German Election Unlikely To Provide Required Auto Industry Shakeup

Investors in the German automotive industry can relax as Sunday’s general election produced a result unlikely to frighten the horses.

The trouble is, anyone looking to find quick solutions to the industry’s long-term malaise will be disappointed. Problems likely to remain unresolved include chronic weakness in China, the threat of Chinese imports into Europe, and President Trump’s promised tariff war. Slack electric vehicle sales require subsidies from a government struggling for money. The overall market for sedans and SUVs also could use some stimulus. Don’t expect any.

One bright spot might be a concession from the European Union that the strict CO2 emissions rules, outlawing the sale of new gasoline and diesel-powered cars by 2035, might be diluted

The election result suggested a coalition between the Conservative Party CDU/CSU which won with 33% of the seats in the Bundestag and left-of-centre SPD with 19%, according to Reuters. The right-wing Alliance for Germany (AfD) came 2^nd with 24.1%. The obvious result suggests the CDU/CSU and AfD should form a government, but the latter party is considered too extreme to be a coalition member.

The AfD is a right-wing libertarian party which seeks lower taxes, and smaller government but its strong calls for an end and even a reversal of recent mass immigration was considered too extreme by other political parties. Some experts say the AfD, which doubled its vote at this election, might well win outright at the next one.

According to Politico, the leader of the CDU and likely next Chancellor of Germany Friedrich Merz, is inheriting an economy in recession that is being further dragged down by a crisis in its automotive sector.

“He recognizes the problems: high energy and labor costs, and stiff competition in the electric vehicle transition. But he’s been light on the details of how he intends to help automakers,” Politico said.

Investment bank UBS said neither the CDU/CSU or SPD had called for specific auto demand stimulus. The SPD had called for renewed EV subsidies. These were withdrawn just over a year ago prompting the bottom to fall out of the German EV market, but the conservative manifesto didn’t mention this. UBS thinks new EV subsidies are unlikely.

The EU CO2 question might offer some relief, according to UBS, when the results of the EU Commission’s Strategic Dialogue is announced March 5.

“The CDU/CSU has been vocal in challenging the EU’s ICE car ban for 2035,” UBS said.

“Merz as likely next chancellor has positioned himself and his party as pro-business, anti-bureaucracy; therefore, investors might become somewhat more optimistic about the competitiveness of German (manufacturers) medium-term. However, we wouldn’t push that argument too hard because the industry’s challenges are of global nature, and the big themes for German manufacturers – loss of share in China, Chinese coming to Europe, U.S. tariff risk – are beyond the control of the next German government,” UBS said in a report.

Schmidt Automotive Research founder Matt Schmidt sees little chance of government funding being available to the auto industry. It will continue to look for energy price stability and more competitive prices for energy-intensive industries.

“Regarding CO2 we expect an even louder call for CO2 targets to be shifted with the CSU, who traditionally do lots of shouting for the auto-industry lobby, now back in the driving seat and the greens out of the equation,” Schmidt said.

“If there is another snap election within the next four years the growth of the AfD could certainly increase come the next election putting in on track to potentially become the largest party,” Schmidt said.

The German automaker’s association, the VDA, made a plea for quick action to form a government.

“Germany now needs a stable government as quickly as possible… A strong, unified German voice in Europe is imperative, as are reforms in Germany, the VDA said in a statement.

That is sentiment likely to be shared by investors who will know this process can be very complicated and could last for months, not days.