'Worst Crisis since World War II' German Auto Industry Facing the Abyss

More than 1.5 million workers in Germany depend on the automobile industry for their jobs. But that industry is now facing one of its worst crises ever. Respected giants BMW and Mercedes are particularly exposed as sales plummet.

It was time for Martin Winterkorn to relax. The exhausted chairman of the VW Group was sitting in a leather seat on the company jet, coming from a conference in Berlin where he warned attendees of the consequences of the financial crisis. It had been a long day. It was 9 p.m. and he was still in the air.

"We have never before seen this kind of a crisis," Winterkorn, 61, said at the conference. The German auto industry, he told his audience, must prepare itself for a "tough, prolonged dry spell." It would not be possible to avoid "difficult cuts" and "painful" measures, Winterkorn said.

Even after the conference, sitting in the company jet, the head of VW was still preoccupied with the question: "How bad is it really?" Winterkorn has been in the industry for decades, and he has weathered many a crisis. But now he too is baffled. "I don't know what else is going to happen," he said.

According to Dieter Zetsche, the CEO of Daimler, there are those in the industry who believe that "up to 100,000 jobs will be lost in the German auto industry in the next 10 years." Some, says Zetsche, are even suggesting that this is "the worst crisis since World War II."

The Daimler CEO has already concluded that Mercedes-Benz will produce more than 150,000 fewer cars than planned in 2009. Management is negotiating with labor representatives over the possibility of Mercedes reducing the workweek to 30 hours, with a corresponding wage cut for workers, or introducing part-time work at the company. Daimler may have to cut several thousand jobs. How many? Zetsche, 55, is not even willing to venture a guess.

Sharp Decline in Sales

Norbert Reithofer, the 52-year-old chief executive of BMW, is similarly baffled. He believes the company is "in the biggest crisis in its history." BMW has already cut more than 8,000 jobs this year. Production in its plants is shut down for several weeks at a time, a step that Volkswagen and Mercedes-Benz have also taken. But this will not be enough to offset the sharp decline in sales. In some markets, auto sales have not dropped by this much since the 1973 oil crisis.

Sales have been dropping across the auto industry.

Sales have been dropping across the auto industry.

In October, car sales dropped by 32 percent in the United States and close to 15 percent in Europe. Sales are also down in former growth markets India and Brazil, while economic growth in China is weakening.

This crisis is different from the ones before it. Opel is fighting for its survival, because its parent company, General Motors, is on the brink of bankruptcy. Mismanagement at Ford and Chrysler has driven the two companies into similarly dire straits. This was predictable.

But now even VW, Mercedes-Benz and BMW are at risk, companies that were considered the most stabile in their industry. Even executives at Japanese carmaker Toyota are worried. According to Executive Vice President Mitsuo Kinoshita, "the current situation is an emergency, of a magnitude we have never seen before."

There is reason for this massive, general uncertainty: The auto industry is being assaulted on several fronts.

Sales are declining rapidly worldwide. If there is one thing anxious consumers can postpone, it is the purchase of a car. Economic crises normally affect one major market, which allows large car companies to make up for the difference in other countries. But this time the financial crisis is shaking North America, Asia and Europe at the same time.

Suppliers are likewise threatened. Banks have cut off funding for necessary investments. Some suppliers are already on the verge of bankruptcy. If the biggest manufacturer of rear-view mirrors or door locks fails, carmakers will be forced to stop production, and it will be difficult to quickly find replacements.

Tens of Thousands of Jobs at Risk

Providing consumers with financing is also becoming more difficult. Part of the reason VW, Audi, Mercedes-Benz, BMW and Porsche have enjoyed such phenomenal sales growth in recent years is that they have offered customers attractive leasing and financing packages. Now the carmakers' lending divisions must pay high interest rates to obtain the necessary funds on the capital markets, if they can borrow at all. As a result, they can no longer attract customers with low-interest car loans.

Ultimately, the entire business model of VW, Mercedes-Benz and BMW is beginning to falter. It is based on the assumption that carmakers can constantly increase sales by constantly introducing new models. This is the only way they can guarantee jobs. For car companies, standing still is in effect moving backwards. Companies that are not increasing sales are in fact shrinking, because productivity in their plants grows by 5 to 10 percent every year. Declining sales can potentially lead to the loss of tens of thousands of jobs.

Opel is not the only German carmaker seeking government assistance. VW, Daimler and BMW have also submitted their requests. They want Berlin to issue government loan guarantees on the loans taken out by the carmakers' financing divisions. They are also asking the German government to pay a premium to anyone who replaces a car more than 10 years old with a new one. And they want to see Brussels cancel its plans to impose penalties on manufacturers for failing to meet their CO2 emissions targets.

Still, its difficult not to think that some manufacturers are merely trying to divert attention away from their own mistakes. Many of the problems are homegrown. The companies placed too much emphasis on growth at all costs, while at the same time neglecting to develop fuel-efficient cars earlier in the game.

Nevertheless, the appeals for help show how serious the situation is. Some senior executives already question whether Daimler and BMW will survive the crisis as independent companies. And close examination reveals that both companies significant Achilles heels.


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