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Germany Auto Market Faces a Rough Road Amid Big EV Push

Germany’s auto industry is one of the four largest automotive markets in the world alongside the United States, China and Japan. In fact, Germany’s automotive industry is the biggest industry sector in the country. But the auto space is reeling under multiple headwinds now, including chip shortage — a byproduct of the COVID-19 pandemic that was worsened by the Russia-Ukraine war—, high commodity costs, other inflationary concerns and severe supply chain snarls.

The year 2021 has been etched as a doomed year in the history of Germany’s automotive sector, with pandemic-enforced shutdowns and challenges taking their toll. In 2021, full-year registrations declined 10.1% year over year to 2,622,132 vehicles, the lowest since Germany’s reunification.

While there was some glimmer of hope for things to look up in 2022, the geopolitical conflict between Russia and Ukraine, aggravated supply chain chaos and uncertain economic environment have crushed the hopes of recovery. Although Germany’s vehicle sales inched up year over year in January and February, persistent supply chain bottlenecks for key components resulted in hefty declines in car sales from March to July.

While the August vehicle sales data from the federal transport authority KBA indicate 3% year over yearincrease, it is just the result of a dismal 2021 August and an extra working day in August 2022. VDIK (Association of International Motor Vehicle Manufacturers) president Reinhard Zirpel believes that this minimal growth in car registrations cannot hide the sluggish state of Germany’s car market. He said that the monthly sales were still "well below" the average of recent years and new orders had slid "significantly." Through August, registrations were down 9.8% to 1.64 million units.

With the chip crisis and supply chain disruptions not likely to abate soon, a recovery in the auto market is not around the corner. Weakening economic conditions and Russia’s gas supply cut to Germany are adding to the woes. Increasing energy costs and sky-high inflation on top of exacerbated logistical challenges are compounding production problems as well as dampening demand and sales.

The headwinds have hit the country’s auto industry at a time when it is accelerating efforts to bolster its position in the global electric vehicle (EV) market. Germany currently seems to be behind its ambitious target to have 15 million EVs on the road by the decade-end. This is because the industry is struggling to secure key components such as microchips as well as the basic raw materials used in the batteries.

Having said that, the growing demand for EVs is indeed a bright spot for Germany’s auto market. EVs are bucking the general downward trend for the vehicle market. In August, EV salesrose 10.9% year over year. With slightly more than 32,000 units sold in Germany, the EVs constituted 16.1% of the car market in August.

To capitalize on the EV revolution, major auto giants of the nation like Volkswagen VWAGY, Mercedes-Benz MBGAF and BMW AG BAMXF have been actively focusing on radically electrifying their line-ups. All three stocks currently carry a Zacks Rank #3 (Hold).  You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Volkswagen has set aside 89 billion euros (a little more than $100 billion) for the development of EVs and future technologies by 2026. That would account for 56% of the company’s total investments.By 2026, the company expects green cars to account for 25% of total vehicle sales. Volkswagen expects half of the global vehicle sales to consist of battery-powered EVs by 2030, setting ambitious goals in an era of green transportation. The company also projects 100% of its new vehicles in major markets to be carbon-free vehicles by 2040. These targets are part of Volkswagen’s broader goal to be fully carbon neutral by 2050.

Mercedes Benz targets plug-in hybrids or BEVs to comprise 50% of its global volume by mid-decade. By 2030, Mercedes aims to switch fully to BEVs except in small markets where conditions like lack of charging infrastructure would make it difficult. For the transformation into a software-driven and emissions-free future, the company has earmarked a 60 billion euros investment through 2022-2026.

BMW expects EVs to account for 50% of its global sales by 2030. By 2025, the carmaker expects to sell more than two million all-electric vehicles. This year, BMW is putting as many as 15 EVs into production.The company has pledged to invest around €30 billion toward e-mobility by 2025 end.Moreover, it has been reported that BMW intends to build five gigafactories for electric car batteries through partnerships, strategically positioned globally at places where the auto biggie manufactures its EVs.

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