German Carmakers: Great Wheels, No Traction

Oil prices aren't helping, but German carmakers blame the stagnant market on the government

Germany's economy is growing at a robust 3.3% annual rate. But its mighty auto industry has hit a roadblock. Car sales have fallen 11.7% in the first four months of the year, slammed by skyrocketing gasoline prices and high taxes.

Frustrated carmakers--and consumers--are pointing the finger at the government, not OPEC. Taxes already account for more than two-thirds of the gasoline price, including a levy added in January to help fund Germany's costly pension system. And there's more to come. Chancellor Gerhard Schroder's coalition of Socialists and Greens plans to impose three oil-tax hikes by 2003 that would add 37 cents to the price of a gallon of gas. A recent poll showed nearly two-thirds of Germans want the levy scrapped. If gas prices don't fall, Schroder's chances for reelection in 2002 could be in danger. And if the downturn in car sales turns into a major slump, it could force the economy into a U-turn.

Germany's economic health is tightly linked to its world-famous auto industry. Some 20% of the country's gross domestic product comes from autos and related businesses. Nearly a third of carmakers' sales happen inside Germany, so a slump in domestic demand is putting tremendous pressure on earnings. Auto stocks are among the worst-performing in the DAX index so far this year. DaimlerChrysler's share price is down 22%, to $56.75, while Volkswagen's is down 24%, to $40.90. And the companies can't restructure without unleashing a political backlash from labor unions and the government, both of whom fear a sharp rise in unemployment.

The carmakers feel betrayed by the government. At a summit five years ago, auto makers pledged to develop cleaner and more fuel-efficient cars and to protect jobs. The government of former Chancellor Helmut Kohl in turn agreed not to impose any more burdens on the industry or on car buyers. Schroder, who was governor of Lower Saxony at the time, took part in the summit. "We in the industry kept our promise," says BMW Chairman Joachim Milberg. "But gasoline prices and taxes have both risen."

The price of gasoline in Germany has surged 30% in the past year, to hit a three-year high this month of $3.85 per gallon. A third of the increase is due to additional taxes. The series of price hikes has fueled an 8.8% rise in the cost of owning a car in Germany--the steepest increase in a decade. At the same time, the overall cost of living rose less than 2%. "Customers are not as ready to buy cars as they were in previous years. You have higher gas prices, fewer tax advantages, and worries about the future," says Jurgen Hunger, a Mercedes dealer in the picturesque southern German city of Esslingen. Sales at his dealership are about 15% off last year's levels.

BRIGHT SPOT. Small- and family-car sales have fallen even more. Sales of the midsize $15,000 Opel Astra plunged 37% in the first four months of the year, and sales of the $22,200 Volkswagen Passat fell 27%. Although May figures are likely to show a rise in sales--there were three more shopping days this May than last--German auto makers' association VDA has lowered its annual forecast and now expects car sales for the full year in Germany to drop 7%, to 3.6 million vehicles.

Brisk auto exports have taken up some of the slack. Exports rose 5% in the first five months of the year, mostly because of strong German car sales in the U.S. Dealers hope the May launch of the sleek new $25,000 Mercedes C-Class will rouse sluggish domestic demand. That has worked before. Analysts say a wave of rollouts between 1997 and mid-1999 underpinned the market despite the weak economy. But besides the C-Class, there's not much in the pipeline this year: a new Corsa from Opel, Ford Motor's revamped Mondeo, and Audi's new A4.

Regardless of the rising gas prices, there are signs that the home market is approaching saturation. There are 516 cars for every 1,000 Germans, while the European average is 450. The VDA estimates there are 1.4 million used cars up for sale in Germany, about 40% more than usual. Over the past 10 years, Germany's carmakers have succeeded in boosting exports and expanding their presence outside Europe. They're lucky they did. Even if Schroder rolls back gas taxes to win votes, the German car market looks stuck in the slow lane.

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