German Auto Industry Facing the Abyss

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As a result, they can no longer attract customers with low-interest car loans.

Ultimately, the entire business model of VW, Mercedes-Benz and BMW is beginning to falter. It is based on the assumption that carmakers can constantly increase sales by constantly introducing new models. This is the only way they can guarantee jobs. For car companies, standing still is in effect moving backwards. Companies that are not increasing sales are in fact shrinking, because productivity in their plants grows by 5 to 10 percent every year. Declining sales can potentially lead to the loss of tens of thousands of jobs.

Opel is not the only German carmaker seeking government assistance. VW, Daimler and BMW have also submitted their requests. They want Berlin to issue government loan guarantees on the loans taken out by the carmakers' financing divisions. They are also asking the German government to pay a premium to anyone who replaces a car more than 10 years old with a new one. And they want to see Brussels cancel its plans to impose penalties on manufacturers for failing to meet their CO2 emissions targets.

Still, its difficult not to think that some manufacturers are merely trying to divert attention away from their own mistakes. Many of the problems are homegrown. The companies placed too much emphasis on growth at all costs, while at the same time neglecting to develop fuel-efficient cars earlier in the game.

Nevertheless, the appeals for help show how serious the situation is. Some senior executives already question whether Daimler and BMW will survive the crisis as independent companies. And close examination reveals that both companies significant Achilles heels.

The biggest risk for BMW stems from its successes in recent years. The Munich-based company risked almost everything for its goal of finally overtaking rival Mercedes-Benz. BMW has almost doubled its car sales since 1999, and since 2007 the Bavarian carmaker has been the world's top seller in the premium class.

BMW has achieved this mainly by expanding its model line downward, with the 1 Series and the Mini. This weakened the company's profitability. But BMW has also boosted its sales by offering customers attractive leases and car loans; today this approach is used to sell every second car the company moves off its lots. This has increased risk.

While Daimler has only about €11 billion ($13.8 billion) on its books for leased vehicles, it is almost €20 billion ($25 billion) at BMW. That is BMW's major weakness.

BMW based its leasing calculations on an estimated residual value for the cars when customers return them after three or four years. But this value has little to do with reality these days, because used car prices fall during an economic crisis. Besides, more and more customers who purchased a BMW on credit can no longer afford their car payments. In the first nine months of this year alone, BMW had to establish reserves of more than €1 billion ($1.25 billion) to make up for the difference, and more reserves are likely to follow.

The second risk for BMW lies in the fact that customers are increasingly buying smaller models, or at least are opting for smaller engines in the larger 5 Series and 7 Series. Because of this, Munich-base engine factories have slid into the danger zone this year.

Waste of Money

"We are producing the wrong engines," Manfred Schoch, the chairman of BMW's works council, warned. The plant can satisfy the demand for eight-cylinder engines in single-shift operation over a four-day workweek. Six-cylinder engines are also becoming less popular, so much so that production could be shifted to the company's engine plan in Steyr in the future. This would "mean the death of BMW at the Munich location," said Shoch.

By introducing new working hour models, Schoch managed to reduce wage costs so that more four-cylinder engines can be assembled in Munich in the future, thereby saving the plant. But BMW still has the problem of having to achieve adequate profits with smaller models in the future.

The company is poorly prepared for this.