German court decision to have devastating impact on its auto industry

The tectonic plates are shifting underneath Germany's huge automobile industry.  The industry has just lost its huge bet on diesels, and Germany's champion exporters are hobbled.

As fuel prices soared in the late 20th century, Japan's Toyota developed the first hybrid car, the Prius, followed by Honda and then a flood of other Japanese, Korean, U.S., and German (and other Euro) makers.  But the Germans, who invented the diesel engine, believed that the simpler and cheaper (and durable) diesel engine offered more promising opportunities and placed their R&D, manufacturing, and marketing bets accordingly.

But a German federal court decision yesterday rings a death knell for that strategy and the huge financial, technological, and marketing bets that underlie it.  William Boston writes in the Wall Street Journal:

A German court on Tuesday rang the death knell for certain diesel cars in a blow to the country's flagship auto industry, which could now be forced to spend billions to upgrade or replace millions of cars.

In a landmark decision, a federal court ruled that German cities Stuttgart and Düsseldorf could ban diesel vehicles from their streets as a way to reduce pollution, rejecting an appeal of a lower-court ruling.  Ultimately, the ruling clears the way for any German city to ban older diesel vehicles and could inspire similar measures in cities around Europe, analysts said.

Germany's blue chip DAX index fell sharply on the news

Germany's auto industry dominates the European industry and exports a large share of its production:


And exports of autos and auto parts account for a huge share of Germany's exports:


The bloom started go off the rose when Volkswagen was busted by the U.S. EPA for rigging its tests of diesel engines.  A massive fine of $18 billion was reduced to $2.8 billion after a guilty plea in court, but the incident tipped off Germany's powerful greens that they had been hornswoggled about the pollution diesels generate.

Before the 2015 Volkswagen emissions scandal, more than half of new cars sold in Europe were equipped with diesel engines.  Now, the share is around 44%, consisting largely of vehicles used by craftsmen and in corporate and delivery fleets, according to analysts, who predict that by 2025 just 20% of new cars sold in Europe will have a diesel engine.

Once upon a time....

That scandal led to the regulations and court cases in Germany that now have crippled diesel sales in Deutschland.  With cities able to ban older diesels, the resale price of diesels is plummeting.

With resale values down, and likely to crash further, the market for new diesels becomes a lot tougher.

Now Germany must play catch-up, and so will its French and other European competitors.  They already feature some hybrids and pure plug-ins, but they face costs in developing more models and costly write-offs of investments in diesels.

Make no mistake: the global auto industry is a cutthroat business, with huge economic stakes for major industrial nations, as well as the giant companies that dominate it.  In many regards, Germany's giants – especially upscale Mercedes, BMW, and Audi – have enjoyed the fattest margins, as the cachet, styling, and reputation for technological leadership of these brands has persuaded global customers to shell out generous sums for the privilege of driving cars with their badges.  American, Japanese, and Korean makes have only envied the margins that the Germans have been able to command.

Any small advantage they can gain is eagerly pursued.  The hobbling of the German industry driving from this court decision and the scandal that preceded it is no small thing.  Stand by for some major scrambling as the dust settles and new plans are devised.

And Frau Merkel now has another big problem on her plate, as green initiatives already have hurt Germany's manufacturing sector deeply.