Viability of Engineering Electric Cars for the German Market

INTRODUCTION

The depletion of the fossil fuels around the world and the improvements in the technology behind the electric cars is making both the regulators and consumers to see Battery Electric Vehicles (BEVs) as the cars of the future. Electric vehicles are also inexpensive to run and have lesser maintenance expenditure than the conventional cars. The low emission rates of BEVs is another big draw for these vehicles. According to an estimate by OECD (2012), fossil fuel powered cars contribute 25 percent of the total greenhouse gases emitted in the world. Pollution caused by vehicles run on fossil fuels significantly contributes to the pollution levels in cities. One good way to reduce the pollution levels in cities is the use of electric cars. Developed countries in general and European countries are giving a lot of incentives for both the producers and consumers to increase the usage rate of electric vehicles. The adoption rate of electric vehicles too has been increasing over the years. Improvements to the battery technology and the entry of major automobile companies like BMW into the market for BEVs are giving a big boost to the BEV market in the world.

Germany is one the major automobile hubs in the world and the home to many major automobile companies in the world. Right from the time when the world’s internal combustion engine was invented in Germany, German countries have been at the forefront of the global automobile industry. Most of the latest technologies in the automobile sector are invented by the German automobile companies. Nearly 10 patents related to the automobile sector are registered in Germany every year making it the most innovative country in the world in the area of automobile sector (Krauss et al. 2011). Higher investments in R&D made Germany as the hub for research and development activity in the BEV sector. Encouragement from the German government is another reason for the speedy adoption BEV technology in the German market.

The German government wants to increase the number of BEVs on German roads so that the pollution levels in its cities can be controlled well. German government wants to have atleast 5 million BEVs on its roads by the year 2030. The German government gives incentives for both the producers and consumers in the form of subsidies and R&D assistance to increase the adoption rate for BEVs. For the year 2014, the German government has injected fresh funds to the tune of € 500 million for research in electrical vehicle technologies (Worldwatch 2014). The German government wants to increase the production of BEVs form the current 2000 units to 1 million units by the year 2020. Being an automobile hub, the German government also sees a huge opportunity for the export of BEVs.

Despite the encouragement from the German government and the initiative from the German car makers, the market for BEVs is still in a nascent stage. The past experience in many western countries which have successfully introduced the electric vehicles but failed to gain a significant market share later puts in doubt the future of BEVs in the German market. There is no guarantee whether electric vehicles will grow in the long-term. BEVs face certain challenges in the form of limited operational range, higher recharge time for their batteries, and the limited availability of battery exchange centers. The increasing fuel efficiency of the conventional cars is another challenge that can pose a threat to the future growth of BEVs in the German market. Latest advancement in the diesel engine technology has greatly increased the fuel efficiency of diesel powered cars. Diesel cars have also become less noisy and easy to maintain. The threat of any new technologies into the market is another threat to the acceptance of BEVs in the German market. Some of the factors related to the industry like high exit costs, high R&D expenditure, and costs incurred for the setting up of new plants to manufacture BEVs can add further problems to BEVs in Germany.

However, German companies are eagerly pushing ahead with BEVs. The year 2014 saw many major German automobile companies like BMW, Audi, and Volkswagen come out with models like i3, A3 e-tron, and e-Up!. There is a dearth of studies relating to the viability of BEVs in the German market. The current study will fill gap by testing the viability of BEVs in the German market through certain theories like Porter’s five forces model. Evaluating the competitive landscape of the German automobile industry and the external forces that impact the functioning of the sector are the key methods in which the study will assess the viability of BEVs in the German market.

While pursuing objectives, the study will also focus on the contemporary German automobile market in general and the market for BEVs in particular. The study contributes both to the academic literature and to the industry. Industry managers can get a thorough understanding of the viability of BEVs in the German market through the analysis conducted in the study.

THE GERMAN AUTOMOBILE INDUSTRY

This chapter outlines the automobile industry. Starting from the invention of the world’s first internal combustion engine in 1870s, the development of Germany as a leading automobile hub in the world in outlined. Statistics regarding the share of German automobile industry like its revenues, investments in R&D, and the major brands sold in the German market gives an idea of the current trends in German automobile industry. The chapter also gives the list of major automobile brands in Germany and the buying preferences of German automobile customers.

The automobile industry is one of the most important components of Germany’s economy. All over the world, the German automobile industry is recognized for its excellence in engineering and superbly designed cars. Germany has a rich automobile history dating back to the late 19^th century. The first automobiles in the world were developed when Karl Benz and Nikolaus Otto developed the world’s first internal combustion engines in the late 1870s (GTI 2013). The combustion engine was later fit to a coach resulting in the development of the world’s first automobile. Apart from the minor gaps during the first and second world wars, Germany remained a leader in the global automobile industry. Unlike other automobile hubs, Germany is a leader in the market for premium cars. Automobile brands like Mercedes Benz, Audi, and BMW make Germany as the leader in the market for premium automobiles. Nearly 80 percent of the global market for premium cars is owned by the four major luxury car brands, viz. Audi, BMW, Mercedes Benz, and Porsche (Boston and Boudette 2014).

In terms of sheer size, the German automobile industry is the biggest industry sector in Germany and has a total turnover of € 361 billion and employed 742,000 persons (MIIG n.d.). The revenues generated by the German automobile sector constitute 20 percent of revenues from the German industry (GTAI nd). The dynamism of the German automobile industry makes Germany as the biggest automotive market in Germany. Nearly 30 percent of the total cars manufactured in Europe and 20 percent of all new car registrations in Europe are from Germany. A total of 46 automobile assembly and engine production plants are based in Germany. Nearly one third of the total the automobile production capacity in Europe is concentrated in Germany. The main reason behind the success of the German automobile industry is its heavy investment in R&D. Most of the latest technologies in the automobile sector are invented in Germany. For the year 2013, the R&D budget of German automobile industry was € 18.3 billion, which was equivalent to one third of the total R&D expenditure incurred by Germany. Other than making top class cars, Germany is also home to some of the best automobile component manufacturers. 21 of the world’s top automobile component manufacturers are based in Germany. Nearly 77 percent of the total cars produced in Germany are exported to other countries making Germany a major export hub for automobiles (GTAI nd).

Below is the list of the top automobile brands made in Germany. Apart from these big automobile brands, Germany is also home to a lot minor automobile brands like Alpina, Lotec, Melkus, and Pegasus.

Company	Segment
Audi	Regular
BMW	Premium
Ford Germany	Regular
Mercedes Benz	Premium
Opel	Regular
Porsche	Premium
Volkswagen	Regular

 

Like many other European automobile markets, most of the cars sold in Germany are Diesel powered. Nearly 49 percent of the total cars sold in Germany are powered by Diesel engines (Stampfer 2012). The low tax rates on Diesel cars and the availability of highly advanced diesel engines are some of the factors responsible for the dominance of diesel cars in Germany.

DIFFERENCES BETWEEN CONVENTIONAL, HYBRID AND ELECTRIC CARS

The automobile technology has evolved over the years resulting in the emergence of different kinds of cars in the market. When the first automobiles were invented in the late 19^th century, they were powered by internal combustion engines. Internal combustion engines burn the fuel (petrol or diesel) to produce the energy required to move the car. The burning of the fuel releases energy that moves the piston. The piston is in turn connected to the vehicle’s wheels. There are different types of internal combustible engines like four stroke, two stroke, single stroke, and multi stroke. Traditionally internal combustion engines are powered by petrol. Diesel engines were used in heavy vehicles due to the high torque produced by them. Conventional cars with internal combustion engines have dominated the automobile landscape for a long time after automobiles were introduced in the market.

Hybrid cars on the other car combine the conventional petrol powered engines with electric motors. Conventional petrol engines operate a dynamo that is fit in the car (Barett nd). The power that is generated from the dynamo is stored in a battery. The main electric engine that actually drives the car is run by the power that is produced by the internal combustion engine. The complexity of hybrid engines and the multiple engines that are required to run a hybrid car increases the cost of manufacturing them. Hybrid technology was pioneered by Toyota when released the world’s first hybrid car called the Toyota Prius in the year 1998 (Cars Direct 2012). Since low powered engines are used for running the dynamo that charges the car’s battery, hybrid cars offer higher fuel efficiency and higher operating range. Batteries of some modern hybrid cars can also be charged directly by directly connecting them to external power sources (Frugal Trader 2008). This makes it possible to use them as electric cars. A latest development in hybrid technology is diesel hybrids that offer even better fuel efficiency than the petrol based hybrids.

Electric cars completely operate with the power stored in their batteries. Batteries need to be charged by connecting them to external power sources. No internal combustion engines are used to charge the batteries of electric cars (Reynolds and Kandikar 2007). Heavy Lithium Ion batteries are used to store the power required for running an electric car. Though electric cars were introduced in the late 19^th century along with cars with internal combustion engines, their acceptability was limited due to the high prices and lower operating range. Advancements in the battery technology in the recent past made it possible for companies to produce electric cars with longer operating range. Since there are no internal combustion engines in an electric car, they are less noisy and operate smoothly.

All three kinds of cars have their own advantages and disadvantages. The conventional cars with internal combustion engines have benefits like high operating range, easy serviceability, and easy availability of fuels. Hybrid cars on the other hand have cheaper running costs and smoother operation.  A big disadvantage with hybrid cars is their higher relative costs when compared with the conventional cars. Higher prices of hybrid cars make them unviable for people with limited use. Electric cars have advantages like cheaper operating costs and smoother operation. However, electric cars suffer from some major disadvantages that has traditionally prevented their widespread use like limited operating range, longer recharge times for their batteries, and limited availability of recharge stations. Lack of innovation in the battery technology has also limited the growth of electric cars in the market.

LITERATURE REVIEW

The chapter on literature review is meant to summarize the past studies that were conducted in current area of research. The main theories and models that will be used in the current study like Porter’s Five Model and PESTL analysis of the German automobile industry will be elucidated so that the reader gets a clear understanding of them. Analysis of the past literature will help in identifying the possible gaps and to come out with a research frame work for the current research.

BEV Automobile Industry in Germany

The tightening regulatory environment and economic pressure has resulted in an increase in the demand for Battery Electric Vehicles (BEVs) around the world. Being a hub of the global automobile industry, Germany is no exception to this shift. German consumers have fast adopted the electric vehicles. Both the regular and premium automobile manufacturers in Germany too have started manufacturing BEVs. The release of BMW’s i3 has given a further boost to the market for BEVs in Germany. Since its release in early 2014, BMW i3 has dominated the sales of electric vehicles in Germany (Shahan 2014). However, the BEVs also face a lot of challenges that are similar to the ones in other countries. The cost of manufacturing a BEV is significantly higher than the conventional cars due to the higher prices of batteries and other components. Sales and marketing expenses for BEVs are also significantly higher than the conventional cars due as it is difficult to convince the many first time buyers of BEVs. Despite the subsidies received by the manufacturers of BEVs from the government, the final prices of BEVs are higher than the conventional cars. Some of the other factors that inhibit the growth of BEVs in the German automobile market are the limited range of BEVs and higher cost of components. There are a lot of automobile companies that sell BEVs in the German market. The table below gives the list of BEV manufacturers in Germany.

The Major BEV Manufacturers in Germany

Brand	Name	Model	Type	Year	Country market	Production site
German E-Cars	CETOS	Mini	BEV	2012	Germany	Germany
German E-Cars	Stromos	Mini	BEV	2010/2011	Germany	Germany
Opel	Ampera	Compact	REEV	2012	Germany	Hamtramck (U.S.)
Smart Fortwo	Electric Drive	Mini	BEV	2012	Germany	Hambach (France)

 

The future growth prospects for BEVs in the German market have significantly grown in the recent past due to a new plan by the German government to put 1 million electric cars on the streets by the year 2020 (Moulsonn.d.). As part of this plan Germany has it a priority to develop better batteries that can speed up the process of BEV development. As more number of luxury car manufacturers in Germany are now moving towards the manufacturing of BEVs, it can only be expected that BEVs market in Germany is poised for a rapid growth in the near future.

Porters Five Forces Model and Automotive Industry in Germany

This current chapter will apply the Porter’s five forces model to the automotive industry in Germany. Like any other industry, the German automobile industry is highly competitive and is impacted by a number of forces within the industry.

According to Porter (1979), there are five competitive forces that govern competition in an industry: threat of new entrants, bargaining power of customers, threat of substitute products and services, and bargaining power of suppliers. The applicability of Porter’s (1979) five forces model to the German automotive industry is elucidated below:

Threat of Substitutes

Substitutes refer to the products that can do the same work as that of the products manufactured by the company for a lower price and equal quality. According to Grundy (2006) substitute products can impact the products that are made by the company and can even make them obsolete. The German automobile industry is mainly dominated by high end premium cars manufactured by players like Audi, Mercedes-Benz, and BMW. Any good substitute products can impact the performance these luxury companies. Even though there are no luxury brands that are entering the market now, some of the old luxury brands are now being revived. The UK based Jaguar Land Lover that makes both the Jaguar and Land Rover is seeing a revival in its sales all over the world and can pose a threat to the sales of German automobile companies. Jaguar is witnessing higher sales in Germany automobile market itself. For the year 2014, the sales of Jaguar have bucked the industry trend of falling sales and registered higher sales than German players like Volkwagen and BMW. Some other staid luxury automobile brands like Lincoln and Cadillac too are staging a comeback with improved performance (Rosevear 2014). This too can pose a threat to the performance of the German automobile industry.

Threat of New Entrants

New entrants in a sector can pose a threat to the status quo and impact the sales of existing players. The Global automobile industry is well entrenched all over the world with most of the sales coming from the highly competitive eastern markets like China. A lot of Chinese automobile manufacturers are now improving the quality of their products and expanding globally. Sales of regular German automobile brands like Volkswagen and Opel may be impacted because of the entry of Chinese automobile brands in the global market (The Economist 2005). Some recent entrants into the global automobile industry like Tesla Motors which manufactures high end electric vehicles is gaining global attention (Tesla 2013). The cars made by Tesla rival the quality of German produced luxury cars. Despite being an industry with high entry barriers, the German automobile industry is prone to competition from players like Tesla that can be detrimental to the interests of the industry in the long-term.

Porter’s Five Forces Model

Intensity of Rivalry among the Existing Firms 

Intensity of rivalry among the exiting firms can impact the performance of the existing firms as firms compete aggressively with each other. The top automobile companies in the German automobile industry compete with each other aggressively both in the home market and abroad. The two German brands, BMW and Audi are now dominating the global automobile market in sales. Mercedes Benz which is recovering from a failed diversification strategy is try to grow in markets like China and India where it stated lagging behind players like BMW and Audi. With some of its new releases like the newly launched S-Class, Mercedes is trying to recover in the global markets (Reuters 2014). The intense rivalry between the existing players is forcing players like BMW to offer deep discounts in markets like India to gain an upper hand over their rivals. All these factors can impact the stability of the players in the German automobile industry.

Bargaining Power of Buyers

Being a closed market, the buyers of the German automobiles have limited bargaining power. As the retail customers of German automobile industry are fragmented across the globe, they cannot come together and bargain for a cheaper price of the cars sold by them. However, the spread of automobile websites that give better information to the buyers of cars and other automobiles around the world can increase the bargaining power of buyers (Chircu and Kauffman 1999). Automobile websites offer a range of assistance to the buyers of cars in the form of assisting buyers in bargaining for discounts, cheaper insurance, and comparison of various alternatives available in the market.

Bargaining Power of Suppliers

Bargaining power of suppliers refers to the ability of supplies to bargain for higher prices from the buyers. Just like any major automobile industry in the world, the German automobile companies too source most of their components from automobile components manufacturers. However, the German automobile companies now source most of their components from components manufacturers around the world. Many components are now )even being sourced from players in markets like India (KPMG 200. Diversification of the supply base for its components limits the bargaining power of suppliers in the German automobile industry.

 

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