Asleep at the wheel? Germany frets about economic car crash

Dieter Zetsche, Chairman of the Board of Management of Daimler AG and Head of Mercedes-Benz Cars, takes part in the ground breaking ceremony for the second battery factory at Daimler subsidiary ACCUMOTIVE in Kamenz, Germany May 22, 2017.

Emma Thomasson and Edward Taylor-JULY 27, 2017

BERLIN/STUTTGART, Germany (Reuters) - Daimler Chief Executive Dieter Zetsche beamed as he posed for cameras in a Mercedes-Benz electric car after meeting politicians to discuss the future of the auto industry in Stuttgart, birthplace of the combustion engine.

What the pictures do not reveal is that the Mercedes EQ car was a prototype that had to be dragged into the city square by four employees before the shoot.

Daimler's EQ brand will only hit the road at the end of the decade. It's a sign of how Germany has been slow to embrace electric vehicles and associated technology as it clings to the combustion engine that has driven its post-war prosperity.

"China dominates the production of solar cells. Tesla is ahead in electric cars and Germany has lost the first round of digitalization to Google, Apple and the like," said Winfried Kretschmann, who is premier of the region where Daimler is based and hosted the meeting with Zetsche and other car bosses.

"Whether Germany has a future as an industrial economy will depend on whether we can manage the ecological and digital transformation of our economy," Kretschmann said.

Despite booming car exports and high employment in the industry, there is a sense of unease: "Is the car finished?" asked the weekly Die Zeit. "Fear in car country," said Stern magazine.

Those fears have been mounting since the Volkswagen (VOWG_p.DE) emissions scandal broke in 2015.

But the angst extends beyond cars to the broader economy, even though exports are booming and unemployment low. Politicians fear Germany is failing to invest enough in new technology and infrastructure.

Chancellor Angela Merkel has made preparing Germany for the digital age big part of her campaign for national elections on Sept. 24, pledging to boost research and development spending.

Digital Era

"I firmly believe that digitization does not mean we will have fewer jobs per se," Merkel said last month.

"If, however, jobs that are lost are not replaced by new jobs created by the management of large amounts of data ... then we will have problems," she added.

Merkel is aware of the risks to Germany's auto industry, noting that only one maker of horse-drawn carriages - U.S. firm Studebaker - survived the invention of the modern car by German engineer Karl Benz 131 years ago.

"We must manage the move of today's auto industry to the car of the 21st century better than the switch from horse power to the car," she said in a speech in January.

Merkel's main rival for the chancellery, Social Democrat (SPD) Martin Schulz, wants to compel the state to raise spending on infrastructure and education.

In the SPD election program, the party says building up battery cell production in Germany is of "central strategic importance" to help the country remain the leading car maker.

In May, Merkel said Germany should do more to invest in battery research as she laid the foundation stone for a new Daimler battery factory in the town of Kamenz that will rely on imported cells.

Germany has fallen behind in developing the cells that are at the heart of electric vehicles, with most imported from Asia, and has also been slow to build charging stations, abandoning a target to have 1 million electric cars on the roads by 2020.

The country needs to spend between 50 to 80 billion euros on electric cars infrastructure, Rolf Bulander, a board member at auto supplier Bosch, told Reuters.

Ketchup Bottle

In March, Daimler said it was speeding up its electric car program, aiming to bring more than 10 new models to market by 2022 through 10 billion euros of investment.

In a video for Daimler staff, Zetsche said: "Electric mobility is a bit like the ketchup bottle. You know that it is coming, but not when or how much," he said as he struggled to shake sauce onto a plate of fries. "We are convinced now is the time to fully jump in."

At Daimler's Mercedes-Benz plant in Untertuerkheim outside Stuttgart, workers are still worried. In July, they refused to work overtime to push their demand for a commitment from Daimler to make components for electric cars at the factory.

"Our future here is closely tied up with the future of the powertrain. That is why it is important to pave the way for the future today," said Wolfgang Nieke, head of the works council at the factory.

The plant, where 19,000 employees produce engines, axles and transmissions for more than 1 million vehicles per year, is one of Daimler's oldest factories, where the Mercedes-Benz brand was established more than 100 years ago.

Frank Deiss, head of the factory, says workers should not fear job cuts as Daimler is expecting so much growth that more combustion engines will be needed by 2025 than now even if electric cars account for 20 percent of Mercedes sales by then.

After tough talks, Daimler earlier this month agreed to make electric car components and batteries at the factory.

But the concerns are being voiced at other car makers too.

"Many people in the factories are saying 'why should we stop what has made us so successful?' There is fear of the future – they know electromobility means less employment in Germany," said Thomas Steg, VW's chief lobbyist.

"We need to make it clear to them that if we don't go this thorny, stony path, the future will look even worse."

In 2015, workers at VW-owned Porsche agreed to a longer workweek and lower pay to secure production of an all-electric sports car.

"In view of the huge responsibility of the auto industry for many jobs, I think it is important to focus on future issues but at the same time not to lose sight of our own profitability," Chief Executive Oliver Blume told Reuters.

The Ifo economic institute has warned that more than 600,000 jobs could be at risk in Germany from a ban on combustion engine cars by 2030 proposed by the Greens.

How Germany copes depends on how quickly the shift takes place, according to IG Metall, the country's biggest union with more than 500,000 car worker members.

Knut Giesler, head of the IG Metall branch in North Rhine Westphalia, demanded that the regional government, IG Metall and local employers come up with a plan for securing jobs in the automotive and supplier industry which is home to 200,000 jobs in North Rhine Westphalia.

Frederic Speidel, head of strategy at the union, says the industry could adapt if the change comes gradually over the next 10 to 15 years as many baby-boomer workers will reach retirement by then and others can be retrained.

However, that timetable is not a given, especially as the price of electric cars is set to fall rapidly as mass production ramps up and battery costs fall. Some expert predict electric cars will cost the same as combustion motors by 2022.

While carmakers like Daimler and Porsche hope to be able to ride the electric wave, it is an existential threat to suppliers of combustion engine parts.

Christian Hochfeld, director of transport think tank Agora, said pressure is mounting.

"We know that companies at the peak of their success can disappear from the market, like Nokia," he warned.

Additional reporting by Andreas Cremer and Ilona Wissenbach; editing by Giles Elgood