Munich musings

I was in Munich at the start of this week, unfortunately fully immersed in client work and unable to actually visit the IAA Mobility Show that has taken over the traditional Frankfurt Motor Show slot in the calendar.  However, I got some flavour of it through some side-meetings, exhibits that were on the streets in the city centre and obviously the press coverage.  The highlights – through that indirect exposure – reflect a number of the topics that I have covered in blogs over the last few months – but they’re worth an update.

Topic #1 must be China.  Munich was full of Chinese show visitors and exhibitors, reflecting their export ambitions for Europe.  There were brands that we know well, others less familiar, but one thing that was very clear was that they all feel ready to take on European competition on their home ground.  This view is clearly shared by many European distributors and dealers as, although they may have been less easy to identify, it was obvious from the packed agendas of the Chinese manufacturers that many would-be partners were in town seeking to represent the Chinese brands in some form or other as part of their market entry strategy.  MG will this year capture over 1% of the European market and others seem likely to get there in the near term.  It's therefore very easy to see a combined Chinese brand market share in excess of 10% by 2030, with at least some element of European manufacturing for the leading players.  That 10% share will be at the expense of the legacy brands rather than through market expansion, so the legacy manufacturers need to be match-fit for the fight ahead.

That brings us to the second dimension of the Chinese challenge which is their growing strength in their domestic market.  In the last decade, the German manufacturers and some others generated the majority of their profits from the Chinese market alone but as the domestic brands have matured and consumer taste has started to switch, they are now losing share and getting engaged in price wars, not helped by Tesla’s highly visible price cuts around the world.  Without the Chinese cash cow, funding the transition to electrification will become more difficult and their ability to push back in European markets restricted.  At a time when they need to be match-fit they may actually have their ankles tied together.  Cost efficiency is going to quickly come back up the agenda despite the bumper profits of recent years.

Electrification was also an obvious focus around the IAA.  As I wrote a couple weeks ago, there are real challenges around meeting the regulatory emissions standards as they ramp up over the coming years, when retail demand for battery electric vehicles (BEVs) is highly influenced by government incentives and anecdotally seems to be softening rather than building.  A number of brands are now openly promoting retail incentives on their BEVs and offering significant support for business customers who until now have found sufficient incentive through the favourable tax treatment of business BEVs and a desire to satisfy a green corporate agenda.  Possibly in recognition of this, leaders of a number of brands were much more positive in Munich about e-fuels and remaining flexible about the final phase-out date of combustion engine products.  When this concession was first announced back in March, I suggested that for cost and technical reasons plus the apparent commitment of OEMs to move quickly to a BEV only product lineup, e-fuels would remain a niche solution.  I still think that this is the likely outcome because of the cost and technical barriers, but will admit to being less confident about this than I was six months ago.

That then feeds into more fundamental questions about manufacturers’ strategies.  Over the last few years we have become used to the idea that ICE was bad, BEV was good and the manufacturers had to transform their businesses, shedding the legacy and re-inventing themselves for the 2030s and beyond.  Herbert Diess whilst at Volkswagen observed that the BEV startups were securing an advantage through raising new capital at a much lower cost then VW could ever achieve, and Jim Farley at Ford split the business into three parts in order to avoid the legacy business constraining the BEV business.  Renault followed a similar route, keeping strategic options open by putting their ICE activities into a joint venture that would benefit from economies of scale, but also anticipating that the BEV business, called Ampere, could actually tap into investor enthusiasm for an electric future through a standalone stock offering.  In Munich he suggested that this might attract a valuation of up to €10 billion in the first half of next year, but if the cracks in the electrification journey widen at the same rate as we have seen over the last six months, will that still be realistic?  Polestar which came to market in June of last year has seen its share price fall from an initial US$13 to 60 cents and just reported second quarter results of a US$274 operating loss on US$685 million revenue.  However, the Tesla share price – never a good benchmark for anything in the rational world – has more than doubled since the trough reached after it’s widespread and well publicised slashing of prices in the last quarter of 2022.

Taken together, the combination of the stronger Chinese competition and electrification, seem set to create an existential risk for some legacy brands.  There will be tough decisions ahead, and arguably the biggest challenge will be that the foundation on which those decisions will be made is one of shifting sands.