German Auto Industry Facing the Abyss

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In Daimler's case, pressure coming from the capital market prompted the company to buy back €5 billion ($6.25 billion) of its own stock.

The carmaker could have invested the money in the development of more environmentally-friendly cars. But this would only produce long-term profits, while reducing profits in the short term. It should thus come as no surprise that BMW has a small lead in the development of fuel-efficient technologies (including a start-stop automatic transmission and recovery of braking energy).

There is also another reason the crisis is causing such distress at Daimler. Normally, luxury cars like the world-famous sedans with the Mercedes star on the hood are not as sharply affected by an economic slump as mass-market models. But this appears to be changing. "The affluent still have the necessary money," says Daimler CEO Zetsche, "but some feel that it is no longer appropriate to drive a big car"—because of the crisis, but also in deference to the climate protection debate.

The mood is gloomy in Mercedes-Benz dealerships. At some dealerships, there are days when not a single new car is sold. When a customer does buy a car, it is more than likely a slightly used car with just 5,000 kilometers (3,100 miles) on the odometer—but already available at a 40 percent markdown.

Because many dealers also sell Mercedes trucks and this business has come to a virtual standstill, they are fighting to survive. Daimler has already provided its dealerships in Germany with €53 million ($66 million) to make up for losses, and €10 million ($12.5 million) for demonstration models. Now the company-owned dealerships, which expect combined losses of about €200 million ($250 million) this year, expect financial assistance.

In this crisis, CEO Zetsche is coming under growing pressure to search for a large-scale solution, in addition to the usual cost-cutting programs, to broaden the company's base. A joint venture with BMW would be one possibility. The second option, say experts, would be close cooperation with a technology company that could help the carmaker develop new drive technology. Under this sort of arrangement, Daimler could also be protected against takeover attempts through a capital investment by the new partner.

VW also at Risk

Volkswagen has already undergone a more or less friendly takeover. The new major shareholder, Porsche, whose sales have declined sharply because of a model changeover, secured its own technology by launching the takeover. The small sports car manufacturer now has access to Europe's biggest automaker.

But even the VW Group faces a serious challenge. The board must correct its model strategy. Until now, developers at VW headquarters in the central German city of Wolfsburg were fixated on developing more and more powerful engines. In addition to a 16-cylinder engine, the company has two different 12-cylinder engines—which not even BMW or Mercedes-Benz can offer. But this does Volkswagen little good, because smaller, fuel-efficient engines are now in demand.

It must have taken will power for Winterkorn, powerful engine enthusiast that he is, to see his company building three-cylinder engines. But the VW CEO has recognized that the future of the company depends more heavily on whether it can become the leader in this model class than on new, high-performance engines.

Winterkorn must also question his growth strategy, which involves almost doubling VW sales by 2018. This would have meant job security for the group's 330,000 employees. But because there is likely to be no growth at all in the next two years, VW has the problem of having too many employees, and company executives assume that VW will have to eliminate several thousand jobs. This will most likely affect some of VW's 18,000 short-term employees and its 25,000 temporary workers.

The board's initial goal is to prevent too many cars from being produced, since they could only be sold at a deep discount. The Christmas break at VW's Wolfsburg plant, already extended to last from Dec. 19 to Jan. 4, will likely be expanded even further.

For German automakers, the year 2009 will begin with eerie silence. It will be quiet in almost all plants, in Stuttgart, Munich, Regensburg, Rüsselsheim, Kaiserslautern, Cologne, Emden, Hannover, Braunschweig and Wolfsburg. All assembly lines will be shut down.

"We are about to face a serious test," says Daimler CEO Zetsche, and yet this does not make him pessimistic about the future of the German auto industry, not by a long shot. It is still more competitive than many other auto industries, not just from the United States, but also from France and Italy.

The crisis "is also a time of renewal," says Zetsche. "We will now see how well-prepared for the future our industry is."

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