It’s difficult to miss the atmosphere when you stroll through the Beijing auto show in April. When Mercedes unveiled its new GLC L electric SUV, it attracted long lines of Chinese buyers who were prepared to make deposits before the vehicles even came off the stand. The crowds were present this year, but they were noticeably louder near the Geely and Nio displays a few halls over and smaller around the German booths. People in the German camp are beginning to openly acknowledge that something has changed.
Speaking to reporters on Saturday, Hildegard Mueller, the head of Germany’s VDA auto lobby, used the word “intense” several times. She wasn’t acting overly dramatic. She was being cautious. Knowing that the numbers behind the curtain are worse than what the public sees makes you more cautious. The foundation of Germany’s automotive finance model, which consists of premium pricing, large margins in China, and consistent reinvestment back into Stuttgart and Munich, is no longer the same as it was five years ago.
There is a feeling that this was anticipated by German executives. There were signs everywhere. Shanghai showroom traffic is expected to decline through 2024. Sales of BMW’s 7-Series are falling short of internal projections. Mercedes is abandoning its ambitious volume goals in favor of discussing “value over volume,” which is business jargon for “we can’t sell as many cars at the prices we used to.” On paper, Geely’s new sedan at the show had features comparable to a German flagship at about half the price. It’s difficult to ignore how quickly that gap narrowed.
The cost of development is the deeper fissure. German vehicle development is roughly four times more expensive than the corresponding Chinese effort, according to research that Bain cited. In a market that is slowing, that ratio is brutal. The entire financial scaffolding begins to wobble when you increase the cost of manufacturing an automobile and your customer base starts saving money, observing an increase in unemployment, and feeling a subtle patriotic pull toward domestic brands. Only when the customer feels the badge is worthwhile does premium pricing work. Buyers in China don’t seem to think that anymore.
A small Nio dealer-side showroom was crowded outside the show floor on a side street close to the convention center. They weren’t merely observing. They inquired about battery-swap stations while perusing the infotainment while seated inside the vehicles. The Germans used to own that type of engagement. These days, it’s earned at a low cost somewhere else.
It’s still unclear if the German response, which includes deeper joint ventures, quicker software cycles, and more EV launches, will be sufficient. The businesses are not failing. They continue to build some of the best machines in the world, are profitable, and are still well-respected. However, the financial model that provided funding for all of this was largely dependent on China bearing the burden. Every euro spent on research and development in Wolfsburg or Munich now has to defend itself against a Chinese competitor that was not a significant threat ten years ago due to that load lightening.
As this develops, the question is not whether the Germans will be able to adjust. They have previously adjusted. Whether the adaptation will be made before the math gets worse is the question.