(Bloomberg Businessweek) -- Just 15 miles from the French border, the German city of Homburg is no stranger to conflict, from the Thirty Years’ War of the 17th century to World War II, when residents sheltered from bombing raids in the sandstone caves deep beneath the local castle. These days, the city of 43,000 is on the front lines of a different kind of battle: one for the future of Germany’s economic might, specifically the automotive industry.
Like many parts of Germany, Homburg depends on auto manufacturing, with about half the workforce—8,000 people—employed at three big parts factories. That has helped fill local parking lots with Mercedes and BMWs, but the affluence is increasingly under threat. With electric cars likely to displace Germany’s autobahn cruisers, the expertise accumulated in scores of places like Homburg could soon be obsolete.
“Carmakers and suppliers that remain complacent while profits are high won’t be relevant in a few years,” said Peter Fuss, a partner at consultancy EY. “Other players inside and outside the industry will claim this field.”
The stakes are high for Germany as the auto industry accounts for 22 percent of manufacturing output, versus 9 percent in France and 8 percent in Italy. While the figure in the Czech Republic is a bit higher, its plants build many cars and engines designed abroad, frequently in Germany. The likes of Volkswagen, BMW AG and Daimler AG and parts makers such as Robert Bosch GmbH, Continental AG and ZF Friedrichshafen AG employ more than 800,000 people in Germany—in manufacturing as well as research, design, and much more.
With its specialization in diesel technology, Homburg is more vulnerable than most other places in Germany. Dominating the local economy is Bosch’s six-decade-old plant that makes diesel injectors, providing some 4,500 jobs. Diesel—favored by German carmakers because it offers powerful acceleration and better fuel efficiency than comparable gasoline engines—has been under attack since Volkswagen AG admitted cheating on emissions in 2015.
While fallout from that scandal puts diesel at greater risk than other conventional-car technologies, Germany’s entire auto sector is threatened as the value in future models will largely come from systems that monitor and operate the vehicle—with the metal-and-rubber underpinnings likely little more than commodities.
“If diesel dies, our jobs die as well,” said Oliver Simon, head of Bosch’s works council in Homburg, who has urged the company to start making fuel cell components at the site. “We need to get away from the combustion engine.”
The challenges for communities like Homburg, which also has ThyssenKrupp AG and Schaeffler AG factories that produce crankshafts and other components not needed for electric engines, became clear this month when Volkswagen announced plans to buy $25 billion in batteries from Korea and China. That means Germany’s biggest automaker is looking outside its home country for a large chunk of the value in its aggressive push into cleaner cars.
Volkswagen’s decision came just weeks after Bosch, the world’s largest car-parts maker, ruled out a 20 billion-euro ($25 billion) investment into manufacturing power packs for electric vehicles, citing competition from Asia.
“If Bosch were to wind down its activities in the longer term, it would be a disaster,” mayor Ruediger Schneidewind said in his wood-paneled office at Homburg’s town hall, an imposing concrete structure dating from the more-optimistic 1970s. “We’ll have to see if the company can carry on here making new components that are future-proof.”
As buyers turn away from diesel in the wake of VW’s cheating and threats of driving bans in cities, Homburg is feeling the pinch. Bosch says production of its diesel injectors for cars fell 10 percent in 2017 due to weak demand, and a new manufacturing line has been idle for more than a year (though the company says it may open this spring). Bosch is in talks to cut working hours, it said, and the company may reduce headcount by some 400 this year, according to two people familiar with the plans.
“The mood among workers is very subdued,” said Pamela Herrmann, a Bosch factory hand in Homburg since 1987. “The workforce here is extremely flexible, but we need concrete plans from the company.”
It would be a mistake to count Germany out. With its long history of manufacturing excellence, its carmakers and component manufacturers are as innovative as any. The German auto industry spent 40 billion euros on new technologies in 2016, up 7 percent, according to lobby group VDA–more than any other country’s manufacturers. Continental AG makes converters for batteries, Schaeffler produces electric-car axles, and Volkswagen, Daimler, and BMW have all announced ambitious plans for battery-powered cars.
Around Homburg, at least one company is finally starting to reap the benefits of an early shift to electric-era parts, after years of disappointing sales. ZF Friedrichshafen says it has registered a “noticeable” jump in demand for plug-in hybrid modules made at its transmission plant in the city of Saarbruecken, a half-hour’s drive away.
Still, the technology transition has gotten scant political support as Chancellor Angela Merkel has done little to prod automakers to shift direction. Subsidies for diesel fuel remain in place, and though Merkel in 2016 introduced incentives for electric cars, sales of battery-powered vehicles have been sluggish. Last year, Merkel abandoned a target to have 1 million electric cars on German roads by 2020.
“They’ve done the bare minimum to keep things going, and that won’t work anymore,” Salvatore Vicari, the works council chief at Schaeffler’s Homburg plant, said over the din of clanking and whirring machines transforming metal bands into rocker arms that help combustion engines save fuel. “The passivity of our government is deeply worrying.”
--With assistance from Hayley Warren and Jana Randow
To contact the author of this story: Elisabeth Behrmann in Munich at ebehrmann1@bloomberg.net.
To contact the editors responsible for this story: Chris Reiter at creiter2@bloomberg.net, David Rocks Anthony Palazzo
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