastering digital technologies, much like they have excelled in hardware and manufacturing. The potential value of SDVs is massive, with the Boston Consulting Group estimating it at USD 650 billion by 2030, suggesting software will largely distinguish 90 percent of car features. A Deloitte report noted that consumers in China and India are more inclined towards connected services than those in established markets, showcasing the importance of digital features in capturing these expansive auto markets.
Conclusion
German carmakers must swiftly enhance their digitalization prowess to mitigate commercial and financial losses in a software-driven future. This isn’t merely an option but a necessity for maintaining their market position amidst global competition. Ultimately, their success hinges on creating an environment conducive to software innovation, leveraging their substantial R&D resources for a digital-first approach.
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— Steven Hale, Editor of Automotive.fyi
