Germany's car market has been saturated for years. Still, the country's carmakers have managed to sell more cars year after year. The key to their success is a simple trick, and here's how it's worked in their favor.
There are 44 million cars on Germany's roads. So, statistically, more than every second German owns a car.
"The German market is driven by the short replacement cycle, with demand adding up to slightly more than three million cars per year", says Ferdinand Dudenhöffer, director of the CAR automotive institute at the University of Duisburg-Essen.
Supply has exceeded demand on Germany's car market for years. In order to make figures appear better, car manufacturers dig deep into their box of tricks and register their own automobiles. A few days later those cars, which in Germany are dubbed 'one-day registration vehicles," are on sale in the showrooms of regular car dealerships. In other words: car manufacturers 'buy' their own products just to sell them to their clients - usually with discounts of up to 25 per cent.
Every third car with 'one-day registration'
According to a new study by the CAR Institute more than 30 per cent of all new cars in Germany are registered by the car industry itself. "It wants to utilize its production as efficiently as possible. Because it's a lot less expensive to offer discounts than to stop the entire assembly line," Dudenhöffer explains.
"Eventually carmakers will have to change their strategy," says industry expert Ferdinand Dudenhöffer
But as discounts affect their profits, why do auto makers not reduce their excess capacity? Because they want to hold on to their market position and show shareholders that they are doing well, car expert Dudenhöffer tells Deutsche Welle: "Basically they doctor the figures to look more successful."
Volkswagen was one of the producers to start this discount battle. The VW group's Skoda models, built in the Czech Republic, are on par with the cars manufactured under the VW brand in Wolfsburg when it comes to technology and quality. But as Skodas are less expensive, VW has been forced to offer discounts, "cannibalizing its own brand", as Dudenhöffer puts it.
Dangerous herd instinct
But when market leader Volkswagen started offering discounts as a result of its home-made competition, car buyers also demanded discounts from other producers. "They are all heading in the same direction, like lemmings", says Dudenhöffer.
As lemmings eventually jump over the cliff, some car manufacturers could be pushed out of business in this discount battle. Up to now, shareholders have been turning a blind eye to the issue, as international profits still offset the cost of massaging sales figures in Germany.
Thanks to China, international car sales have surged in the last 15 years. "In 2000 global car sales amounted to 50 million units. Today 80 million cars are sold in a year," Dudenhöffer says, "and the global market is still growing, although at a lower rate."
But global sales growth will not make up for the weakness of Germany's domestic car market forever. Eventually, carmakers will have to change their strategy, Ferdinand Dudenhöffer emphasizes.
He recalls Porsche's strategy, back in the old times, when Wendelin Wiedeking headed up the company and prior to the takeover by Volkswagen: "Wiedeking was always able to survive years of sluggish business, without resorting to the industry's discount battles."
The strategy behind it sounds simple: in times of weak demand, fewer Porsches rolled off the assembly line, but were still sold for a robust price. "Porsche didn't build every piece of their cars in their own plant. They had other service providers and manufacturers, who helped them to cope with production spikes", Dudenhöffer recalls. "That's what you'd call flexibility."