the automotive cluster in baden-w¼rttemberg, germany - eurofound

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The automotive cluster inBaden-Württemberg, Germany

European Foundation for the Improvement of Living and Working Conditions

This report is available in electronic format only

Introduction

Profile of Baden-Württemberg

Automotive industry in Germany

Baden-Württemberg's automotive cluster

Factor conditions

Demand conditions

Summary and future scenarios

Bibliography

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Introduction

This report looks at the automotive industry cluster in the German federal state of Baden-Württemberg. It begins with ashort profile of Baden-Württemberg and the German automotive industry. This is followed by an analysis of the way thatthe main trends and drivers for change in the industry (as identified in the mapping report

1) are reflected in the cluster,

according to Porter’s ‘diamond model’2. The report concludes with a SWOT analysis, exploring the competitive

advantage of the cluster and possible scenarios for the future development of the industry.

Profile of Baden-Württemberg

Baden-Württemberg is the third largest and the third most populated federal state in Germany, with a population of10.7 million inhabitants and an area of 35,752 km² in 2003. The largest city is Stuttgart with a population of 587,152. Eightother cities have a population over 100,000: Mannheim, Karlsruhe, Freiburg, Heidelberg, Heilbronn, Ulm, Pforzheim andReutlingen. Other large cities are Esslingen, Ludwigsburg, Tübingen and Villingen-Schwenningen (see Figure 1).

Figure 1: Baden-Württemberg and Europe

Source: Baden-Württemberg Agency for International Economic Cooperation (GWZ)

© European Foundation for the Improvement of Living and Working Conditions, 2004

1MacNeill, S. (et al), Trends and drivers of change in the European automotive industry: Mapping report, European Foundationfor the Improvement of Living and Working Conditions, 2004.

2For an illustration and more detailed description, see Porter, M. E., The competitive advantage of nations, New introduction, 2ndedn, London, Macmillan Press, 1998, p.127.

http://www.emcc.eurofound.eu.int/publications/2004/ef0427en.pdf

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With 9,300 manufacturing plants and an export quota of 41.7% for manufacturing products, the manufacturing sectorrepresented 32.4% of gross value added in Baden-Württemberg. In 2002 the biggest exporting industries are theautomotive industry worth €26.32 billion (equalling 25.2% of total exports), machinery worth €23.84 billion (22.8% ofexports), and chemical products worth €9 billion (8.7% of export) (Wirtschaftsministerium Baden-Württemberg, 2003a,p. 7). Other important sectors include electrical products, electronics and ICT.

Automotive industry in Germany

German manufacturers of motor vehicles and motor vehicle parts (NACE 34) account for 2,500 enterprises with a totalworkforce of 890,000, according to the 2001 Yearbook on International Auto Statistics produced by the Association ofthe Automotive Industry (Jürgens, 2002, p. 2). In 2002, the workforce was 856,000, or 44% of the EU total in this sector,according to Eurostat.

The industry consists of a small number of global lead manufacturers with a large number of family-owned small andmedium-sized suppliers surrounding them, though a wave of mergers and acquisitions in the 1990s has seen many of thetraditional SME suppliers disappear. However, most German car companies are still firmly anchored in block ownership,making them less exposed to the capital market.

The ownership structure of the major German car companies is as follows (Jürgens, 2002, p. 5):

a) Volkswagen Group including Audi, which is a 100% fully owned subsidiary since 1964 (ownership structure inDecember 2000)

3:

20% State of Lower Saxony;

10.2% self-control led by VW;

12.1% national institutional investors;

3.5% other European institutional investors;

3% US institutional investors;

51.4% floating capital.

b) DaimlerChrysler including Mercedes-Benz (September 2000):

11.6% Deutsche Bank (part of block ownership);

7.5% Kuwaiti Sheiks (part of block ownership);

56% other institutional investors;

25% small private shareholders.


3Source: Share-world-LEREPS, in Dupuy and Lung, 2001, quoted in Jürgens (2002, p. 6).

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c) BMW is owned by the Quandt family (September 2000):

45.34% free flow;

15.53% Hanna Quandt;

15.25% Stefan Quandt;

11.62% Susanne Klatten;

10.16% GFA Gesellschaft für Automobilwerte mbH;

2.10% employees.

d) Porsche (September 2000):

55% held by the Porsche and Piëch families;

45% free float.

e) Ford (98%) and Opel (100%) are both fully owned subsidiaries of the parent corporations Ford Premier AutoGroup (PAG) and General Motors (GM).

Only a few suppliers are listed. A number of companies with a strong global market position have the legal form of afoundation, with Bosch being the most prominent example.

Baden-Württemberg’s automotive cluster

The automotive industry is not only a key industrial sector in Baden-Württemberg but also in Germany as a whole. It isestimated that every seventh job in Germany depends directly or indirectly on the automotive sector

4.

The centre of the industry, however, is located in Baden-Württemberg, which generates more than a quarter ofGermany’s annual sales in this sector, with a high export rate of over 50%. The industry’s competitive advantage derivesfrom a closely-knit, dense network of manufacturers and supplier industries located in one central hub.


4See Auto & Wirtschaft: Deutsche Automobilindustrie erhöht ihre Wettbewerbsfähigkeit (Verband der Automobilindustrie, 2003a).

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Baden-Württemberg is host to major car manufacturers, including prestigious brand names such as:

Audi, which is based in Neckarsulm near Heilbronn (part of the Volkswagen group);

Mercedes-Benz, which is based in Stuttgart (part of DaimlerChrysler);

Porsche, which is based in Stuttgart-Zuffenhausen.

The region is also home to major manufacturers of heavy vehicles, agricultural vehicles, buses and other vehicles suchas Kässbohrer, Neoplan, Iveco, John Deere, Evo Bus, and Mercedes-Benz. Automotive and engine manufacturers inBaden-Württemberg account for sales of €38 billion in 67 factories

5.

In addition, direct suppliers at 194 operating plants produce high value-added components, generating sales of €13billion. These include high-capacity companies and pioneers such as Behr, Bosch, Eberspächer, Knecht, Mahle and ZFFriedrichshafen AG.

Including manufacturers of special vehicles, distributors and indirect suppliers, Baden-Württemberg brings togethermore than 2,000 enterprises and development partners which are closely associated with the automobile industry. In totalthese companies generate sales of more than €30 billion (Wirtschaftsministerium Baden-Württemberg (Ministry ofEconomic Affairs), 2003b, p. 24).

Supporting and related industries There is a high concentration of component suppliers in supporting sectors such as electronics and electrical engineering,information technology, plastics and glass production, metal manufacture and processing, optics and precisionmechanics. This provides the region with considerable potential for the creation of synergies.

The automotive industry in the region benefits, in particular, from the strong presence of the supporting electronics sectorwith its 1,000 companies employing around 210,000 personnel, representing a 22% share of total employment. Theimportance of this supporting industry can be illustrated by the estimate that the share of electronic and electriccomponents in the total costs for a compact car may increase from 20% in 2002 to 40% by 2015 (Verband derAutomobilindustrie (German Association of the Automotive Industry), 2003d, p. 51).

Leading companies in related industries such as aviation and aeronautics (e.g. EADS with Dornier, DASA and ZeppelinLuftschifftechnik) are also present in the region. This provides further potential for synergies, based on the knowledgeand innovations of aerospace technology. There is also considerable experience in process technology and mechanicalengineering.


5See http://www.bw-invest.de/englisch/w_2_1_1_2.asp

http://www.bw-invest.de/englisch/w_2_1_1_2.asp

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Products and branches of the automotive industry Products and branches listed on the website of the Baden-Württemberg Agency for International Economic Cooperation(Gesellschaft für wirtschaftliche Zusammenarbeit in Baden Württemberg, GWZ) include, for example

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automobiles;

brake systems;

chassis, drive train, suspension;

communications systems;

electrical and electronic systems;

exhaust systems;

fittings, fitting parts;

glass windows;

lighting, lighting parts;

miscellaneous;

motors, motor parts;

omnibuses;

painting;

safety engineering;

seats, sleeper berths, interior equipment;

special purpose vehicles and special vehicle superstructures;

steering systems;

tractors, agricultural machines;

trailers, flatbeds;

transmission;

transporters;

trucks;

vehicle body and parts, frame and parts;

wheels, tyres;

workshop equipment.


6See http://www.bw-invest.de/englisch

http://www.bw-invest.de/englisch

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Competition within the industryThe automotive industry faces tough competition with challenges such as:

further globalisation;

innovation;

consolidation and value chain restructuring;

cost pressures.

Baden-Württemberg’s automotive cluster has a long tradition of technological innovation. Latest developments include,for example: the airbag; spark gap regulator; Mercedes-Benz’s activities in the field of driver safety and Tempomat(cruise-control); Porsche in all areas of sports car technology including Tiptronic; Audi in four-wheel drive for normalsedans; and the major supplier Bosch in fuel-injection systems and the anti-blockade system ABS (Baden-WürttembergAgency for International Economic Cooperation GWZ, 2001).

Innovation is key to maintaining an industry’s competitiveness, even though there is a flat and slow process of diffusiondue to the typical gradual introduction in the different vehicle segments (Jürgens et al, 2002, p. 27). Since the majormanufacturers from Baden-Württemberg serve premium markets, their innovation is even more crucial.

The trend towards a new regime of governance in the automotive industry has seen increasing sub-contracting, thedevelopment of hierarchy classification of supplier relationships and, in particular, a power shift from finalmanufacturers towards mega suppliers and system integrators

7(Naschold et al, 1999, p. 5). In some cases, the

outsourcing goes as far as the total production, an example being the Audi A4 convertible which has been let to thesupplier Karmann. Suppliers are also taking over tasks within the production chain, such as the chassis of the PorscheBoxster by the Finnish firm Valmet and that of the BMW X3 by the Austrian firm Steyr-Magna (Dudenhöffer andBüttner, 2003, p. 4).

The built-to-order concept offers potentially great savings by reducing the average inventory time. It applies mainly tothe consumer-driven premium brands, for which customers are more likely to be willing to wait (Accenture, 2002b,p. 2). Since the big players in Baden-Württemberg, such as Mercedes, Porsche and Audi, serve those high-end markets,the industry may benefit from a slight cost advantage in this respect, reducing the advantage volume brands have due totheir economies of scale.

Strategies and business models at company levelApplied business strategies and models depend on the environment in which companies operate. Germany is oftenregarded as the classic case of non-shareholder value orientation. However, shareholder-value orientation has gainedmomentum due to increasingly deregulated financial markets and institutional investor pressure as well as the apparentfear of hostile takeovers following the prominent Mannesmann case, which was acquired by the British


7This trend represents a paradigm shift in central segments of industrial production away from the traditional mechanic-orientatedmodel of the automobile industry towards new business models such as adopted by the electronics and IT industry. These businessmodels use considerable outsourcing with new project-determined forms of vertical and horizontal cooperation betweencompanies, and have a greater dominance of central component manufacturers. The models have been labelled with the acronym‘Wintelismus’, which refers to the increasing control of Microsoft and Intel as component suppliers over the final product PC(Naschold et al, 1999, p.1).

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telecommunication company Vodafone (Jürgens, 2002, pp. 2 and 14). If this trend prevails, there is a threat of higherfluctuations and redundancies, and less job security for workers.

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According to the automotive and assembly unit of the consultancy firm McKinsey (2003b), the main strategic challengesfor original equipment manufacturers (OEMs) and vehicle manufacturers (OVMs) are: brand management, business-to-business (B2B) and business-to-consumer (B2C) eCommerce strategies, lean manufacturing and production, suppliermanagement, and value-chain cost reduction. One trend in the manufacturing of vehicles is the increased use of modulesto give cost advantage while maintaining flexibility and a variety of possible versions. An example mentioned byDudenhöffer (Beneker, 2003) is the new Golf V which is built on its PQ 35 platform like a house made of Lego bricks.

In terms of brand management, some German premium brands, such as BMW and Mercedes, appear to do particularlywell (Dudenhöffer, 2003c). One further trend is the increasing use of entertainment equipment for cars, bringing the carinto the travel and leisure industry. An example is Volkswagen’s Autostadt (Symon and Lutz, 2001, pp. 47-52). Targetingthe consumer directly provides not only a means to develop customer relationships but is a distribution strategy too. Byproviding a 50% discount (representing dealer charges) for direct purchase of the Autostadt, the dealership network isbypassed. If this trend grows, it could have a profound impact on dealerships.

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The Internet is also becoming a distribution medium for used cars, due to decreased advertising costs.10

Quelle, a majorcatalogue sales company in Germany (comparable to Argos in the UK), has started selling the new Golf V 10% cheaperthan the listed price.

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Achieving technological leadership and choosing the right strategy is not an easy task. It depends not only on thepresence of relevant supporting industries but also on various factors such as knowledge and human resources.

Factor conditions

The factors determining Baden-Württemberg’s automotive industry can be divided into the following categories: capitalresources, human resources and knowledge resources

12.


8Nevertheless, note that Jürgens (2002, p. 34), for example, concluded in his case study on Volkswagen that no fundamental changeof the corporate governance system was found due to capital market pressure and shareholder value demands.

9The development could be similar to travel agencies being bypassed by low-cost airlines, who sell flights on the Internet andprovide passwords instead of issuing tickets.

10Among the most prosperous areas on the Internet are car exchange/selling platforms (Autobörsen) such as mobile.de andAutoscout24.de in Germany. A market research study by TNS Emnid has shown that 46% of 1,500 surveyed users of Internet carselling websites actually bought the car they were interested in. 15% acquired a car from a different provider and 37% did notundertake a purchase. This illustrates high acceptance of using the Internet to buy a car, though the majority of interest is in thelow-value end of the market (with two thirds of emails concerning offers of up to €15,000) and used cars (83%) (Anonymous,2003c).

11See http://www.manager-magazin.de/geld/artikel/0,2828,266718-3,00.html

12Porter, M. E., The competitive advantage of nations, 2nd edn, London, Macmillan Press, 1998, pp. 74-75.

http://www.manager-magazin.de/geld/artikel/0,2828,266718-3,00.html

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Capital resourcesBanks play a dominant role in company finance even with the high level of direct ownership in Germany (Jürgens andRupp, 2002). According to the European Innovation Scoreboard in 2002, Germany has a major relative weakness ininnovation finance. The country shows below EU-average indicators for high-technology venture capital investment(as a % of GDP), and for capital raised on parallel markets and on main markets (% of GDP) (European Commission,2002a, p. 12).

Human resources Baden-Württemberg’s car manufacturers and suppliers employ more than 220,000 people, which represents around 20%of the total workforce in the region (Baden-Württemberg Agency for International Economic Cooperation GWZ, 2003a).This makes it a key strategic sector for Baden-Württemberg. Its companies also represent the centre of the Germanautomotive industry, with about one quarter (24.9%) of all jobs in the industry being found here (WirtschaftsministeriumBaden-Württemberg & Statistisches Landesamt Baden-Württemberg, 2002).

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The employment trend is shown in Figure 2 below. Figures for 2002 indicate a decrease of total employment in theautomotive industry by 0.8% from 2001. However, prior to 2002, the German automotive industry saw employmentincrease for five consecutive years following a decline in the mid 1990s, from a peak in 1990 (Verband derAutomobilindustrie, 2003b, p. 15). The figures show a decrease of 2.6% for automotive manufacturers and a decreaseof 1.7% for manufacturers of trailers and structures. The figures for Mercedes show an even greater decline.Employment in component suppliers increased by 1.7%, even though the turnover of suppliers slightly dipped by 0.6%.These trends support the claim of a continuing shift of employment from the vehicle manufacturers to suppliers.

Figure 2: Development of the workforce in the German automotive industry

Source: VDA


13According to the 2001 Yearbook on International Auto Statistics by the German Association of the Automotive Industry (VDA),the German car industry, classified as manufacturers of motor vehicles and motor vehicle parts (NACE 34), accounts for 2,500enterprises with a total workforce of 890,000 (Jürgens, 2002, p. 2).

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These fluctuations and new employment increases are accompanied by a growth in atypical forms of working such aspart-time work, agency work, short-term work, telework, contract work and so on. These working arrangements areexpected to spread (Klotz, 1998)

14. There is an increased use of employment agencies for routine jobs (Jürgens et al,

2002, p. 27). Another trend is the high number of fixed-term work contracts, which are now being used in about 40% ofall new jobs. These offer greater flexibility to the industry (Verband der Automobilindustrie, 2003b).

Well-qualified labour supplyGermany’s unique dual training system combines practical training with theoretical specialist knowledge. The vocationalcolleges in Baden-Württemberg supply companies with well trained, practical specialists, resulting in an internationalpole position of 48.3% for its industrial skilled worker quota (Wirtschaftsministerium Baden-Württemberg &Statistisches Landesamt Baden-Württemberg, 2002).

The importance of a qualified workforce has to be viewed against the generally difficult German labour market position.There is, paradoxically, a considerable shortage of qualified personnel in the supplier industry while, at the same time,there are high unemployment rates. A survey by the Centre for Automotive Research (CAR), sent to 119 suppliers inGermany, sheds some light on the scale of the labour market problem. The results show that 65.5% of all suppliersquestioned report a shortage of qualified personnel and 50.4% report a lack of suitable managers (Dudenhöffer andBüttner, 2003, p. 5). An indicator for the large capacity of qualified employees available to companies in the Baden-Württemberg automotive sector is that as many as 5% of employees in Baden-Württemberg have an engineering degree,a proportion unmatched in Europe (Baden-Württemberg Agency for International Economic Cooperation GWZ,2003a).

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The region has some of the most renowned universities in Germany, for instance, Heidelberg, Tübingen and Freiburg,as well as economically and technically oriented universities, such as Stuttgart, Karlsruhe and Mannheim. Moreimportantly, many of the region’s technical colleges and universities offer special courses for the automotive sector(Baden-Württemberg Agency for International Economic Cooperation GWZ, 2001) including courses such as: design,development and process engineering in Esslingen and Konstanz; automotive engineering in Karlsruhe and Esslingen;business administration in the automotive industry in Nürtingen; automotive engineering (powertrain/services andchassis/mechatronics) in Esslingen; English language courses in Mechatronics in Ravensburg; automotive engineeringin Esslingen; and automotive design at the technical college of Pforzheim.


14Klotz provides a good general overview of changes in working conditions, according to the union IG Metall, in Work in the futureand the future of work. The document is available at http://www.igmetall.de/download.

15However, the engineer density, as the ratio between engineers and scientists and total workforce, is reported to be 3.4%, whichrepresents every thirtieth employee rather than every twentieth (Wirtschaftsministerium Baden-Württemberg & StatistischesLandesamt Baden-Württemberg, 2002).

http://www.igmetall.de/download

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Labour costsWage and salary levels in the automotive industry are high in comparison to other sectors in Germany. Baden-Württemberg’s wages and salaries are also 6.4% higher than the German average. In 2001, the region’s average grosssalaries in manufacturing were €33,446 per year for blue-collar workers and €49,411 for white-collar workers

16.

However, the higher labour costs are more than compensated for by higher productivity (Wirtschaftsministerium Baden-Württemberg & Statistisches Landesamt Baden-Württemberg, 2002).

However, labour cost differences in comparison to eastern Europe are a threat to German companies. Wages17

are €4 perhour in the new Member States, €16.5 in east Germany and €18 in west Germany (Dudenhöffer, 2003a). Averageworking hours per year in Germany (1,492) are lower than in the US (2,152) and Japan (2,012) but labour productivityin Germany is the highest in Europe, though behind the US and Japan (Jürgens, 2002, p. 2).

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Role of the trade unionsNegotiations are solely between the trade unions and employers from the individual industrial sectors, with a focusmainly on issues such as working time regulations, job security, working hours, holidays and early retirement. In general,negotiations are carried out in a ‘dual system’, in which general agreements on wages and salaries are concluded withthe union

19, and details of wage differentiation, working conditions and grievances are dealt with by work councils at

plant level (Jürgens, 2002, pp. 11-12).

Recently, the German automotive industry has seen the introduction of several innovative projects, which have beencollectively agreed with the unions. The Volkswagen 5000x5000 project aims at creating 5,000 new jobs with a monthlywage of DM 5,000 (around €2,500) by 2005.

20Successful participants work for a preliminary qualification at an

employment agency (three months), and then receive a temporary employment contract of six months, followed by apermanent employment contract.

21The project also incorporates innovations in work organisation, with learning centres

in each production area and programmes for the training of employees during the project.


16Please note that these do not represent overall averages.

17In addition to wages and salaries, labour costs in terms of social security provisions arise for employees. The amount ofcontributions to three social security schemes (pension, nursing or old-age insurance; health insurance; and unemploymentinsurance) is statutorily determined and specified. The contributions are shared equally between the employer and employee.

18The hourly productivity rate increased by 3.5% in 2001, but decreased by 0.8% during the first half of 2002 (Schmidt, 2002, pp.15 and 20).

19In Germany, the single trade unions are spread among the differing branches of industry. The most important union for theautomotive industry is IG Metall.

20However, this has to be seen in the context of the high degree of cooperation between management and works councils in companypolicy at Volkswagen, which exceeds the formal co-determination framework of industrial relations in Germany (Jürgens, 2002,pp. 11-12). Volkswagen is an unusual case as it did not become a member of the employer association Gesamtmetall. Collectiveagreements have to be negotiated directly with the union, IG Metall, rather than the normal 'dual system' of negotiations.

21See http://www.igmetall.de/tarife/nachrichten/vw/index_5000_5000.html andhttp://www.igmetall.de/tarife/nachrichten/vw/englisch.html.

http://www.igmetall.de/tarife/nachrichten/vw/index_5000_5000.html

http://www.igmetall.de/tarife/nachrichten/vw/englisch.html

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Knowledge resourcesA region’s knowledge resources strongly depend on its human resources. In 1999, Baden-Württemberg had 70,000personnel working in research and development (R&D) in the industrial sector, representing a 22.8% share in Germany’sR&D employment. Although this percentage fell slightly during the last decade (from 23.9% in 1989), it did not decreaseas much as the share of the total labour force (from 16.2% in 1990). This shows that R&D work density increased overthe last decade, just as the percentage of engineers increased (Wirtschaftsministerium Baden-Württemberg &Statistisches Landesamt Baden-Württemberg, 2002).

Research spending also shows a strong picture for Baden-Württemberg. The EU average for public R&D expenditure asa percentage of the gross domestic product (GDP) was 0.7% in 2002, while private R&D expenditure was 1.3%, makinga total spend of 2% of GDP.

22Germany, on the other hand, spent 0.7% on public R&D and 1.8% on private R&D,

totalling 2.5% in 2002 (European Commission, 2002a, pp. 9 and 24). Baden-Württemberg has a slightly above averagepublic R&D expenditure (Wirtschaftsministerium Baden-Württemberg & Statistisches Landesamt Baden-Württemberg,2002).

23But it is the heavy R&D spending by Baden-Württemberg’s private companies that lifts the region’s total

expenditure to a very high share of 3.7% of GDP (Baden-Württemberg Agency for International Economic CooperationGWZ, 2003d).

24

In addition to business R&D expenditure, patenting has also been identified as a major relative strength of Germany(European Commission, 2002a, p. 12). As a result of the high concentration of knowledge resources in Baden-Württemberg, the state’s R&D output, measured in domestic patent applications, represents nearly double the federalaverage. The region records 112 patent applications per 100,000 inhabitants, compared to the German average of 58applications.

25Although patent applications from Baden-Württemberg’s companies dropped from 12,486 in 2000 to

11,884 in 2001, applications have still increased from 7,048 in 1990 (Baden-Württemberg Agency for InternationalEconomic Cooperation GWZ, 2003d, 2003e).

Overall, Baden-Württemberg has been listed amongst the top 10 leading innovative regions in the EU, according to theEuropean Innovation Scoreboard (European Commission, 2002a, p. 4)

26. This analysis includes indicators of human

resources, employment in high-technology sectors, and the creation of new knowledge through R&D and patents.


22In comparison, the US spends 2.7% of their GDP on R&D (0.66% public and 2.04% private) and Japan spends 2.98% (0.87%public and 2.11% private).

23The per capita state expenditure for science and research, including communities, is 1.8%, higher than the German average (indexof 101.8 in comparison to 100 for Germany as a whole).

24Baden-Württemberg is already achieving the European Union’s target of ‘R&D investment approaching 3% of GDP by 2010’,which was set by the European Council in Barcelona in 2002 within the framework of the Lisbon strategy to become ‘the mostcompetitive and dynamic knowledge-based economy in the world’. This shows the current strength of Baden-Württemberg interms of research and development.

25Baden-Württemberg’s domestic patent applications account for 22.6% of all domestic applications in Germany(Wirtschaftsministerium Baden-Württemberg & Statistisches Landesamt Baden-Württemberg, 2002).

26The European Commission’s European Innovation Scoreboard (SEC(2002)1349 of 09.12.2002) is also published as a specialedition of CORDIS focus, which is available at http://www.cordis.lu/focus/en/src/supplements.htm.

http://www.cordis.lu/focus/en/src/supplements.htm

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The region’s research efforts draw on its dense research infrastructure. Companies in Baden-Württemberg benefitdirectly or indirectly from research results and resources from the large number of universities, non-university researchand transfer institutes (Baden-Württemberg Agency for International Economic Cooperation GWZ, 2003c). Baden-Württemberg’s research infrastructure includes:

1. nine state universities (in Freiburg, Heidelberg, Hohenheim, Karlsruhe, Konstanz, Mannheim, Stuttgart, Tübingenand Ulm), three private universities (in Bruchsaal, Stuttgart and Karlsruhe) as well as 22 public colleges, of which16 are technologically oriented, which also play a part in more applied research;

2. 14 Max-Planck institutes for future-oriented basic research, of which 12 are oriented towards natural sciences(representing approximately 20% of all Max-Planck institutes throughout Germany);

3. seven independent contractual and applied research institutes at universities;

4. 15 institutes of the Fraunhofer Association (FhG) for applied research (representing 30% of all 47 FhG research andservice institutes in Germany);

5. nine institutes of the ‘Otto von Guericke’ Association for joint industrial research, which provide help for small andmedium-sized enterprises regarding technical progress (out of a total of 70 institutes in Germany)

27;

6. three large research centres (out of a total of 16 in Germany) of the ‘Hermann von Hemholtz’ Organisation of Germanresearch centres (HGF), of which two are business-oriented;

7. 250 supporting transfer centres of the Steinbeis Foundation, which offer consultancy services, training courses andthe allocation of concrete development contracts in order to help small and medium-sized enterprises.

Demand conditions

Automotive production and sales The worldwide automotive production of cars and utility vehicles reached 57.6 million units in 2000, 55.8 million unitsin 2001, and just over 59 million in 2002. While total worldwide production decreased by 3.7% in 2001, Germanproduction increased by 3% (Schmidt, 2002, pp. 5-7).

Production – domestic and abroad – by German manufacturers28

accounted for 17.9% of world production in 2001(23.2% for cars and 5.1% for utility vehicles). Overall, Germany ranked third for automotive production, with a total of5,691,677 vehicles produced, of which 391,978 were utility vehicles. The US ranked first with 11,424,689 vehicles andJapan second, with a production of 9,777,191 vehicles. After Germany, the other automotive producing countries in theranking were in order: France, South Korea, Spain, Canada, China, Mexico, the UK, Brazil and Italy (Schmidt, 2002,pp. 5-7 and 12, based upon VDA data). A consultancy survey (KPMG International, 2003a) assumed that NorthAmerican-based car makers will be likely to continue to lose global market share to Asian companies, while Europeanmakers are expected to be able to hold their own market share or even slightly increase it.

29While Europe is leading the

car market, the US is leading in the utility vehicle market (Schmidt, 2002, p. 6).


27Services of these institutes include consultation, tests, inspections, contractual research and development as well as education andtraining.

28German automotive manufacturers here refer to Audi, BMW, DaimlerChrysler (without Chrysler and Freightliner), Evo Bus, Ford,Iveco-Magirus, MAN, Multi-car, Neoplan, Opel, Porsche and Volkswagen.

29The former EU15 account for 38% of world production, followed by Japan with 20.7%, US with 12.4%, Asia (excluding Japan)with 12.1%, the rest of Europe (excluding the EU15) with 5.8%, the rest of NAFTA with 5.8%, and others with 5.3% (Schmidt,2002, pp. 5-8).

13

Domestic demand in the German motor car market, expressed in new registrations, plunged from a peak in 1999, with3.8 million cars, to a level below 3.3 million in 2002, as illustrated in Table 1 below. Domestic demand is, however,expected to increase over the following few years, since cars in Germany are on average over seven years old and a risein replacement purchases is anticipated (Reiche, 2003, based on an interview with analyst Michael Punzet). Nine out of10 new car purchases are replacements, due to the high car density in Germany, with 539 cars per 1,000 population in2001 (Verband der Automobilindustrie, 2003e)

30. This means that new purchases are often postponed to a later date if

the consumption climate is negative. Such dependence on the consumption climate indicates that sales are affected bypsychological expectations, for example, future economic welfare. This proves that automotive demand in general issubject to cyclical fluctuations (Verband der Automobilindustrie, 2003c).

Table 1: New registrations in the German car market (000s)

* forecastSource: B&D-Forecast (Dudenhöffer, 2003b, p. 8; B&D-Forecast, 2003a)

Nonetheless, the decrease in domestic demand in Germany was compensated - at least in 2001 - by higher exports. Outof the total of 5,299,704 cars produced in Germany in 2001, 68.7% were exported (Schmidt, 2002, pp. 8-10 and 26).This illustrates the high export dependency of German automotive manufacturers. Hence, financial profits are prone toexchange rate fluctuations, particularly between the dollar and the euro. Large businesses are able to manage theirforeign exchange exposure by contractual, operating and financial hedging; this can include the use of risk-sharingagreements and specific back-to-back loans such as so-called swaps.

31

Figure 3 illustrates the breakdown of production and sales, abroad and in the domestic market, of German motor cars.Exports from the automotive industry in Baden-Württemberg alone have more than doubled over the last decade, from€12.9 billion in 1990 to €26.6 billion in 2000 and €26.5 billion in 2001. In the same period, Baden-Württemberg’s shareof total automotive exports from Germany remained at about the same: 21.5% in 2001 (Wirtschaftsministerium Baden-Württemberg & Statistisches Landesamt Baden-Württemberg, 2002).


1998 1999 2000 2001 2002 2003 * 2004 * 2005 *

3,736 3,802 3,379 3,342 3,253 3,220 3,450 3,750

30According to a Shell forecast in 1999, vehicle density is expected to further increase by 11-19% until 2020 reaching 700-750 carsper 1000 adults; and the total car kilometres driven is expected to rise by 4-17%, depending on scenarios.

31For more information, see Eiteman, Stonehill, Moffett, and Kwok, 1998, pp. 192 and 254-255.

14

Figure 3: Production and sales of German motor cars in 2001

Source: IG Metall (Schmidt, 2002, p. 10) based on VDA data

Trends in automotive demandWhile foreign cars – in particular French – have become more popular in Germany, increasing their market share to 35%(Reiche, 2003), German brands are expected to regain some market share, to the disadvantage of Japanese and Koreanbrands (Schmidt, 2002, p. 16).

One contributor to this trend is the increasing proportion of diesel engines in all new registrations in the Germanautomotive market

32. The share has risen from 14.9% in 1997 to 34.6% in 2001 (Schmidt, 2002, pp. 10-11). The diesel

engine is a German invention, and the French PSA Group invented the diesel soot particle filter. German33

and Frenchmanufacturers are likely to benefit from their strong position within the diesel segment (Dudenhöffer, 2003b, p. 2). SomeJapanese and American manufacturers appear to have deficits within this market segment, probably rooted in theundeveloped position of this segment in their domestic markets (KPMG International, 2003a).


Motor car production of German manufacturers

9,154,704

Exports from German

production 3,639,891

Imports from production

abroad 502,093

Domestic sales from German

production 1,659,813

Direct sales abroad

3,352,907

Domestic production 5,299,704

Production abroad 3,855,000

Domestic sales of German manufacturers

2,161,906

Sales abroad of German manufacturers

6,992,798

32Environmental concerns, environmental regulations and tax exemptions granted for diesel are among the driving forces for theincrease in diesel cars (Dudenhöffer, 2003b).

33A strategy brief by the consultancy Bain & Company (Matthies and Heideloff, 2001, p. 3) attests a leading competitive positionto German brands such as BMW, Mercedes-Benz, Audi and Porsche.

15

In addition to the diesel market, other niche markets are also expected to experience high growth rates. Crossovers andsports utility vehicles (SUV) are expected to grow in popularity, as well as premium segments in general (KPMGInternational, 2003a). The premium segment’s market share as a percentage of the total volume in Germany is expectedto increase by 7.1% between 1997 and 2004, while the market share of the ‘price-breakers’ segment is forecast toincrease by 2.4%. The mainstream segment is expected to experience a 9.5% loss in market share (Matthies andHeideloff, 2001, p. 2).

34Premium brands, such as Audi, BMW-Mini, Mercedes-Smart, Porsche, Saab and Volvo, have

already seen an increase of their market share from 21.5% to 30.4% between 1990 and 2002 (Anonymous, 2003a).

This tendency towards upmarket premium brands reflects a trend in the automotive industry: the car has become aninnovative lifestyle product (Beneker, 2003). Due to the competitive position of premium brands such as BMW,Mercedes-Benz, Audi and Porsche, German car manufacturers are likely to lead this trend in Europe. Since thosepremium manufacturers are all, with the exception of BMW, based in Baden Württemberg, this region in particular couldprofit from such a development.

In parallel with this trend comes the increasing demand for car equipment relating to security, comfort and‘infotainment’, as well as a growing demand for more engine power (Anonymous, 2003a). Many security systems suchas driver, passenger and side airbags, the anti-blockage system ABS and, increasingly, the electronic stability programme(ESP) are now standard equipment, representing ‘must-have’ technologies. Many comfort features such as centrallocking, seat heating, air conditioning and navigation systems started as dream technologies, and then slowly evolvedinto standard equipment (Verband der Automobilindustrie, 2003d, p. 16).

In this respect, it has to be noted that countries differ in their demand pattern and consumer taste. In broad terms,customers will find more consumer-driven convenience concepts in cars in the US, rather than the engineering-drivenconcepts found in Germany. Another characteristic of the German market, for example, is that environmental concernsare the fourth most important factor (out of 14) for buying a car, after security, quality and value for money, accordingto the ADAC-AutoMarxX Study (Dudenhöffer & Krüger, 2003). North American customers, in contrast, have apreference for large vehicles and passenger trucks (PricewaterhouseCoopers, 2000).

Trends in demography, as a recent study on higher education and research pointed out, have an impact on patterns ofconsumption. In contrast to most of the world population, demographics show that the average age levels in the EU arerising. According to Eurostat, the breakdown of the population in the EU is expected to change radically between 1995and 2025, with an anticipated decrease of around 9.4 million in the number of young people under 20 years and anincrease in the number of older people above 60 of around 37.2 million (European Commission, 2002b, pp. 9-13 and23-24).

35This, of course, is relevant to the automotive industry as it will affect consumer behaviour, and will mean that

companies need to serve the needs of older people


34In addition to the growth of the premium segment, Dudenhöffer also declares that prices of new car purchases have soared by134% over the last 20 years since 1983, with living costs only having increased by 30.4%. For the period 1991-2002, he reportsa 40% increase in prices of new cars (Anonymous, 2003a; Beneker, 2003). Another source (Verband der Automobilindustrie,2003d, p. 13), however, states that the end price of cars basically remained unchanged with the example given of the standard VWGolf model car, for which the price has only increased by 0.7% after inflation since 1990.

35This will also have effects on the higher education and research system. There will be greater competition in maintaining studentnumbers and challenges in replacing retiring staff at higher education and research institutes.

16

Demand patterns also differ greatly between the motor car and utility vehicle segments, with the latter being driven byother customer requirements. For a buyer of a new car, the price often plays the major role. However, for a buyer of autility vehicle, price is a more complex issue as the total costs of ownership (TCO) are considered. These include directand indirect follow-up costs in the full life cycle of the vehicle (Verband der Automobilindustrie, 2003d, pp. 32-35).Since fuel costs can account for up to 25% of TCO, fuel and cost saving innovations are of particular interest for thissegment.

Role of governmentNational and regional governments play a role in providing a policy framework for the industry. Their education andresearch policies can shape the knowledge capacities and skills in a region, setting up institutions specialising in keyindustries. In Germany, the federal Ministry of Education and Research supports the concentration of experience andexcellence, with the creation of networks of competence. This approach seeks to establish an inter-disciplinary networkof universities, external research institutes and firms with a clear focus on producing new cutting-edge productdevelopments on particular competence themes.

Out of a total of 91 networks of competence, 21 competence centres (23% of the total) were established in Baden-Württemberg (Federal Ministry of Education and Research, 2003, pp. 2-3, 6). This indicates the strong researchinfrastructure in the locality. The wider Stuttgart region was particularly successful as it succeeded in eight networks bids(Federal Ministry of Education and Research, 2003, p. 153). Among the networks of competence established aroundStuttgart, several focus on important future areas for the automotive industry. Examples are Pro3 - Process Technology,Mechatronics Göppingen, ReFuelNet - Renewable Fuels, and BZI - Fuel Cell Research Alliance Baden-Württemberg.

36

Through employment and social policies, governments often also provide direct or indirect financial support towardsbusinesses’ research and development expenditure, expansion and trade efforts, as well as for staff training andqualifications. By doing so, governments can support the transformation of economies to meet new demands within thebusiness framework, an example being new qualifications for the automotive workforce. Baden-Württemberg offersfinancial support for introducing modern technologies and innovative projects to investors, start-ups, consolidations and,particularly, to small and medium-sized companies. The financial support ranges from loan schemes and subsidies toguarantees and holdings from the Baden-Württemberg venture capital funds. Various agents can also provide subsidisedtraining as well as inexpensive management (Baden-Württemberg Agency for International Economic CooperationGWZ, 2003b).

Important regulating mechanisms include norms and standards by which innovations in particular fields are promoted.Environmental regulations (Dudenhöffer, 2003b), such as the Euro 4-Norm at European level for diesel cars which limitsthe amount of soot output (from 1 January 2005 when it becomes effective), will force the industry to undertake aminimum of innovation regarding environmental considerations.


36The Network of Competence BZI-Fuel Cell Research Alliance was set up in May 2001. It is an amalgamation of the Fuel CellResearch Alliance Baden-Württemberg and the Centre of Competence and Innovation for Fuel Cell Technology for the Stuttgartregion, within which companies such as DaimlerChrysler and EnBW carry out research in cooperation with the leadinginstitutions in the field. Examples are the universities of Stuttgart, Ulm and Karlsruhe, as well as the Fraunhofer and Max-Planckinstitutes, and the Centre for Solar Energy and Hydrogen Research (ZSW) in Ulm (Federal Ministry of Education and Research,2003, pp. 14-16).

17

Other regulations such as the European Community block exemption will also have a huge impact on the industry(Accenture, 2003). By allowing sales outside traditionally established territories and multi-branded retailing, theEuropean Commission aims to open competition across the automotive industry’s value chain. This will incrementallychange the shape of both distribution and servicing of cars and commercial vehicles in the EU. It threatens to weakenthe link between sales and after-sales services, while providing a new role for independent repairers. However, newtechnologies such as telematics could enable automotive manufacturers to personalise their services, creating a strongbond between their own dealerships and services, which could potentially counterbalance this trend.

Summary and future scenarios

This case study of the automotive sector in the German federal state of Baden-Württemberg concludes with a SWOTanalysis looking at the competitive position of the region’s industry and its preparedness for these changes.

Strengths:long tradition and an established reputation of the existing automotive cluster as the region’s key industrial industrywith the necessary critical mass and a closely-knit network and proximity of manufacturers and suppliers;

strong presence of plants and headquarters of major vehicle manufacturers acting as a hub for the industry;

high concentration of complementary businesses in supporting industries such as electronics/electrical engineering,process and manufacturing technologies, and a presence of companies from related industries such as aviation andaeronautics;

high percentage of worldwide production and exports;

high productivity and relatively low unemployment rate;

existing brand values and positioning in the high-quality and premium segment driving technological innovation andless vulnerability to cost pressure as a result of overcapacities;

trend-setting region for technological innovations with high research and development spending, enabling theemergence of technological innovations and high patent output;

dense higher education and research infrastructure, partly specialised towards the automotive industry, with a highconcentration of researchers and engineers cooperating in research of future technologies;

greater relative pool of science and engineering graduates and researchers based in the regional trajectory, creating acultural affinity of employment in engineering and manufacturing;

protection of companies from capital markets through block ownership.

Weaknesses:domestic car market close to maturity;

export dependency;

a supplier industry that is not yet sufficiently consolidated;

weakness of innovation finance market;

high labour costs compared with international competition;


18

shortage of qualified personnel despite above-average qualifications;

lower working hours in international comparison;

lack of shareholder-value orientation in the industry.

Opportunities:increasing world-wide automotive demand, particularly in emerging markets such as Russia and China, providinghuge future sales opportunities;

strong potential to benefit from the ‘electronisation of the automotive vehicle’ due to the local presence of theelectronics/electrical supplier industry;

potential benefits from the quick diffusion of new knowledge and from externalities due to the proximity and densityof automotive companies;

possible long-term strategies due to close relationships and ownerships of banks;

opportunities to seize growth in niche and particularly in premium markets due to strong positioning as well as byserving demands of ageing customers;

widening of retailing strategies into leisure industry, stretching the value chain;

regulatory norms and standards providing opportunities for innovations.

Threats:tough and increasing competition through globalisation;

growing over-capacity leading to more cost pressure;

uncertainties about stability and openness of emerging markets on which increases in world-wide demand heavilydepend;

currency exchange rate fluctuation and appreciation of the euro, which would make European exports more expensiveabroad;

economic downturn with particular effects on premium markets;

employment shift towards eastern Europe and Asia due to comparative labour cost disadvantage, especially from morelabour dependent medium-sized enterprises;

emergence of illegal copying of components in Asia;

entry of new players into the market;

lack of shareholder-value orientation, which may deter investors;

insufficient attraction for outside science and engineering graduates;

inability of companies to seize growth opportunities due to lack of qualified personnel or shortage of finance.

It can be concluded that the automotive industry is in a transition process towards further flexibility, outsourcing andcustomer orientation, all which have a great impact on forms of work, working conditions and employment in general.


19

In order to maintain competitiveness and be able to afford a high level of social security, advanced economies such asBaden-Württemberg will have to maintain their leading innovation edge and technology advantage. This includes havingto fight competition from countries with lower labour costs. It will not be an easy challenge for the region but itspositioning in the high-quality and upmarket premium segments of the automotive industry represents the only viablestrategy. The success will depend on the capability of the region to attract qualified personnel and to tackle the existingshortages by providing effective qualifications and training to its workforce. Human resources are the driving force forfuture competences which would enable the region to retain its competitive advantage.

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