Why German automakers are 4x as expensive and 2x as slow

Welcome to Issue #68 of The German Autopreneur!

We hear it again and again: German carmakers are too expensive and too slow. Especially compared to Chinese OEMs.

But what exactly does that mean? Where does this difference come from? And above all: what can we do about it?

Today's newsletter is inspired by a recent Bain study. The figures show: The gap to Chinese competitors is greater than many suspect.

4x as expensive but only half as fast

German car manufacturers have an efficiency problem.

According to Bain, German vehicle development costs are around four times higher than Chinese ones. Specifically: Chinese OEMs need only 27% of the budget of German manufacturers.

At the same time, they are twice as fast. What does that mean?

German OEMs need an average of 48 to 54 months from first sketch to start of production. Chinese competitors manage this in 24 to 30 months. Some even in 18 months.

And the gap just keeps getting bigger.

CATL recently launched a skateboard chassis.

This is essentially a prefabricated platform that contains all the important components. Battery, drive, control system and chassis. Car manufacturers only have to add their body on top.

With this platform, new vehicles can go from concept to production in just 12-18 months.

This undercuts the already fast Chinese development times by another 40%.

Mazda has just said that they will work with CATL. Chinese manufacturers such as Avatr, Changan and Neta are already using the system.

The difference in speed has a direct impact on product cycles.

Chinese models are on the market for an average of 1.3 years before they get updates.

Western brands average around 4 years.

The result: German manufacturers take twice as long and spend four times as much. The result: German cars cost more.

Why are we so slow?

The obvious explanation would be: “The Chinese are cutting back on quality.”

But it's not that simple.

Chinese EVs perform excellently in Euro NCAP tests. They win design and technology awards. And even Germany’s largest automobile association confirms this: The quality is of European level.

The real reasons lie elsewhere:

1. Too many models

European OEMs have inflated their model portfolio by around 250% since 2000. Each brand offers dozens of variants and derivatives. Each of these requires its own development resources.

Chinese manufacturers focus on a few core models and modular platforms. They follow the “less is more” principle. Fewer variants, more focus.

In addition, German manufacturers are developing 3 drive types at the same time: ICEs, hybrids and EVs. Resources are spread across too many projects.

2. Meeting culture and too many decision-makers

There are way too many unnecessary decision-making cycles and hierarchical levels.

A German manager recently explained it like this: “We have endless meetings just to decide when the next meeting will take place.”

Silo thinking still dominates in German companies. Each department protects its own turf. Hierarchy weighs more than good ideas. Politics makes decisions take forever.

3. German perfectionism

German engineers want to plan every aspect down to the last detail. Everything has to be perfect before a car is brought to market.

In the ICE era, this was a competitive advantage. Today it is becoming a problem.

Chinese OEMs follow the Silicon Valley principle: “Ship fast, fix later.”

They launch cars with hardware that is not yet activated. Features are added later via software updates. A completely new way of making cars.

This “software first” idea comes from Tesla. Start quickly. Improve continuously.

The result? While we are still working on the perfect solution, the Chinese have already rolled out 2 product generations.

4. Fragmented supply chains

In China, you often find development, manufacturing, and suppliers all in the same neighborhood. If a manufacturer needs a larger display, they just go "down the street." And a few months later, the change is made.

In Europe, such a process can take 3-4 years. Long decision-making processes and global supply chains slow down every change.

Ironically, Germany used to have just such an ecosystem. OEMs, suppliers, and service providers were all connected and concentrated geographically.

This was one of the reasons why Germany became an automotive powerhouse.

But when it comes to new technologies, this ecosystem is missing. Semiconductors, batteries, and software. All of these must be sourced around the world.

Germany's former advantage is gone.

5. Hardware obsession

Chinese manufacturers see cars as tech gadget. Development follows the principle of “software first, hardware second”.

German manufacturers continue to prioritize mechanics. Software is often seen as an add-on.

Chinese cars get updates over the air. New features are being released continuously. German models typically only receive significant updates when the models are updated every few years.

6. Expensive locations

German car manufacturers concentrate their development almost exclusively in expensive countries. Around 3/4 of R&D employees work in high-wage locations such as Germany.

Chinese manufacturers take advantage of the global wage gap. They benefit from lower labor costs in their home markets. And they're strategically establishing R&D centers in different regions.

7. Dependence on suppliers

Many Chinese OEMs manufacture key components themselves. BYD is a pioneer in this area. They produce batteries, chips, motors, and software in-house.

German manufacturers rely on external suppliers. This drives up costs. And it also makes every modification more complex and time-consuming.

8. Government support

From 2009 to 2023, China has supported the domestic EV and battery industry with over $230 billion in subsidies.

There were buying incentives and tax benefits. The government also provided R&D subsidies and cheap loans. These policies created a perfect environment for Chinese manufacturers.

In Europe, industrial policy support is often hesitant and uncoordinated. China has been pursuing a clear strategy for over a decade.

This continuous support provides planning security and accelerates innovation cycles.

The price of inefficiency

The consequences of these differences?

Chinese companies can build a compact EV €10,000 cheaper than European competitors.

The average price of an EV in China is around €32,000. In Europe, it is around €66,000.

In China, EVs are now cheaper than comparable ICE models. In Germany, they are often much more expensive.

So, what should German automakers do now?

What can we learn from this? How can German carmakers become faster and cheaper again?

1. Simplify the product portfolio. The variety of models and variants must be reduced. Less is more. Instead of dozens of variants, we need a few, well thought-out models on shared platforms.

2. Speed up decisions. No more endless committees. Ideally, they should be killed completely. Instead: Clear ownership. A product owner must have full decision-making power. Without 20 managers or stakeholders having to share their thoughts.

3. Be present in China. We need to develop where the innovation ecosystem exists. Being close to suppliers of batteries, chips, and software saves an enormous amount of time. At the same time, we should also work on our own ecosystem in Europe.

4. Bring diversity to the boardroom. Where are the software folks on the board? Why aren't there any tech CEOs? We all agree that core competencies in automotive have shifted. But we have not changed the people in charge. The majority of them are still mechanical engineers and business graduates.

Then there's China. It's the most important market for all German carmakers. So why isn't there a Chinese person on the management board? Someone who understands the market? Someone who understands the culture? I don't think a German with a few years of experience in China could really fill that role.

5. Break with perfectionism. German perfectionism was a strength in the ICE era. In the software age, it has become an obstacle. A car does not have to be 100% perfect before it's sold. In the world of software, we can continuously improve.

The problem is not with the engineers. It's too often the corporate culture that holds us back.

The meaning of quality needs to be redefined. A car that is launched late and too expensive cannot be “good”. No matter how perfect the technology is.

Either the way of thinking needs to change, or German automakers will be overtaken. Chinese competitors have proven that they are not only faster and cheaper. Now, they’re also getting better and better.

🔗 bain | rt1 | rt2 | rt3 | rt4 | ait | cnc1 | cnc2 | el | wef | wef2 | cd | adac | itif | solid

That's all for today.

Feel free to reply to this email with your thoughts.

Until next week,
— Philipp

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