European Foundation for the Improvement of Living and Working Conditions

The automotive cluster in

Baden-Württemberg, Germany

Introduction

Profile of Baden-Württemberg

Automotive industry in Germany

Baden-Württemberg's automotive cluster

Factor conditions

Demand conditions

Summary and future scenarios

Bibliography

This report is available in electronic format only

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Introduction

This report looks at the automotive industry cluster in the German federal state of Baden-Württemberg. It begins with a
short profile of Baden-Württemberg and the German automotive industry. This is followed by 1
an analysis of the way that
the main trends and drivers for change in2the industry (as identified in the mapping report ) are reflected in the cluster,
according to Porter’s ‘diamond model’ . The report concludes with a SWOT analysis, exploring the competitive
advantage of the cluster and possible scenarios for the future development of the industry.

Profile of Baden-Württemberg

Baden-Württemberg is the third largest and the third most populated federal state in Germany, with a population of
10.7 million inhabitants and an area of 35,752 km² in 2003. The largest city is Stuttgart with a population of 587,152. Eight
other cities have a population over 100,000: Mannheim, Karlsruhe, Freiburg, Heidelberg, Heilbronn, Ulm, Pforzheim and
Reutlingen. Other large cities are Esslingen, Ludwigsburg, Tübingen and Villingen-Schwenningen (see Figure 1).

Figure 1: Baden-Württemberg and Europe

Source: Baden-Württemberg Agency for International Economic Cooperation (GWZ)

1
MacNeill, S. (et al), Trends and drivers of change in the European automotive industry: Mapping report, European Foundation
for the Improvement of Living and Working Conditions, 2004.
2
For an illustration and more detailed description, see Porter, M. E., The competitive advantage of nations, New introduction, 2nd
edn, London, Macmillan Press, 1998, p.127.

© European Foundation for the Improvement of Living and Working Conditions, 2004 1
With 9,300 manufacturing plants and an export quota of 41.7% for manufacturing products, the manufacturing sector
represented 32.4% of gross value added in Baden-Württemberg. In 2002 the biggest exporting industries are the
automotive industry worth €26.32 billion (equalling 25.2% of total exports), machinery worth €23.84 billion (22.8% of
exports), and chemical products worth €9 billion (8.7% of export) (Wirtschaftsministerium Baden-Württemberg, 2003a,
p. 7). Other important sectors include electrical products, electronics and ICT.

Automotive industry in Germany

German manufacturers of motor vehicles and motor vehicle parts (NACE 34) account for 2,500 enterprises with a total
workforce of 890,000, according to the 2001 Yearbook on International Auto Statistics produced by the Association of
the Automotive Industry (Jürgens, 2002, p. 2). In 2002, the workforce was 856,000, or 44% of the EU total in this sector,
according to Eurostat.

The industry consists of a small number of global lead manufacturers with a large number of family-owned small and
medium-sized suppliers surrounding them, though a wave of mergers and acquisitions in the 1990s has seen many of the
traditional SME suppliers disappear. However, most German car companies are still firmly anchored in block ownership,
making them less exposed to the capital market.

The ownership structure of the major German car companies is as follows (Jürgens, 2002, p. 5):

a) Volkswagen Group including Audi, which is a 100% fully owned subsidiary since 1964 (ownership structure in
3
December 2000) :

z 20% State of Lower Saxony;

z 10.2% self-control led by VW;

z 12.1% national institutional investors;

z 3.5% other European institutional investors;

z 3% US institutional investors;

z 51.4% floating capital.

b) DaimlerChrysler including Mercedes-Benz (September 2000):

z 11.6% Deutsche Bank (part of block ownership);

z 7.5% Kuwaiti Sheiks (part of block ownership);

z 56% other institutional investors;

z 25% small private shareholders.

3
Source: Share-world-LEREPS, in Dupuy and Lung, 2001, quoted in Jürgens (2002, p. 6).

2 © European Foundation for the Improvement of Living and Working Conditions, 2004
c) BMW is owned by the Quandt family (September 2000):

z 45.34% free flow;

z 15.53% Hanna Quandt;

z 15.25% Stefan Quandt;

z 11.62% Susanne Klatten;

z 10.16% GFA Gesellschaft für Automobilwerte mbH;

z 2.10% employees.

d) Porsche (September 2000):

z 55% held by the Porsche and Piëch families;

z 45% free float.

e) Ford (98%) and Opel (100%) are both fully owned subsidiaries of the parent corporations Ford Premier Auto
Group (PAG) and General Motors (GM).

Only a few suppliers are listed. A number of companies with a strong global market position have the legal form of a
foundation, with Bosch being the most prominent example.

Baden-Württemberg’s automotive cluster

The automotive industry is not only a key industrial sector in Baden-Württemberg but also in Germany as a whole. It is
4
estimated that every seventh job in Germany depends directly or indirectly on the automotive sector .

The centre of the industry, however, is located in Baden-Württemberg, which generates more than a quarter of
Germany’s annual sales in this sector, with a high export rate of over 50%. The industry’s competitive advantage derives
from a closely-knit, dense network of manufacturers and supplier industries located in one central hub.

4
See Auto & Wirtschaft: Deutsche Automobilindustrie erhöht ihre Wettbewerbsfähigkeit (Verband der Automobilindustrie, 2003a).

© European Foundation for the Improvement of Living and Working Conditions, 2004 3
Baden-Württemberg is host to major car manufacturers, including prestigious brand names such as:

„ Audi, which is based in Neckarsulm near Heilbronn (part of the Volkswagen group);

„ Mercedes-Benz, which is based in Stuttgart (part of DaimlerChrysler);

„ Porsche, which is based in Stuttgart-Zuffenhausen.

The region is also home to major manufacturers of heavy vehicles, agricultural vehicles, buses and other vehicles such
as Kässbohrer, Neoplan, Iveco, John Deere, Evo Bus, and Mercedes-Benz. Automotive and engine manufacturers in
5
Baden-Württemberg account for sales of €38 billion in 67 factories .

In addition, direct suppliers at 194 operating plants produce high value-added components, generating sales of €13
billion. These include high-capacity companies and pioneers such as Behr, Bosch, Eberspächer, Knecht, Mahle and ZF
Friedrichshafen AG.

Including manufacturers of special vehicles, distributors and indirect suppliers, Baden-Württemberg brings together
more than 2,000 enterprises and development partners which are closely associated with the automobile industry. In total
these companies generate sales of more than €30 billion (Wirtschaftsministerium Baden-Württemberg (Ministry of
Economic Affairs), 2003b, p. 24).

Supporting and related industries

There is a high concentration of component suppliers in supporting sectors such as electronics and electrical engineering,
information technology, plastics and glass production, metal manufacture and processing, optics and precision
mechanics. This provides the region with considerable potential for the creation of synergies.

The automotive industry in the region benefits, in particular, from the strong presence of the supporting electronics sector
with its 1,000 companies employing around 210,000 personnel, representing a 22% share of total employment. The
importance of this supporting industry can be illustrated by the estimate that the share of electronic and electric
components in the total costs for a compact car may increase from 20% in 2002 to 40% by 2015 (Verband der
Automobilindustrie (German Association of the Automotive Industry), 2003d, p. 51).

Leading companies in related industries such as aviation and aeronautics (e.g. EADS with Dornier, DASA and Zeppelin
Luftschifftechnik) are also present in the region. This provides further potential for synergies, based on the knowledge
and innovations of aerospace technology. There is also considerable experience in process technology and mechanical
engineering.

5
See http://www.bw-invest.de/englisch/w_2_1_1_2.asp

4 © European Foundation for the Improvement of Living and Working Conditions, 2004
Products and branches of the automotive industry
Products and branches listed on the website of the Baden-Württemberg Agency for International Economic Cooperation
6
(Gesellschaft für wirtschaftliche Zusammenarbeit in Baden Württemberg, GWZ) include, for example :

„ automobiles;

„ brake systems;

„ chassis, drive train, suspension;

„ communications systems;

„ electrical and electronic systems;

„ exhaust systems;

„ fittings, fitting parts;

„ glass windows;

„ lighting, lighting parts;

„ miscellaneous;

„ motors, motor parts;

„ omnibuses;

„ painting;

„ safety engineering;

„ seats, sleeper berths, interior equipment;

„ special purpose vehicles and special vehicle superstructures;

„ steering systems;

„ tractors, agricultural machines;

„ trailers, flatbeds;

„ transmission;

„ transporters;

„ trucks;

„ vehicle body and parts, frame and parts;

„ wheels, tyres;

„ workshop equipment.

6
See http://www.bw-invest.de/englisch

© European Foundation for the Improvement of Living and Working Conditions, 2004 5
Competition within the industry
The automotive industry faces tough competition with challenges such as:

„ further globalisation;

„ innovation;

„ consolidation and value chain restructuring;

„ cost pressures.

Baden-Württemberg’s automotive cluster has a long tradition of technological innovation. Latest developments include,
for example: the airbag; spark gap regulator; Mercedes-Benz’s activities in the field of driver safety and Tempomat
(cruise-control); Porsche in all areas of sports car technology including Tiptronic; Audi in four-wheel drive for normal
sedans; and the major supplier Bosch in fuel-injection systems and the anti-blockade system ABS (Baden-Württemberg
Agency for International Economic Cooperation GWZ, 2001).

Innovation is key to maintaining an industry’s competitiveness, even though there is a flat and slow process of diffusion
due to the typical gradual introduction in the different vehicle segments (Jürgens et al, 2002, p. 27). Since the major
manufacturers from Baden-Württemberg serve premium markets, their innovation is even more crucial.

The trend towards a new regime of governance in the automotive industry has seen increasing sub-contracting, the
development of hierarchy classification of supplier relationships and, in particular, a power shift from final
7
manufacturers towards mega suppliers and system integrators (Naschold et al, 1999, p. 5). In some cases, the
outsourcing goes as far as the total production, an example being the Audi A4 convertible which has been let to the
supplier Karmann. Suppliers are also taking over tasks within the production chain, such as the chassis of the Porsche
Boxster by the Finnish firm Valmet and that of the BMW X3 by the Austrian firm Steyr-Magna (Dudenhöffer and
Büttner, 2003, p. 4).

The built-to-order concept offers potentially great savings by reducing the average inventory time. It applies mainly to
the consumer-driven premium brands, for which customers are more likely to be willing to wait (Accenture, 2002b,
p. 2). Since the big players in Baden-Württemberg, such as Mercedes, Porsche and Audi, serve those high-end markets,
the industry may benefit from a slight cost advantage in this respect, reducing the advantage volume brands have due to
their economies of scale.

Strategies and business models at company level

Applied business strategies and models depend on the environment in which companies operate. Germany is often
regarded as the classic case of non-shareholder value orientation. However, shareholder-value orientation has gained
momentum due to increasingly deregulated financial markets and institutional investor pressure as well as the apparent
fear of hostile takeovers following the prominent Mannesmann case, which was acquired by the British

7
This trend represents a paradigm shift in central segments of industrial production away from the traditional mechanic-orientated
model of the automobile industry towards new business models such as adopted by the electronics and IT industry. These business
models use considerable outsourcing with new project-determined forms of vertical and horizontal cooperation between
companies, and have a greater dominance of central component manufacturers. The models have been labelled with the acronym
‘Wintelismus’, which refers to the increasing control of Microsoft and Intel as component suppliers over the final product PC
(Naschold et al, 1999, p.1).

6 © European Foundation for the Improvement of Living and Working Conditions, 2004
telecommunication company Vodafone (Jürgens, 2002, pp. 2 and 14). If this trend prevails, there is a threat of higher
8
fluctuations and redundancies, and less job security for workers.

According to the automotive and assembly unit of the consultancy firm McKinsey (2003b), the main strategic challenges
for original equipment manufacturers (OEMs) and vehicle manufacturers (OVMs) are: brand management, business-to-
business (B2B) and business-to-consumer (B2C) eCommerce strategies, lean manufacturing and production, supplier
management, and value-chain cost reduction. One trend in the manufacturing of vehicles is the increased use of modules
to give cost advantage while maintaining flexibility and a variety of possible versions. An example mentioned by
Dudenhöffer (Beneker, 2003) is the new Golf V which is built on its PQ 35 platform like a house made of Lego bricks.

In terms of brand management, some German premium brands, such as BMW and Mercedes, appear to do particularly
well (Dudenhöffer, 2003c). One further trend is the increasing use of entertainment equipment for cars, bringing the car
into the travel and leisure industry. An example is Volkswagen’s Autostadt (Symon and Lutz, 2001, pp. 47-52). Targeting
the consumer directly provides not only a means to develop customer relationships but is a distribution strategy too. By
providing a 50% discount (representing dealer charges) for direct purchase of the Autostadt, the dealership network is
9
bypassed. If this trend grows, it could have a profound impact on dealerships.

10
The Internet is also becoming a distribution medium for used cars, due to decreased advertising costs. Quelle, a major
catalogue sales company in Germany (comparable to Argos in the UK), has started selling the new Golf V 10% cheaper
11
than the listed price.

Achieving technological leadership and choosing the right strategy is not an easy task. It depends not only on the
presence of relevant supporting industries but also on various factors such as knowledge and human resources.

Factor conditions

The factors determining Baden-Württemberg’s automotive industry can be divided into the following categories: capital
12
resources, human resources and knowledge resources .

8
Nevertheless, note that Jürgens (2002, p. 34), for example, concluded in his case study on Volkswagen that no fundamental change
of the corporate governance system was found due to capital market pressure and shareholder value demands.
9
The development could be similar to travel agencies being bypassed by low-cost airlines, who sell flights on the Internet and
provide passwords instead of issuing tickets.
10
Among the most prosperous areas on the Internet are car exchange/selling platforms (Autobörsen) such as mobile.de and
Autoscout24.de in Germany. A market research study by TNS Emnid has shown that 46% of 1,500 surveyed users of Internet car
selling websites actually bought the car they were interested in. 15% acquired a car from a different provider and 37% did not
undertake a purchase. This illustrates high acceptance of using the Internet to buy a car, though the majority of interest is in the
low-value end of the market (with two thirds of emails concerning offers of up to €15,000) and used cars (83%) (Anonymous,
2003c).
11
See http://www.manager-magazin.de/geld/artikel/0,2828,266718-3,00.html
12
Porter, M. E., The competitive advantage of nations, 2nd edn, London, Macmillan Press, 1998, pp. 74-75.

© European Foundation for the Improvement of Living and Working Conditions, 2004 7
Capital resources
Banks play a dominant role in company finance even with the high level of direct ownership in Germany (Jürgens and
Rupp, 2002). According to the European Innovation Scoreboard in 2002, Germany has a major relative weakness in
innovation finance. The country shows below EU-average indicators for high-technology venture capital investment
(as a % of GDP), and for capital raised on parallel markets and on main markets (% of GDP) (European Commission,
2002a, p. 12).

Human resources
Baden-Württemberg’s car manufacturers and suppliers employ more than 220,000 people, which represents around 20%
of the total workforce in the region (Baden-Württemberg Agency for International Economic Cooperation GWZ, 2003a).
This makes it a key strategic sector for Baden-Württemberg. Its companies also represent the centre of the German
automotive industry, with about one quarter (24.9%) of all jobs in the industry being found here (Wirtschaftsministerium
13
Baden-Württemberg & Statistisches Landesamt Baden-Württemberg, 2002).

The employment trend is shown in Figure 2 below. Figures for 2002 indicate a decrease of total employment in the
automotive industry by 0.8% from 2001. However, prior to 2002, the German automotive industry saw employment
increase for five consecutive years following a decline in the mid 1990s, from a peak in 1990 (Verband der
Automobilindustrie, 2003b, p. 15). The figures show a decrease of 2.6% for automotive manufacturers and a decrease
of 1.7% for manufacturers of trailers and structures. The figures for Mercedes show an even greater decline.
Employment in component suppliers increased by 1.7%, even though the turnover of suppliers slightly dipped by 0.6%.
These trends support the claim of a continuing shift of employment from the vehicle manufacturers to suppliers.

Figure 2: Development of the workforce in the German automotive industry

Source: VDA

13
According to the 2001 Yearbook on International Auto Statistics by the German Association of the Automotive Industry (VDA),
the German car industry, classified as manufacturers of motor vehicles and motor vehicle parts (NACE 34), accounts for 2,500
enterprises with a total workforce of 890,000 (Jürgens, 2002, p. 2).

8 © European Foundation for the Improvement of Living and Working Conditions, 2004
These fluctuations and new employment increases are accompanied by a growth in atypical forms of working such as
part-time work, agency work, short-term work, telework, contract work and so on. These working arrangements are
14
expected to spread (Klotz, 1998) . There is an increased use of employment agencies for routine jobs (Jürgens et al,
2002, p. 27). Another trend is the high number of fixed-term work contracts, which are now being used in about 40% of
all new jobs. These offer greater flexibility to the industry (Verband der Automobilindustrie, 2003b).

Well-qualified labour supply

Germany’s unique dual training system combines practical training with theoretical specialist knowledge. The vocational
colleges in Baden-Württemberg supply companies with well trained, practical specialists, resulting in an international
pole position of 48.3% for its industrial skilled worker quota (Wirtschaftsministerium Baden-Württemberg &
Statistisches Landesamt Baden-Württemberg, 2002).

The importance of a qualified workforce has to be viewed against the generally difficult German labour market position.
There is, paradoxically, a considerable shortage of qualified personnel in the supplier industry while, at the same time,
there are high unemployment rates. A survey by the Centre for Automotive Research (CAR), sent to 119 suppliers in
Germany, sheds some light on the scale of the labour market problem. The results show that 65.5% of all suppliers
questioned report a shortage of qualified personnel and 50.4% report a lack of suitable managers (Dudenhöffer and
Büttner, 2003, p. 5). An indicator for the large capacity of qualified employees available to companies in the Baden-
Württemberg automotive sector is that as many as 5% of employees in Baden-Württemberg have an engineering degree,
a proportion unmatched in Europe (Baden-Württemberg Agency for International Economic Cooperation GWZ,
15
2003a).

The region has some of the most renowned universities in Germany, for instance, Heidelberg, Tübingen and Freiburg,
as well as economically and technically oriented universities, such as Stuttgart, Karlsruhe and Mannheim. More
importantly, many of the region’s technical colleges and universities offer special courses for the automotive sector
(Baden-Württemberg Agency for International Economic Cooperation GWZ, 2001) including courses such as: design,
development and process engineering in Esslingen and Konstanz; automotive engineering in Karlsruhe and Esslingen;
business administration in the automotive industry in Nürtingen; automotive engineering (powertrain/services and
chassis/mechatronics) in Esslingen; English language courses in Mechatronics in Ravensburg; automotive engineering
in Esslingen; and automotive design at the technical college of Pforzheim.

14
Klotz provides a good general overview of changes in working conditions, according to the union IG Metall, in Work in the future
and the future of work. The document is available at http://www.igmetall.de/download.
15
However, the engineer density, as the ratio between engineers and scientists and total workforce, is reported to be 3.4%, which
represents every thirtieth employee rather than every twentieth (Wirtschaftsministerium Baden-Württemberg & Statistisches
Landesamt Baden-Württemberg, 2002).

© European Foundation for the Improvement of Living and Working Conditions, 2004 9
Labour costs
Wage and salary levels in the automotive industry are high in comparison to other sectors in Germany. Baden-
Württemberg’s wages and salaries are also 6.4% higher than the German average. In 2001, the region’s average gross
16
salaries in manufacturing were €33,446 per year for blue-collar workers and €49,411 for white-collar workers .
However, the higher labour costs are more than compensated for by higher productivity (Wirtschaftsministerium Baden-
Württemberg & Statistisches Landesamt Baden-Württemberg, 2002).

17
However, labour cost differences in comparison to eastern Europe are a threat to German companies. Wages are €4 per
hour in the new Member States, €16.5 in east Germany and €18 in west Germany (Dudenhöffer, 2003a). Average
working hours per year in Germany (1,492) are lower than in the US (2,152) and Japan (2,012) but labour productivity
18
in Germany is the highest in Europe, though behind the US and Japan (Jürgens, 2002, p. 2).

Role of the trade unions

Negotiations are solely between the trade unions and employers from the individual industrial sectors, with a focus
mainly on issues such as working time regulations, job security, working hours, holidays and early retirement. In general,
negotiations are carried out in a ‘dual system’, in which general agreements on wages and salaries are concluded with
19
the union , and details of wage differentiation, working conditions and grievances are dealt with by work councils at
plant level (Jürgens, 2002, pp. 11-12).

Recently, the German automotive industry has seen the introduction of several innovative projects, which have been
collectively agreed with the unions. The Volkswagen 5000x5000 project aims at creating 5,000 new jobs with a monthly
20
wage of DM 5,000 (around €2,500) by 2005. Successful participants work for a preliminary qualification at an
employment agency (three months), and then receive a temporary employment contract of six months, followed by a
21
permanent employment contract. The project also incorporates innovations in work organisation, with learning centres
in each production area and programmes for the training of employees during the project.

16
Please note that these do not represent overall averages.
17
In addition to wages and salaries, labour costs in terms of social security provisions arise for employees. The amount of
contributions to three social security schemes (pension, nursing or old-age insurance; health insurance; and unemployment
insurance) is statutorily determined and specified. The contributions are shared equally between the employer and employee.
18
The hourly productivity rate increased by 3.5% in 2001, but decreased by 0.8% during the first half of 2002 (Schmidt, 2002, pp.
15 and 20).
19
In Germany, the single trade unions are spread among the differing branches of industry. The most important union for the
automotive industry is IG Metall.
20
However, this has to be seen in the context of the high degree of cooperation between management and works councils in company
policy at Volkswagen, which exceeds the formal co-determination framework of industrial relations in Germany (Jürgens, 2002,
pp. 11-12). Volkswagen is an unusual case as it did not become a member of the employer association Gesamtmetall. Collective
agreements have to be negotiated directly with the union, IG Metall, rather than the normal 'dual system' of negotiations.
21
See http://www.igmetall.de/tarife/nachrichten/vw/index_5000_5000.html and
http://www.igmetall.de/tarife/nachrichten/vw/englisch.html.

10 © European Foundation for the Improvement of Living and Working Conditions, 2004
Knowledge resources
A region’s knowledge resources strongly depend on its human resources. In 1999, Baden-Württemberg had 70,000
personnel working in research and development (R&D) in the industrial sector, representing a 22.8% share in Germany’s
R&D employment. Although this percentage fell slightly during the last decade (from 23.9% in 1989), it did not decrease
as much as the share of the total labour force (from 16.2% in 1990). This shows that R&D work density increased over
the last decade, just as the percentage of engineers increased (Wirtschaftsministerium Baden-Württemberg &
Statistisches Landesamt Baden-Württemberg, 2002).

Research spending also shows a strong picture for Baden-Württemberg. The EU average for public R&D expenditure as
a percentage of the gross domestic product (GDP) was 0.7% in 2002, while private R&D expenditure was 1.3%, making
22
a total spend of 2% of GDP. Germany, on the other hand, spent 0.7% on public R&D and 1.8% on private R&D,
totalling 2.5% in 2002 (European Commission, 2002a, pp. 9 and 24). Baden-Württemberg has a slightly above average
public R&D expenditure (Wirtschaftsministerium Baden-Württemberg & Statistisches Landesamt Baden-Württemberg,
23
2002). But it is the heavy R&D spending by Baden-Württemberg’s private companies that lifts the region’s total
expenditure to a very high share of 3.7% of GDP (Baden-Württemberg Agency for International Economic Cooperation
24
GWZ, 2003d).

In addition to business R&D expenditure, patenting has also been identified as a major relative strength of Germany
(European Commission, 2002a, p. 12). As a result of the high concentration of knowledge resources in Baden-
Württemberg, the state’s R&D output, measured in domestic patent applications, represents nearly double the federal
average. The region records 112 patent applications per 100,000 inhabitants, compared to the German average of 58
25
applications. Although patent applications from Baden-Württemberg’s companies dropped from 12,486 in 2000 to
11,884 in 2001, applications have still increased from 7,048 in 1990 (Baden-Württemberg Agency for International
Economic Cooperation GWZ, 2003d, 2003e).

Overall, Baden-Württemberg has been listed amongst the top 10 leading innovative regions in the EU, according to the
26
European Innovation Scoreboard (European Commission, 2002a, p. 4) . This analysis includes indicators of human
resources, employment in high-technology sectors, and the creation of new knowledge through R&D and patents.

22
In comparison, the US spends 2.7% of their GDP on R&D (0.66% public and 2.04% private) and Japan spends 2.98% (0.87%
public and 2.11% private).
23
The per capita state expenditure for science and research, including communities, is 1.8%, higher than the German average (index
of 101.8 in comparison to 100 for Germany as a whole).
24
Baden-Württemberg is already achieving the European Union’s target of ‘R&D investment approaching 3% of GDP by 2010’,
which was set by the European Council in Barcelona in 2002 within the framework of the Lisbon strategy to become ‘the most
competitive and dynamic knowledge-based economy in the world’. This shows the current strength of Baden-Württemberg in
terms of research and development.
25
Baden-Württemberg’s domestic patent applications account for 22.6% of all domestic applications in Germany
(Wirtschaftsministerium Baden-Württemberg & Statistisches Landesamt Baden-Württemberg, 2002).
26
The European Commission’s European Innovation Scoreboard (SEC(2002)1349 of 09.12.2002) is also published as a special
edition of CORDIS focus, which is available at http://www.cordis.lu/focus/en/src/supplements.htm.

© European Foundation for the Improvement of Living and Working Conditions, 2004 11
The region’s research efforts draw on its dense research infrastructure. Companies in Baden-Württemberg benefit
directly or indirectly from research results and resources from the large number of universities, non-university research
and transfer institutes (Baden-Württemberg Agency for International Economic Cooperation GWZ, 2003c). Baden-
Württemberg’s research infrastructure includes:

1. nine state universities (in Freiburg, Heidelberg, Hohenheim, Karlsruhe, Konstanz, Mannheim, Stuttgart, Tübingen
and Ulm), three private universities (in Bruchsaal, Stuttgart and Karlsruhe) as well as 22 public colleges, of which
16 are technologically oriented, which also play a part in more applied research;

2. 14 Max-Planck institutes for future-oriented basic research, of which 12 are oriented towards natural sciences
(representing approximately 20% of all Max-Planck institutes throughout Germany);

3. seven independent contractual and applied research institutes at universities;

4. 15 institutes of the Fraunhofer Association (FhG) for applied research (representing 30% of all 47 FhG research and
service institutes in Germany);

5. nine institutes of the ‘Otto von Guericke’ Association for joint industrial research, which provide help for small and
27
medium-sized enterprises regarding technical progress (out of a total of 70 institutes in Germany) ;

6. three large research centres (out of a total of 16 in Germany) of the ‘Hermann von Hemholtz’ Organisation of German
research centres (HGF), of which two are business-oriented;

7. 250 supporting transfer centres of the Steinbeis Foundation, which offer consultancy services, training courses and
the allocation of concrete development contracts in order to help small and medium-sized enterprises.

Demand conditions

Automotive production and sales

The worldwide automotive production of cars and utility vehicles reached 57.6 million units in 2000, 55.8 million units
in 2001, and just over 59 million in 2002. While total worldwide production decreased by 3.7% in 2001, German
production increased by 3% (Schmidt, 2002, pp. 5-7).

28
Production – domestic and abroad – by German manufacturers accounted for 17.9% of world production in 2001
(23.2% for cars and 5.1% for utility vehicles). Overall, Germany ranked third for automotive production, with a total of
5,691,677 vehicles produced, of which 391,978 were utility vehicles. The US ranked first with 11,424,689 vehicles and
Japan second, with a production of 9,777,191 vehicles. After Germany, the other automotive producing countries in the
ranking were in order: France, South Korea, Spain, Canada, China, Mexico, the UK, Brazil and Italy (Schmidt, 2002,
pp. 5-7 and 12, based upon VDA data). A consultancy survey (KPMG International, 2003a) assumed that North
American-based car makers will be likely to continue to lose global market share to Asian companies, while European
29
makers are expected to be able to hold their own market share or even slightly increase it. While Europe is leading the
car market, the US is leading in the utility vehicle market (Schmidt, 2002, p. 6).

27
Services of these institutes include consultation, tests, inspections, contractual research and development as well as education and
training.
28
German automotive manufacturers here refer to Audi, BMW, DaimlerChrysler (without Chrysler and Freightliner), Evo Bus, Ford,
Iveco-Magirus, MAN, Multi-car, Neoplan, Opel, Porsche and Volkswagen.
29
The former EU15 account for 38% of world production, followed by Japan with 20.7%, US with 12.4%, Asia (excluding Japan)
with 12.1%, the rest of Europe (excluding the EU15) with 5.8%, the rest of NAFTA with 5.8%, and others with 5.3% (Schmidt,
2002, pp. 5-8).

12 © European Foundation for the Improvement of Living and Working Conditions, 2004
Domestic demand in the German motor car market, expressed in new registrations, plunged from a peak in 1999, with
3.8 million cars, to a level below 3.3 million in 2002, as illustrated in Table 1 below. Domestic demand is, however,
expected to increase over the following few years, since cars in Germany are on average over seven years old and a rise
in replacement purchases is anticipated (Reiche, 2003, based on an interview with analyst Michael Punzet). Nine out of
10 new car purchases are replacements, due to the high car density in Germany, with 539 cars per 1,000 population in
30
2001 (Verband der Automobilindustrie, 2003e) . This means that new purchases are often postponed to a later date if
the consumption climate is negative. Such dependence on the consumption climate indicates that sales are affected by
psychological expectations, for example, future economic welfare. This proves that automotive demand in general is
subject to cyclical fluctuations (Verband der Automobilindustrie, 2003c).

Table 1: New registrations in the German car market (000s)

1998 1999 2000 2001 2002 2003 * 2004 * 2005 *
3,736 3,802 3,379 3,342 3,253 3,220 3,450 3,750

* forecast
Source: B&D-Forecast (Dudenhöffer, 2003b, p. 8; B&D-Forecast, 2003a)

Nonetheless, the decrease in domestic demand in Germany was compensated - at least in 2001 - by higher exports. Out
of the total of 5,299,704 cars produced in Germany in 2001, 68.7% were exported (Schmidt, 2002, pp. 8-10 and 26).
This illustrates the high export dependency of German automotive manufacturers. Hence, financial profits are prone to
exchange rate fluctuations, particularly between the dollar and the euro. Large businesses are able to manage their
foreign exchange exposure by contractual, operating and financial hedging; this can include the use of risk-sharing
31
agreements and specific back-to-back loans such as so-called swaps.

Figure 3 illustrates the breakdown of production and sales, abroad and in the domestic market, of German motor cars.
Exports from the automotive industry in Baden-Württemberg alone have more than doubled over the last decade, from
€12.9 billion in 1990 to €26.6 billion in 2000 and €26.5 billion in 2001. In the same period, Baden-Württemberg’s share
of total automotive exports from Germany remained at about the same: 21.5% in 2001 (Wirtschaftsministerium Baden-
Württemberg & Statistisches Landesamt Baden-Württemberg, 2002).

30
According to a Shell forecast in 1999, vehicle density is expected to further increase by 11-19% until 2020 reaching 700-750 cars
per 1000 adults; and the total car kilometres driven is expected to rise by 4-17%, depending on scenarios.
31
For more information, see Eiteman, Stonehill, Moffett, and Kwok, 1998, pp. 192 and 254-255.

© European Foundation for the Improvement of Living and Working Conditions, 2004 13
Figure 3: Production and sales of German motor cars in 2001

Motor car production of

German manufacturers
9,154,704

Domestic production Production abroad

5,299,704 3,855,000

Exports Domestic sales Imports from Direct sales

from German from German production abroad
production production abroad
3,639,891 1,659,813 502,093 3,352,907

Domestic sales
of German manufacturers
2,161,906

Sales abroad
of German manufacturers
6,992,798

Source: IG Metall (Schmidt, 2002, p. 10) based on VDA data

Trends in automotive demand

While foreign cars – in particular French – have become more popular in Germany, increasing their market share to 35%
(Reiche, 2003), German brands are expected to regain some market share, to the disadvantage of Japanese and Korean
brands (Schmidt, 2002, p. 16).

One contributor to this trend is the increasing proportion of diesel engines in all new registrations in the German
32
automotive market . The share has risen from 14.9% in 1997 to 34.6% in 2001 (Schmidt, 2002, pp. 10-11). The diesel
33
engine is a German invention, and the French PSA Group invented the diesel soot particle filter. German and French
manufacturers are likely to benefit from their strong position within the diesel segment (Dudenhöffer, 2003b, p. 2). Some
Japanese and American manufacturers appear to have deficits within this market segment, probably rooted in the
undeveloped position of this segment in their domestic markets (KPMG International, 2003a).

32
Environmental concerns, environmental regulations and tax exemptions granted for diesel are among the driving forces for the
increase in diesel cars (Dudenhöffer, 2003b).
33
A strategy brief by the consultancy Bain & Company (Matthies and Heideloff, 2001, p. 3) attests a leading competitive position
to German brands such as BMW, Mercedes-Benz, Audi and Porsche.

14 © European Foundation for the Improvement of Living and Working Conditions, 2004
In addition to the diesel market, other niche markets are also expected to experience high growth rates. Crossovers and
sports utility vehicles (SUV) are expected to grow in popularity, as well as premium segments in general (KPMG
International, 2003a). The premium segment’s market share as a percentage of the total volume in Germany is expected
to increase by 7.1% between 1997 and 2004, while the market share of the ‘price-breakers’ segment is forecast to
increase by 2.4%. The mainstream segment is expected to experience a 9.5% loss in market share (Matthies and
34
Heideloff, 2001, p. 2). Premium brands, such as Audi, BMW-Mini, Mercedes-Smart, Porsche, Saab and Volvo, have
already seen an increase of their market share from 21.5% to 30.4% between 1990 and 2002 (Anonymous, 2003a).

This tendency towards upmarket premium brands reflects a trend in the automotive industry: the car has become an
innovative lifestyle product (Beneker, 2003). Due to the competitive position of premium brands such as BMW,
Mercedes-Benz, Audi and Porsche, German car manufacturers are likely to lead this trend in Europe. Since those
premium manufacturers are all, with the exception of BMW, based in Baden Württemberg, this region in particular could
profit from such a development.

In parallel with this trend comes the increasing demand for car equipment relating to security, comfort and
‘infotainment’, as well as a growing demand for more engine power (Anonymous, 2003a). Many security systems such
as driver, passenger and side airbags, the anti-blockage system ABS and, increasingly, the electronic stability programme
(ESP) are now standard equipment, representing ‘must-have’ technologies. Many comfort features such as central
locking, seat heating, air conditioning and navigation systems started as dream technologies, and then slowly evolved
into standard equipment (Verband der Automobilindustrie, 2003d, p. 16).

In this respect, it has to be noted that countries differ in their demand pattern and consumer taste. In broad terms,
customers will find more consumer-driven convenience concepts in cars in the US, rather than the engineering-driven
concepts found in Germany. Another characteristic of the German market, for example, is that environmental concerns
are the fourth most important factor (out of 14) for buying a car, after security, quality and value for money, according
to the ADAC-AutoMarxX Study (Dudenhöffer & Krüger, 2003). North American customers, in contrast, have a
preference for large vehicles and passenger trucks (PricewaterhouseCoopers, 2000).

Trends in demography, as a recent study on higher education and research pointed out, have an impact on patterns of
consumption. In contrast to most of the world population, demographics show that the average age levels in the EU are
rising. According to Eurostat, the breakdown of the population in the EU is expected to change radically between 1995
and 2025, with an anticipated decrease of around 9.4 million in the number of young people under 20 years and an
increase in the number of older people above 60 of around 37.2 million (European Commission, 2002b, pp. 9-13 and
35
23-24). This, of course, is relevant to the automotive industry as it will affect consumer behaviour, and will mean that
companies need to serve the needs of older people

34
In addition to the growth of the premium segment, Dudenhöffer also declares that prices of new car purchases have soared by
134% over the last 20 years since 1983, with living costs only having increased by 30.4%. For the period 1991-2002, he reports
a 40% increase in prices of new cars (Anonymous, 2003a; Beneker, 2003). Another source (Verband der Automobilindustrie,
2003d, p. 13), however, states that the end price of cars basically remained unchanged with the example given of the standard VW
Golf model car, for which the price has only increased by 0.7% after inflation since 1990.
35
This will also have effects on the higher education and research system. There will be greater competition in maintaining student
numbers and challenges in replacing retiring staff at higher education and research institutes.

© European Foundation for the Improvement of Living and Working Conditions, 2004 15
Demand patterns also differ greatly between the motor car and utility vehicle segments, with the latter being driven by
other customer requirements. For a buyer of a new car, the price often plays the major role. However, for a buyer of a
utility vehicle, price is a more complex issue as the total costs of ownership (TCO) are considered. These include direct
and indirect follow-up costs in the full life cycle of the vehicle (Verband der Automobilindustrie, 2003d, pp. 32-35).
Since fuel costs can account for up to 25% of TCO, fuel and cost saving innovations are of particular interest for this
segment.

Role of government
National and regional governments play a role in providing a policy framework for the industry. Their education and
research policies can shape the knowledge capacities and skills in a region, setting up institutions specialising in key
industries. In Germany, the federal Ministry of Education and Research supports the concentration of experience and
excellence, with the creation of networks of competence. This approach seeks to establish an inter-disciplinary network
of universities, external research institutes and firms with a clear focus on producing new cutting-edge product
developments on particular competence themes.

Out of a total of 91 networks of competence, 21 competence centres (23% of the total) were established in Baden-
Württemberg (Federal Ministry of Education and Research, 2003, pp. 2-3, 6). This indicates the strong research
infrastructure in the locality. The wider Stuttgart region was particularly successful as it succeeded in eight networks bids
(Federal Ministry of Education and Research, 2003, p. 153). Among the networks of competence established around
Stuttgart, several focus on important future areas for the automotive industry. Examples are Pro3 - Process Technology,
36
Mechatronics Göppingen, ReFuelNet - Renewable Fuels, and BZI - Fuel Cell Research Alliance Baden-Württemberg.

Through employment and social policies, governments often also provide direct or indirect financial support towards
businesses’ research and development expenditure, expansion and trade efforts, as well as for staff training and
qualifications. By doing so, governments can support the transformation of economies to meet new demands within the
business framework, an example being new qualifications for the automotive workforce. Baden-Württemberg offers
financial support for introducing modern technologies and innovative projects to investors, start-ups, consolidations and,
particularly, to small and medium-sized companies. The financial support ranges from loan schemes and subsidies to
guarantees and holdings from the Baden-Württemberg venture capital funds. Various agents can also provide subsidised
training as well as inexpensive management (Baden-Württemberg Agency for International Economic Cooperation
GWZ, 2003b).

Important regulating mechanisms include norms and standards by which innovations in particular fields are promoted.
Environmental regulations (Dudenhöffer, 2003b), such as the Euro 4-Norm at European level for diesel cars which limits
the amount of soot output (from 1 January 2005 when it becomes effective), will force the industry to undertake a
minimum of innovation regarding environmental considerations.

36
The Network of Competence BZI-Fuel Cell Research Alliance was set up in May 2001. It is an amalgamation of the Fuel Cell
Research Alliance Baden-Württemberg and the Centre of Competence and Innovation for Fuel Cell Technology for the Stuttgart
region, within which companies such as DaimlerChrysler and EnBW carry out research in cooperation with the leading
institutions in the field. Examples are the universities of Stuttgart, Ulm and Karlsruhe, as well as the Fraunhofer and Max-Planck
institutes, and the Centre for Solar Energy and Hydrogen Research (ZSW) in Ulm (Federal Ministry of Education and Research,
2003, pp. 14-16).

16 © European Foundation for the Improvement of Living and Working Conditions, 2004
Other regulations such as the European Community block exemption will also have a huge impact on the industry
(Accenture, 2003). By allowing sales outside traditionally established territories and multi-branded retailing, the
European Commission aims to open competition across the automotive industry’s value chain. This will incrementally
change the shape of both distribution and servicing of cars and commercial vehicles in the EU. It threatens to weaken
the link between sales and after-sales services, while providing a new role for independent repairers. However, new
technologies such as telematics could enable automotive manufacturers to personalise their services, creating a strong
bond between their own dealerships and services, which could potentially counterbalance this trend.

Summary and future scenarios

This case study of the automotive sector in the German federal state of Baden-Württemberg concludes with a SWOT
analysis looking at the competitive position of the region’s industry and its preparedness for these changes.

Strengths:
„ long tradition and an established reputation of the existing automotive cluster as the region’s key industrial industry

with the necessary critical mass and a closely-knit network and proximity of manufacturers and suppliers;

„ strong presence of plants and headquarters of major vehicle manufacturers acting as a hub for the industry;

„ high concentration of complementary businesses in supporting industries such as electronics/electrical engineering,

process and manufacturing technologies, and a presence of companies from related industries such as aviation and
aeronautics;

„ high percentage of worldwide production and exports;

„ high productivity and relatively low unemployment rate;

„ existing brand values and positioning in the high-quality and premium segment driving technological innovation and
less vulnerability to cost pressure as a result of overcapacities;

„ trend-setting region for technological innovations with high research and development spending, enabling the
emergence of technological innovations and high patent output;

„ dense higher education and research infrastructure, partly specialised towards the automotive industry, with a high
concentration of researchers and engineers cooperating in research of future technologies;

„ greater relative pool of science and engineering graduates and researchers based in the regional trajectory, creating a
cultural affinity of employment in engineering and manufacturing;

„ protection of companies from capital markets through block ownership.

Weaknesses:
„ domestic car market close to maturity;

„ export dependency;

„ a supplier industry that is not yet sufficiently consolidated;

„ weakness of innovation finance market;

„ high labour costs compared with international competition;

© European Foundation for the Improvement of Living and Working Conditions, 2004 17
„ shortage of qualified personnel despite above-average qualifications;

„ lower working hours in international comparison;

„ lack of shareholder-value orientation in the industry.

Opportunities:
„ increasing world-wide automotive demand, particularly in emerging markets such as Russia and China, providing

huge future sales opportunities;

„ strong potential to benefit from the ‘electronisation of the automotive vehicle’ due to the local presence of the
electronics/electrical supplier industry;

„ potential benefits from the quick diffusion of new knowledge and from externalities due to the proximity and density
of automotive companies;

„ possible long-term strategies due to close relationships and ownerships of banks;

„ opportunities to seize growth in niche and particularly in premium markets due to strong positioning as well as by
serving demands of ageing customers;

„ widening of retailing strategies into leisure industry, stretching the value chain;

„ regulatory norms and standards providing opportunities for innovations.

Threats:
„ tough and increasing competition through globalisation;

„ growing over-capacity leading to more cost pressure;

„ uncertainties about stability and openness of emerging markets on which increases in world-wide demand heavily
depend;

„ currency exchange rate fluctuation and appreciation of the euro, which would make European exports more expensive
abroad;

„ economic downturn with particular effects on premium markets;

„ employment shift towards eastern Europe and Asia due to comparative labour cost disadvantage, especially from more
labour dependent medium-sized enterprises;

„ emergence of illegal copying of components in Asia;

„ entry of new players into the market;

„ lack of shareholder-value orientation, which may deter investors;

„ insufficient attraction for outside science and engineering graduates;

„ inability of companies to seize growth opportunities due to lack of qualified personnel or shortage of finance.

It can be concluded that the automotive industry is in a transition process towards further flexibility, outsourcing and
customer orientation, all which have a great impact on forms of work, working conditions and employment in general.

18 © European Foundation for the Improvement of Living and Working Conditions, 2004
In order to maintain competitiveness and be able to afford a high level of social security, advanced economies such as
Baden-Württemberg will have to maintain their leading innovation edge and technology advantage. This includes having
to fight competition from countries with lower labour costs. It will not be an easy challenge for the region but its
positioning in the high-quality and upmarket premium segments of the automotive industry represents the only viable
strategy. The success will depend on the capability of the region to attract qualified personnel and to tackle the existing
shortages by providing effective qualifications and training to its workforce. Human resources are the driving force for
future competences which would enable the region to retain its competitive advantage.

37
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22 © European Foundation for the Improvement of Living and Working Conditions, 2004