The Looming Auto Industry Reckoning: Why Germany’s ‘Both Paths’ Strategy Could Backfire
A 73% price gap. That’s the difference between a new Volkswagen in Germany and the same model in China, a statistic that underscores the escalating pressure on European automakers. Germany’s once-vaunted automotive industry is at a crossroads, attempting a delicate balancing act between the continued refinement of internal combustion engines (ICE) and the full-scale transition to electric vehicles (EVs). But according to leading industry analyst Ferdinand Dudenhöffer, this “double path” isn’t a strategy for survival – it’s a recipe for obsolescence in the face of aggressive competition from China.
The Retreat from Electrification: A Costly Gamble?
Just a few years ago, the narrative was clear: the future of the automobile was electric. German manufacturers, spurred by increasingly stringent emissions regulations and consumer demand, pledged ambitious timelines for phasing out ICE vehicles. However, that momentum has stalled. BMW, Volkswagen, and Mercedes-Benz are now extending the lifespan of combustion engines, citing slowing EV adoption rates, economic headwinds, and the persistent price disparity between EVs and their gasoline-powered counterparts.
This shift, however, isn’t being viewed as pragmatic adaptation by all. Dudenhöffer argues that it’s a dangerous retreat, a clinging to the past while competitors like BYD and Xiaomi aggressively push forward with innovative and affordable EVs. The risk? German automakers could buckle under the weight of mounting costs – billions invested in both ICE and EV technologies – before they can successfully navigate the transition.
China’s Price War: A Tsunami Heading for Europe
The primary driver of this pressure isn’t simply technological advancement; it’s price. Chinese manufacturers, led by Chery (the largest auto exporter in 2024), are flooding the market with vehicles that offer comparable features and performance at significantly lower price points. While BYD receives much of the attention, other brands like MG, Roewe, and Changan are quietly gaining market share.
“Chinese manufacturers bring numerous petrol engines,” Dudenhöffer warns, “and the competition will continue to tighten.” The price war that’s already raging in China is poised to spill over into Europe, eroding the profit margins of established automakers. This isn’t a matter of free market forces; it’s a calculated strategy. Volkswagen, for example, is forced to offer significantly lower prices in China to remain competitive, a reality that will inevitably impact its European pricing strategy.
Key Takeaway: The price advantage held by Chinese automakers isn’t a temporary phenomenon. It’s a structural advantage driven by economies of scale, streamlined production, and a different approach to profitability.
The European Dilemma: Technology Openness and its Consequences
The concept of “technology openness” – the willingness to continue developing ICE technology alongside EVs – is gaining traction in Europe. Initially, political factors like the abrupt cancellation of the environmental premium slowed EV adoption. Now, the industry itself is contributing to the slowdown, arguing that the price gap between combustion and electric cars is shrinking, ranges are improving, and CO₂ levies are incentivizing diesel use.
However, Dudenhöffer and co-author Haonan Zhu contend that this “openness” is a distraction. It allows manufacturers to delay the full commitment to electrification, diverting resources and potentially hindering the development of truly competitive EV offerings. This delay has particularly dire implications for the European supplier industry, which faces a potentially bleak future if the transition to EVs is significantly slowed.
The US Model: A Different Path
Interestingly, the situation in the United States is markedly different. While older V8 engines are experiencing a resurgence in demand, this isn’t driving significant new investment in ICE technology. The limited production runs and existing infrastructure mean that maintaining these engines is relatively inexpensive. In Europe, however, every improvement to combustion engine efficiency requires substantial investment to meet increasingly stringent emissions standards.
Did you know? The cost of developing and implementing cleaner combustion engine technologies in Europe is significantly higher than maintaining existing ICE infrastructure in the US.
Navigating the Future: What Can European Automakers Do?
The path forward for European automakers is fraught with challenges. Simply continuing on the current trajectory – investing in both ICE and EV technologies – is unsustainable. Here are some potential strategies:
- Accelerate EV Investment: A full commitment to electrification is crucial. This requires prioritizing EV development, securing battery supply chains, and investing in charging infrastructure.
- Focus on Software and Services: The future of the automotive industry isn’t just about hardware; it’s about software and services. Developing advanced driver-assistance systems (ADAS), over-the-air updates, and subscription-based services can generate new revenue streams and differentiate automakers from the competition.
- Strategic Partnerships: Collaboration with technology companies and battery manufacturers can help reduce costs and accelerate innovation.
- Embrace Platform Sharing: Sharing vehicle platforms and components can significantly reduce development costs and improve economies of scale.
Expert Insight: “The European automotive industry needs to make a decisive choice,” says Dr. Anya Sharma, a leading automotive economist at the University of Berlin. “Continuing to hedge bets on both ICE and EV technologies will only dilute resources and weaken their competitive position.”
Frequently Asked Questions
Q: Will combustion engines completely disappear?
A: While the long-term trend points towards full electrification, combustion engines are likely to remain in use for several decades, particularly in niche applications and developing markets. However, their role will continue to diminish as EV technology improves and becomes more affordable.
Q: How will the price war impact consumers?
A: Consumers will likely benefit from lower vehicle prices and increased competition. However, this could also lead to a decline in quality and features as manufacturers cut costs.
Q: What is the role of government policy in this transition?
A: Government policies, such as emissions regulations, tax incentives, and investments in charging infrastructure, will play a crucial role in accelerating the transition to EVs. Consistent and long-term policies are essential to provide certainty for automakers and consumers.
Q: Are smaller European automakers at greater risk?
A: Yes, smaller automakers with limited resources are particularly vulnerable to the price war and the high costs of developing both ICE and EV technologies. Consolidation within the industry is likely.
The automotive landscape is undergoing a seismic shift. The decisions made by European automakers today will determine their fate in the years to come. Ignoring the lessons from China – and the warnings from analysts like Ferdinand Dudenhöffer – could prove to be a fatal mistake. What are your predictions for the future of the automotive industry? Share your thoughts in the comments below!
