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Can Germany’s Auto Industry Keep Pace?

New technology is challenging decades of engineering leadership.

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Germany’s strength for the past half-century has been its automotive industry. The big question now is whether that also will become its biggest vulnerability.

Challenged on all fronts by fundamental shifts in automotive technology, the German auto industry is struggling to transform itself from precision metal bending to advanced electronics, and so far its future in the face of competitors such as Tesla, Waymo, NIO, and a number of very nimble startups remains uncertain.

Tesla’s announcement in November that it plans to build a “gigafactory” in Grünheide, 23 miles southeast of the German capital, is evidence of just how contested this market has become. Tesla will make batteries, powertrains, and vehicles at the factory, starting with the Model Y compact crossover and the Model 3 sedan.

“There is a lot of ongoing change,” said Manfred Horstmann, vice president of technology and integration at GlobalFoundries. “The German car industry, the automotive industry, is in a transformation from combustion engines to electrical engines. In California, there are fast movers. Tesla is a fast mover. The German car industry is catching up quickly. Smaller car companies can work with Volkswagen, Audi, BMW – from the low end to premium trucks and buses.”

However, whether German automakers can move quickly enough to be competitive remains to be seen because Tesla, Waymo and NIO and many others aren’t standing still.

“[Germany’s] automotive is still seen as the leading industry in the world if it comes to high-quality premium cars,” said Martin Reuter, Europe-Middle East-Africa technical director for Mentor, a Siemens Business. “Companies like VW, BMW, Daimler, Audi, and Porsche are seen as the leaders. This is also valid for the German Tier 1 suppliers, Bosch and Continental. They remained steady in the two top positions of a worldwide ranking. With the diesel crisis they started to report declines in revenue and earnings. Investments are made into future technologies that will enable them to recover from the decline.”

A key factor in the speed of that recovery, and how pervasive it becomes, depends on just how willing German automakers are to make some fundamental shifts. What has enabled companies like Tesla to grow so quickly is that their core expertise is electronics, which are used to control and monitor a much simpler vehicle’s behavior. For German automakers, in contrast, the starting point has been highly complex mechanical systems — primarily internal combustion engines — with electronics augmenting the behavior of those systems.

“Traditional automotive companies are starting to shift to software,” said Burkhard Huhnke, vice president of automotive at Synopsys. “The problem is that the entire thinking process is different. It’s incredibly different and complex, and it’s not clear who can shift to a software and hardware stack and scale up. That is the new battle.”

That also has repercussions for the entire German economy, which is heavily dependent on the automotive industry. The auto industry represents 5% of the country’s GDP and 820,000 jobs, according to The Financial Times. And that’s just the direct impact. The rule of thumb is that money changes hands multiple times, so this can have a broad impact on everything from restaurants and entertainment to home sales.

In the United States, in contrast, automotive accounts for about 3% to 3.5% of total GDP, according to the Alliance of Automobile Manufacturers. So Germany’s auto industry is significantly more important to its domestic economy, and a slowdown in sales, coupled with a delay in the development of autonomous driving technology, is being felt across Germany’s entire tech industry.

“We see a general slowdown, mainly from the automotive space and exports,” said Michael Lerchenmueller, design IP director at Cadence Design Systems. “In the automotive area, we see a transition from traditional engines to electrical. Big companies are either partnering with smaller companies or Tier 1s. It’s a dynamic situation right now. German carmakers are pragmatic. Maybe the technology is not necessarily always inside Germany, so they go to Israel, which is famous for hot startups. The collaboration is between the startups in Israel and the carmakers in Germany, which have the domain expertise and the system certification.”

Fundamentals for growth
Behind this swirl of activity are questions about the fundamentals that have made the German economy so successful for the past decade.

Germany has a strong economic base to sustain its many industries as the largest economy in Europe and the fifth largest economy in the world. It is among the three largest trading nations on a global basis. The country is renowned for its automotive industry, led by BMW, the Daimler Group (Mercedes-Benz, Freightliner Trucks, Detroit Diesel, et al.), and the Volkswagen Group (VW, Audi, Porsche, Bentley Motors, Lamborghini, MAN, Scania, SEAT, Škoda). Germany is also a world leader in industrial machinery, but its role in semiconductors has been limited.

“Not enough people are starting in semiconductors,” observed Cadence’s Lerchenmueller. The semiconductor industry in Germany is facing the same challenges as in other countries. There simply is not enough new talent coming into the chip industry. Engineering graduates continue to pour into software and cloud services companies, drawn by higher salaries and AI/machine learning opportunities. “We have a lot of interns in Germany, from other countries.”

The IW Institut in Cologne says there were more than 300,000 engineering, science, and technology positions that went unfilled in April of 2019. PwC estimates this hiring bottleneck for small and medium-sized businesses could cost €65 billion (about $71.9 billion) in lost revenue.

Two years ago, Germany began the Skills Initiative, a program linking American and German companies to identify and spread best practices in sustainable workforce development in the U.S. The German vocational training system dates back to the Middle Ages and is firmly established in Germany’s educational system. The country’s “dual system” divides government responsibilities. The federal government supports vocational training within companies, while state governments operate the vocational schools.

But semiconductors have proven to be a mixed bag for Germany. Risto Puhakka, president of VLSI Research, notes that the failure of Qimonda, the memory chip spinoff from Infineon Technologies, was a setback for the German semiconductor industry. “It had to transform itself when Qimonda fell apart,” he said. “They are not the leaders in the memory world or in the classic CMOS world.”

Infineon has since specialized in power semiconductors for automotive electronics, communications, consumer products, industrial systems, and security applications and smart cards. But there still aren’t many semiconductor startups in Germany, compared with the number of fabless companies in China and India, said Puhakka.

Follow the money
At the same time, the number of outside players moving into Germany is rising, and they are competing for Germany’s engineering talent, as well. Contemporary Amperex Technology Ltd. of China is committing $2 billion toward building a battery factory in Arnstadt, a city in eastern Germany, which is eager for economic development that doesn’t involve the acquisition of an established Germany company. The idea is that new business will create more opportunities for domestic companies, but it’s not clear who will fill those positions.

“Once you do that, you start to develop local supply chains. And there is a very strong local supply chain,” Puhakka said. “From the business perspective, that’s probably a pretty smart move, assuming they can manage all the other things. From that perspective, they can start to build a very strong local, German, European-based supply chain for that factory, once they get there.”

This requires an enormous amount of capital, and it comes with an equal amount of risk. Automotive factories, built from the ground up, cost billions of dollars, much like wafer fabrication facilities. Bosch Semiconductors last year began construction on a 300-millimeter wafer fab in Dresden, which is also the site of three GlobalFoundries 300mm fabs. Infineon has a fab in Dresden, making chips on 200mm and 300mm wafers.

Germany has a number of semiconductor manufacturing equipment suppliers, led by Aixtron, headquartered in Herzogenrath. There is also Stuttgart-based Exyte, which specializes in building wafer fabs and other high-tech facilities.

“Germany plays to its strengths right now,” Puhakka said. “You have certain markets where they are leaders. Going into huge amounts of money somewhere else may not make sense. It’s more of a matter of figuring out where you can make that difference, and they are playing to that pretty well. It’s a pretty reasonable approach.”

Sitting still is not an option, either. Gross domestic product in Germany grew just 0.1% in Q3 of 2019, but that’s still better than in Q2, when GDP declined 0.2% compared with Q1. Construction and consumer spending, combined with cheap credit and low unemployment, helped to pump up the GDP, the Federal Statistics Office reports.

The timing game
Automotive is the big problem area, and it helps that the German government is backing the move toward electrification. The German Parliament recently approved a climate-change package to enable Germany to meet its targets under the Paris Agreement, including a $60 billion spending package, a fee system for carbon emissions, as well as new taxes on air travel.

All of this makes it imperative to both electrify vehicles to reduce emissions, and to add more electronics into cars to improve safety and ultimately autonomy for vehicles. Electric cars are mechanically much simpler than those powered by internal combustion engines, but the electronics are significantly more complex.

And that raises huge questions for German automakers about where to place their bets. On one hand, the future is in electrification of vehicles, regardless of whether those vehicles are powered by batteries, fuel cells or some hybrid model. On the other hand, not everyone is ready to buy an electric vehicle, which is particularly troublesome for German companies because roughly 77% of the cars made in Germany are exported and each end market is radically different. Some 50% of U.S. electric car sales, for example, have been in California, according to IDTechEx.

Electric cars in Germany have other challenges. “Electricity prices in Germany are 50% higher than in Austria — a point that energy-intensive industries have to take into account,” says Volker Gieritz, head of media relations for Infineon Technologies. “Government research funding is quite good in Austria (where Infineon is strongly represented through Infineon Technologies Austria). In Germany, research funding is mainly provided to Fraunhofer societies and other research funding agencies. Tax breaks for research promotion are capped in Germany and are therefore only of interest to SMEs. This is better in Austria or France. The only bright spot in Germany is IPCEI (Important Projects of Common European Interest).”

Autonomy in vehicles presents another timing challenge. At the recent International Congress for Automotive Electronics in Bonn, the general consensus was that autonomous vehicle development should be pushed back until at least 2032, instead of the previous goal of 2027, according to several attendees of the conference.

This is a huge investment, and so far one of the biggest challenges has been the amount of compute power necessary to handle all of the possible corner cases for an autonomous vehicle would push the price of a car well beyond what most consumers can afford.

“The idea of a computer in the trunk is not happening anymore,” said Synopsys’ Huhnke. “You need to decrease the cost, power, complexity and the number of variants.”

This raises questions about what to invest in and when. Timing is everything in electronics.

Being part of the European Union adds its own complications. Electrified and autonomous vehicles utilize brand new technology, including 7nm logic chips for the brains of assisted and autonomous driving systems. But historically, the EU’s efforts have not backed leading-edge chip development.

“Companies get supported on a German and European level, but less when it comes to emerging technologies — high-performance computing, AI, virtual reality, and augmented reality,” said Mentor’s Reuter. “There is a high effort in autonomous driving where all OEMs and automotive suppliers are heavily engaged, but very little in 5G, HPC, and quantum computing. There is research at universities and institutes, such as Fraunhofer, with good programs. Some of them are collaborating with leading industry companies such as Ericsson (5G), and Arm (HPC). The European Processor Initiative project is of high interest and will show if Europe can really become kind of independent on high-performance computing.”

Germany’s future
Where Germany really excels is in manufacturing, and that extends beyond cars. There are complete value-added networks for cars, railways, power generation and distribution, mechanical engineering, and medical technology.

“Germany is weak in consumer or computer electronics, but strong in the area of medical devices and industrial automation systems,” Reuter said. “But in industrial automation systems German companies in a good position. Companies like Siemens, Thyssenkrupp, Fresenius, and ZF are driving export to high numbers, and the brand ‘Made in Germany’ is still of high reputation around the globe.”

This is true for automotive ICs, specifically high-voltage components, sensors, and ICs with mostly analog content, Reuter notes. “Digital high-end processors and memory chips are not our domain in Germany.”

The ability to recruit engineering talent across the EU is a potential advantage, as well. “Germany has the highest number of employed engineering workers and the second highest share of engineering workers among all employees in the European Union,” said Infineon’s Gieritz. “Engineers from non-EU countries can benefit from the new EU Blue Card, which gives highly skilled foreign immigrants the right to live and work in Germany. Because of the shortage of engineers, this group has low entry requirements at the moment. For Infineon, Germany, as the country of origin of the workforce, has no outstanding international significance — 21.3% percent are employed in Germany, 26.4% of Infineon’s workforce are German.”

There also is a growing recognition that Germany needs to become much stronger in chip technology. “The German electrical and electronic industry makes an important contribution to maintaining Germany as a research location,” Gieritz said. “The industry’s most recent R&D expenditure amounted to €17.7 billion. Almost 100,000 people were employed in R&D by our companies — almost one in nine of them. More than every third innovation in the manufacturing industry comes from the electrical industry, and around 12,000 patents are applied every year. In macroeconomic terms, a total of €92.2 billion was spent on R&D in 2016. Germany is one of the world’s 10 most research-intensive economies.”

Whether this works or not remains to be seen. “In the traditional domains (machinery, electro technics, physics), Germany is still in a leading position,” Mentor’s Reuter said. “In electronics, computer science, and other high-tech domains, it is not.”

Conclusion
Germany’s prowess in business, government and technology is well proven, but how that can be leveraged into the future is not so clear-cut. The automotive industry is undergoing fundamental shifts based upon semiconductor and software technology, and this is an area where Germany’s skill sets have a lot of catching up to do.

Even if the country continues reducing its dependence on fossil fuels and nuclear energy and emphasizes adoption of renewable energy sources, only 23% of Germany’s cars are consumed internally. And there is plenty of competition coming into Germany from the outside from companies, each with a major headstart in electrification and advanced electronics and competing for the same talent as Germany’s automakers.

—Ed Sperling contributed to this report.

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