Industry Trend Analysis - German Election: Merkel Victory Will Force Industry Innovation - OCT 2017

BMI View: A victory for Angela Merkel ' s CDU party in Germany ' s federal elections will see a tougher stance taken against carmakers with a push for more innovation to tackle pollution. However, while standing by the 2020 goal for having 1mn EVs on the road, Merkel will not take the route of EV quotas favoured by the SPD.

As the biggest industry in the country, the automotive sector is in the spotlight in run-up to the German federal election, not least because of the negative press it has been generating through the emissions scandal and most recently, the allegations of collusion amongst the industry's biggest brands. Regardless of who wins the election we would expect a tougher stance towards the nation's carmakers, but our core view of another term for Angela Merkel as Chancellor enhances this view given her reputation as a strong leader ( see ' CDU Will Hold Whip Hand In Coalition Negotiations ' , August 8). She will not push for electric vehicle (EV) quotas, however, favouring innovation in other areas instead.

No Leeway For Carmakers

The traditionally solid 'Made in Germany' image has been shaken by events in the automotive sector over the last two years. The diesel emissions scandal that engulfed Volkswagen (VW) in late 2015 was just the beginning as allegations have since been made that VW, Porsche, Audi, BMW and Daimler have been colluding over prices since 1996. An investigation has been launched by the EU, which not only risks the reputation of the sector, but is already having a tangible effect on investment as a number of asset managers have banned investment in German carmakers from some of their funds, according to the Financial Times.

The developments are also starting to impact public sentiment, with a poll from German broadcaster ARD showing that 57% of respondents had lost faith in domestic carmakers, while the following question showed 56% believed this would have a long-term impact on the German economy. This is undoubtedly now a political issue and both Merkel and her closest rival Martin Schulz, leader of the junior coalition partner Social Democratic Party (SPD), have spoken out against the companies.

Slide In Confidence Becomes Political
Opinion Poll Results, August 2017
ARD; Note: remaining respondents didn't know or didn't answer

Merkel addressed the issue directly at a campaign rally in Dortmund in August, laying the blame for the diesel emissions scandal firmly with the executives of the companies rather than the workers. This was undoubtedly tailored for the labour activist audience, but also provides an idea of the direction the ruling Christian Democratic Union (CDU) party's handling of the situation would take. She also criticised the lack of innovation in the sector as a threat to jobs, signalling an understanding of how the economic effects are a concern to voters. She has pledged to push for new technologies in the sector as well as holding executives to account.

Schulz has taken a more personal tone, criticizing not only the carmakers for their deception of consumers but Merkel herself for switching policy regarding carmakers, claiming that carmakers feel safe because of a closeness to Merkel. He has called for a second 'diesel summit' to address outstanding issues and come up with technical upgrades to diesel vehicles if the software upgrades are inadequate at the carmakers' cost. However, given the likelihood of a Merkel victory, she would be the one to lead such a summit.

Dealing With Diesel

Aside from the candidates' attitudes towards dealing with the country's carmakers, their policies towards the vehicles themselves need to be considered. With the UK and France announcing bold plans to ban the sale of new petrol and diesel cars by 2040, attention has turned to how the country that is home to a large number of manufacturers of these cars will deal with the issue of pollution.

The first 'diesel summit' saw the Department of Transport urge VW, BMW and Daimler to upgrade the software in 5.3mn diesel vehicles. This is largely an interim measure, however, and Merkel has since said that while she will not state a timeframe for a ban on internal combustion engines (ICEs), it is the right approach to take. Indeed, some individual German cities are already moving towards bans, including Stuttgart - home of Daimler and Porsche.

Where the candidates differ most is in how big a part electrification will play in reducing the role of the ICE. As part of a five-point plan for putting the industry back on the right track, Schulz has suggested EU-wide quotas for EVs claiming that the domestic industry has been arrogant towards EVs and should do more.

Still A Small Share Of Sales
Germany Pure Electric And Plug-in Hybrid Sales

However, the CDU thinks this is restrictive and it is better to focus on making emission standards tougher and have more open competition between different technologies to find the best way of meeting them. Merkel has said that the quota option is 'not well thought out', but she has reiterated the goal to have 1mn EVs on the road by 2020 and said more needs to be done. In 2016, battery electric and plug-in hybrid sales totalled 25,154 units in a total passenger car market of 3.35mn units ( see chart above).

The actual direction of the country's EV policy might be shaped by the make-up of the government following the election, as we expect the CDU to win a plurality not a majority. If the grand coalition with the SPD is maintained, the junior party could use its position to push for a stronger EV policy, which will not quite reach the levels of quotas but will see more support for EVs than is currently in place.

Strained Relations

Another issue which may come down to the composition of the government is the direct relationship between the state of Lower Saxony and the industry. The Free Democratic Party (FDP) has called for the state to sell its 20% stake in VW, as this creates a conflict of interest in managing the company's oversight period following the diesel emission scandal.

The CDU, which is expected to win a state-level election in Lower Saxony in October, has also highlighted the conflict of interest between the state as a VW shareholder and as a government looking to preserve jobs in the region. However, rather than selling the stake, the CDU favours giving one of Lower Saxony's two seats on the VW board to an independent expert and hire more staff to oversee the company. With the CDU looking poised to win Lower Saxony from the SPD, as well as a plurality in the federal elections (with only a slim chance of the FDP being a junior partner), it is likely that this will be the ultimate course of action taken.