The End of an Era Will Tesla and Google Kill the German Car?

Threatened by entrepreneurs in California and by Chinese upstarts, German automakers are urgently trying to find their place in a new world of robots and electric cars. BMW, Daimler, Audi and VW set the standards for a century but have now fallen behind. By SPIEGEL Staff

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History will be written on Nov. 4 at the VW plant in Zwickau, Germany. Anyone lucky enough to recently visit the factory, which is sealed behind blue rolling doors, entered into a secret world, a hidden industrial laboratory to which only a few Volkswagen employees have access. In its "ghost run," or test operation, orange-colored robots run by highly complex programs and aided by humans and machines assembled eight electric model-ID.3 cars per day for testing purposes. Serial production is now set to begin on Nov. 4. Depending on how you see it, this marks either the beginning or the end of an era.

In the future, 1,500 electric Volkswagen cars are to roll off the assembly line at the plant in the eastern state of Saxony every day, a total of 330,000 vehicles every year, in what the company describes as the "largest and most efficient electric car factory in Europe." The designers of the new compact, C-class ID.3 want to make it a 21st century icon, just as the VW Beetle and VW Golf were in their heydays. That's advertising language, of course, but even from a neutral perspective, it is difficult to overestimate the significance of what is happening: In Zwickau, Volkswagen is ringing the death knell for the combustion engine. By 2040, VW plans to cease manufacturing all cars that run on gasoline or diesel fuel. It's the end of an era.

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And what a momentous era it was. It lasted over 100 years, and was shaped in decisive ways by German inventors and engineers -- courageous entrepreneurs, visionary designers and highly competent, skilled workers. During this era, German automobiles became the epitome of the highest quality workmanship around the world. A time when Volkswagen, Mercedes-Benz, BMW, Porsche and Audi, and the objects of global prestige they produced, became ambassadors for Germany. Their finely tuned engines were models for industrial excellence. German cars were considered "das Auto" par excellence and Audi's advertising slogan "Vorsprung durch Technik" (Progress through technology) became one of the few German terms actually known in English.

Men like Eberhard von Kuenheim, who laid the foundations for BMW's success, Ferdinand Piëch, who first made Audi and then VW household names around the world, or Wendelin Wiedeking, who saved Porsche and catapulted it into unimagined dimensions, were to the German economy what Bill Gates, Steve Jobs and Jeff Bezos are today to American industry: heroes.

Of course, there have also always been headaches over the years: oil crises, gasoline-price shocks, trouble with air pollution in the cities, the nuisance of traffic jams and debates about appropriate speed limits. In the 1980s, people began thinking more about the links between the economy and the environment. In the 1990s, the whole world laughed when the environmentalist Green Party in Germany argued for a massive hike in the price of gasoline for the sake of the environment.

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Since the start of the new millennium, worries about climate change have increased sharply, and people have started coming around to the idea that it's madness to get around using large, heavy boxes that burn fossil fuels.

Late To The Game

But it was only very recently that the German automobile industry finally came to the realization that it is going to need to radically adapt. The industry, led by Volkswagen, believed it could solve its problem in two ways: first by creating better, less-polluting and more efficient (diesel) cars and secondly, when the first approach failed, by cheating or denying reality.

As paradoxical as it may sound, VW's diesel scandal ultimately triggered the modernization push the entire industry needed. Confidence in the industry had been shaken so badly that management and supervisory boards at German car companies were forced to recognize the inevitability of radical change.

But they didn't reach that realization until very late. Now, companies that were industry leaders in the last century face the real risk of straggling behind in the new era, a development that would have serious consequences for the German economy and the country's future prosperity. It would be the beginning of a new and uncomfortable era. Because as German companies were busy manipulating their diesel engines and placing their bets on ever bigger SUVs, as they half-heartedly studied and tested alternative drive systems, and as they collected arguments against self-driving cars instead of testing them, a whole new paradigm was unfolding elsewhere in the world. In California and China, private and state-owned companies emerged that are now surpassing Germany's former technological leaders. They have entirely different views of the car and how it is used.

Until recently, the prevailing mentality among German manufacturers was that the primary use for new computer technology and digital networks was perfecting conventional cars that already exist. They didn't question their traditional business model focused on selling cars for private transportation. Meanwhile, their upstart competitors from China and the U.S. took a different approach by placing digital elements at the center of their new mobility concepts. For those companies, computers are no longer just an ingredient -- they're the very heart of the vehicles and their business model.

In the eyes of its creators, a Tesla is a high-performance computer that can do any number of amazing things, including drive itself. China's industrial pioneers are no longer exclusively interested in people's individual driving pleasure -- they are also searching for powerful new mobility tools that can be integrated into an urban life that needs to be newly organized, and that can safely and comfortably carry passengers from point A to point B.

Worlds Colliding

In recent weeks, DER SPIEGEL has been exploring the colliding worlds of the automotive industry -- at the Tesla factory in Fremont, California; in a Chinese model city located south of Beijing; at companies in southern Germany that make car supplies, and in the research departments of German automakers.

The findings are alarming. All signs point to "disruption," a word that has become fashionable these days, even among managers.

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Sajjad Khan, 45, speaks with missionary zeal when he talks about the future. The Pakistani-born executive is a member of the divisional board for CASE at Mercedes-Benz, which stands for connected, autonomous, shared, electric -- i.e., everything car-industry managers believe will shape the mobility of tomorrow. It's Khan's job to ensure Daimler isn't steamrolled by the future.

He works in Sindelfingen near Stuttgart, where Daimler cars -- including the S-Class, the pride of all Daimler engineers and an icon for Mercedes fans -- have been built since 1915. More than 25,000 people work for Daimler here, in the company's largest plant. Khan aims to drive executives at workers in Sindelfingen out of complacency mode.

'We Need a Wake-Up Call'

He's just come from a company "town-hall meeting," where executives introduce strategies and changes to workers. "We need a wake-up call," says Khan. "We have to change fundamentally -- as individuals, as departments, as a company, as a country. If we don't, we're going to be facing tough times ahead." He's fighting for Germany, where his wife and children were born. Khan says his role model is Konrad Adenauer, the country's first postwar chancellor. "We need to rebuild the mentality that made the economic miracle (in postwar Germany) possible. And we can't wait until we have fallen on our faces to do this."

Khan also addresses fears that upstart competitors from Silicon Valley and China are faster and hungrier for success than Daimler. The company has given itself a new, albeit slightly desperate slogan: "We invented the automobile. Now we're shaping its future." But what's that supposed to mean?

The quick answer is anything and everything. A few weeks ago, Daimler CEO Ola Källenius conjured the company's pioneering spirit at the International Motor Show (IAA) in Frankfurt. He presented seemingly everything produced by the company's research laboratories in Sindelfingen, California and India, from an air taxi called the Volocopter to a fuel-cell vehicle. "We have to work on all four CASE themes in parallel," says Khan. "It would be extremely dangerous and short-sighted if we focused only on e-mobility."

Khan argues that the future will be decided not only by engines, but also by intelligent systems, and the ability to build and network self-driving cars, as well as the development of profitable car-sharing services. Last year, Daimler increased its research and development budget to 9.1 billion euros ($10.2 billion). But whereas Sindelfingen and Stuttgart are still in the research phase, companies in California and China have long since been building completely new, very different cars. Are the Germans putting all that money in the right places?

Daimler is putting considerable efforts into improving its "Hey Mercedes" voice assistant, which customers can use to control the infotainment system. Commercials are currently running worldwide advertising the gadget. Together with South Korea's Hyundai and two Chinese technology companies, Daimler has invested $100 million in the American startup company SoundHound, which develops speech-recognition software. Daimler fears that Amazon's Alexa or Google Assistant might one day spread beyond peoples' homes and find their way into cars. Khan wants to make sure people to use "Hey Mercedes" when they order a pizza on the go and not other companies' services. That doesn't really sound like the dawn of a new era -- at least not at first.

The Global Leader

At the future lab of Google's parent company Alphabet, John Krafcik and a team of several hundred people are focusing their efforts on the self-driving car. There's nothing in the lobby of the three-story, bright brick building in Mountain View, California, to suggest the company is single-handedly taking on car companies around the world. A large silver "X" hangs on a black wall behind the narrow reception table -- it's the code used for all the projects Alphabet is pursuing in the hopes of changing the world.

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One of these projects has resulted in the creation of a separate company now known as the world leader in autonomous driving -- Waymo, a neologism combining the words "way" and "mobility." The company is developing "the world's most experienced driver." From Krafcik's perspective, that will no longer be a human being, but a computer that constantly scans its surroundings with cameras, laser scanners and radar, and runs that data through algorithms to decide how to react.

Driverless white vans cruise outside on the streets around the Google building. The vehicles still have safety drivers behind their steering wheels, but these employees don't have to steer, brake or shift gears -- they're just here to intervene in case the computer makes a mistake. That only rarely happens. On average, a driver only has to take over in the Waymo system about once every 11,154 miles (18,000 km), according to a report from the California Department of Motor Vehicles. The figures for German manufacturers, who started testing much later, are rather shocking by comparison.

Statistics show that in 2018, Waymo operated 111 self-driving test cars. General Motors even has a robotic fleet of 162 cars on the road. BMW, on the other hand, is taking part in the large-scale field test in California with just five vehicles, and Mercedes-Benz with only four. The DMV's "Disengagement Report" reveals how often the human driver had to intervene and take over from the autonomous driving system. Whereas the drivers of Waymo cars had to take over once every 11,154 miles, the five BMW test cars, which only traveled around 41 miles on the road, didn't manage 4.6 miles without the intervention of safety drivers. Mercedes fared even worse: Its vehicles only made it 1.5 miles before the driver had to take over from autopilot. The technological leap Waymo has made is already enormous -- and BMW and Mercedes have an incredible amount of catching up to do.

The Real Threat

The only good news for the latter is that the Google subsidiary has no plans to build its own vehicles. Fiat Chrysler, an American manufacturer, built the white vans in Mountain View. Waymo then equipped the vehicles with sensors and artificial intelligence developed internally at the company. But that doesn't make it any less of a threat to Volkswagen, Daimler and others in Germany.

If companies like Waymo, with their algorithms and their mastery of cameras, laser scanners and other sensors, dominate the future of automotive navigation, it could turn today's large manufacturers into mere suppliers of bodies and chassis. But what value is a robot-driven BMW if it doesn't provide "driving pleasure"? And what remains of the Mercedes myth when its heart, the engine, has been replaced by an electric powertrain and battery from South Korea, and fleets of autonomous cars are driving under the flag of the American technology giants? At the end of the day, people don't fly with a brand like Airbus or Boeing, they do so with an airline like Lufthansa or Emirates.

As is so often the case with Silicon Valley technology companies, Waymo's business model is geared toward scaling and market domination. The company currently operates its own car-service fleets and has tested its self-driving cars in 25 U.S. cities. Things have progressed so far that, in Phoenix, Waymo cars will soon start picking up their customers without a human safety driver.

Despite his drive for dominance, Krafcik has no interest in squeezing out the old car manufacturers. The company has invested 10 years in research work and billions of dollars in this technology. But all the efforts that have gone into Waymo will only pay off if the existing car industry licenses the robot-taxi system and deploys it in vehicles.

It's no coincidence that the Waymo CEO gave the opening keynote speech at IAA in Frankfurt and is currently on a global tour to promote the company. He says his company wants to support the car industry, not disrupt it.

But he does say that the current business model of primarily selling cars is inefficient. "It doesn't really work well for the world and the environment," Krafcik told DER SPIEGEL, "and it doesn't work well for the automakers."

Most cars, he points out, just sit around idle for most of the time. He says the average American car owner may drive around 25,000 kilometers each year. With an autonomous taxi or driving service fleet, on the other hand, the use of vehicles can be increased four to fivefold. Fewer cars would be required under that scenario, but they would have to be replaced more often.

Krafcik says companies could be making money not only from the sale of vehicles, but also from every single mile the customer travels. The Waymo CEO says that as providers of mobility services, automakers would have "a much greater opportunity to realize their profits."

A Dangerous Dilemma

That will be even more true once human drivers, the greatest cost factor in an autonomous vehicle, are completely eliminated. Taxis without drivers, maintenance trips without staff, deliveries without deliverers -- in this new world, there will be no salaries or benefits to pay and the machines only go on strike when they have technical problems.

It remains unclear when driverless cars will actually be able to prevail in normal road-traffic conditions -- some predict 2025, others 2050. However, few doubt that autonomous vehicles will gradually take over our highways and inner cities. The closer we get to this future vision, the more the pressure mounts for companies like VW, BMW and Daimler to partner with high-tech providers like Waymo, given that it hardly seems realistic for them to quickly develop the necessary innovations completely on their own.

This presents them with a dangerous dilemma. Without partnerships, it may no longer be possible for German automakers to play a leading role in the world of networked cars. But if they do allow the tech specialists in, they also run the risk of becoming reliant on them to the point that they take on a subordinate role and are no longer the manufacturer, but the supplier.

Some German automakers have already discussed the idea of buying shares in Waymo to secure access to the technology and have a say in the company's future. But those efforts failed due to the prohibitive cost of buying into the company. With its bright prospects, U.S. analysts have valued Waymo at up to $250 billion. That's more valuable than Daimler, Volkswagen and BMW combined.

Is this really the "iPhone moment" for German automakers, as American and British business newspapers have written, with no small dose of schadenfreude -- a turning point dividing the before and the after? Thus far, no vehicle has emerged that is comparable to Steve Jobs' iPhone, which bundled the best available technologies with a beautiful, desirable design. There isn't even agreement on the drive system of the future. So, the search continues for the time being, even if Tesla, the U.S. giant, believes it has already found the Holy Grail.

Elon's Dream Factory

Elon Musk's dream factory is located in Fremont, California. There, the Tesla CEO has an army led by comic-book heroes slaving away on his behalf on an area the size of the Vatican: Robots with names like Iceman, Thunderbird or Cyclops balance car bodies in the air, install electric batteries and carefully lift around 1,000 finished vehicles off the assembly line every day. Production of the new mass-market Model 3 alone has increased more than eight-fold since the beginning of 2018 thanks to the assembly robots.

The bright red machines are shaped like strong arms but are about twice the size of a human being when stretched out. Their movement, strength and precision are far superior to those of any human employee. Musk has named the biggest of them after characters from the science fiction series "X-Men," and their names are emblazoned on the plexiglas cages in which the robots operate.

If you want to visit the plant in Fremont, it helps to be a Tesla owner. Journalists are allowed to visit in exceptional cases, but they are subject to many conditions -- and neither photos nor note-taking are permitted. The hour-long tour is conducted with an electric tram that takes visitors through the plant, which has 5.3 million square feet of manufacturing space.

The company's self-proclaimed mission is emblazoned in silver letters at the entrance, as unwieldy as it is mighty: "Accelerate the world's transition to sustainable energy." Every employee who passes through the barriers and security has to go by the sign each day. With Tesla, which was founded in 2003, Musk has created not only a car and technology company, but also a brand with a cult-like following. The company gives its customers and employees the feeling they are a part of a greater cause, and that they are directly involved in the effort to save the planet.

Those who are unprepared to go along with it may find themselves having to get out of the way. Musk's declared goal is to eliminate all diesel and gasoline engines -- and, implicitly, all the automakers who fail to recognize the signs of the times. Musk recently tweeted his prediction that the combustion engine is a "passing fad" and will soon wind up just where the steam engine did: in the museum.

Bold Moves as Germany Straggled

Tesla has set up a few old gasoline pumps at its Fremont factory, with a supercharger electric rapid-charging station next to them. There's no question, of course, about which devices come from the past and to which the future belongs. Tesla has already installed 14,000 superchargers around the world. It's a bold move, if you consider that politicians and executives at car companies in Germany are still debating whether electric cars are the right step and, if so, who is responsible for financing and managing the necessary charging stations. Tesla has built up the necessary infrastructure on its own.

It's the Musk way: Many thought he was crazy when he bought the gigantic Fremont factory from Toyota. And executives in Germany at VW, BMW, Daimler and Audi all found it amusing when he announced he planned to create a new automaker. Nobody is laughing now.

The bright lighting inside the Tesla factory makes it feel like a sterile hospital ward. The employees look like toys working among the white steel scaffolding. They wear black trousers and black shirts as if they're already mourning their own coming obsolescence. Musk's dream, after all, is to have a highly automated factory: "Building the machine that builds the machine." For now, though, he still needs people, and around 9,000 are employed at the Fremont factory, where they maintain and program the nearly 1,100 robots used to assemble the Model 3.

Tesla Is Years Ahead

For a long time -- too long -- the established car companies viewed Musk as a pompous man burning through loads of cash with his billion-dollar investments in charging stations, and car and battery factories. But they were wrong. Tesla often posts losses, but last month, Musk reported a surprising profit for the last quarter. The company's cash reserves fluctuate, it occasionally operates on the verge of financial collapse, and Musk has had big problems with the kind of mass production that VW and Daimler can handle confidently, but the quality product Tesla delivered shocked everyone.

Companies like VW got a hold of Tesla's new mid-range Model 3 before it reached the market and dismantled it into its individual parts. Their findings were shocking: They discovered their small American rival was years ahead of them in important areas. In addition to having more efficient batteries, Tesla's cars also have better network connections. It turns out the Musk's aspiration to turn cars into rolling computers was more than just talk.

Indeed, Tesla's engineers have a different approach to their product. They believe cars can be improved through constant updates, just like a smartphone, and developed what they call the over-the-air update, which allows for car maintenance to be provided without having to take it to a dealer. They are able, for example, to shorten cars' braking distance by realigning the algorithm for the anti-lock braking system using an internet update. Model 3 owners can also unlock pre-installed seat-heaters in the back seats. It's a fascinating new experience that is particularly fun for early adopters, even if not every new innovation works flawlessly from the start.

Tapping Computer Power

An insider claims the Teslas are equipped with central computers that are about as powerful as 150 PCs combined. Entire teams within Musk's company are devoted to the question of what a car with that kind of computing power can do.

They came up with ideas like the "Smart Summon" feature, which allows car owners to "summon" their car -- that is, to prompt it to unpark and drive to them autonomously -- although there were a number of problems with the function first got released. And "Sentry Mode," a surveillance mode in which the car films the surrounding area and triggers an alarm as soon as any suspicious person gets too close. Tesla drivers have uploaded videos filmed in Sentry Mode to YouTube showing people secretly scratching cars or trying to steal them.

Although Tesla's future remains uncertain, Musk has managed to shake up the entire industry. His company now delivers close to 100,000 electric vehicles per quarter, more than VW or Mercedes managed in the past year. That's another reason other companies are trying to maintain ties with their competitor in California. Daimler temporarily became a strategic investor in Tesla, and VW head Herbert Diess later flirted with the idea of buying shares.

But the Germans have since shifted their strategy and now want to fight Tesla rather than embrace it. Whether that's a good idea is an open question.

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