A slow start to new car sales in Germany threatens to undermine the considerable strength of the country's supplier community.

Especially alarming are disappointing sales of the new Volkswagen Golf, Germany's biggest seller and one of the cornerstones of the expected recovery in 2004.

New-car sales were down 12.4% in January despite the German vehicle manufacturers' association (VDA) forecast of a 3% rise this year.

In 2003, German car sales fell 0.6% and the year ended with domestic order intakes running at levels less than 0.5% above levels of three years ago.

There are reasons to be optimistic about the second half of 2004. The economy is expected to pick up, the fleet of cars is older and there is more exciting product coming along. But the news of discounting on the new Golf suggests that carmakers will have to work hard to generate any extra volume.

That could undermine growth in their domestic market, which was one of the few bright spots in developments for the German vehicle makers in 2003.

German vehicle makers saw revenue grow only 0.7% in 2003, according to the VDA. German carmakers are worried that the continuing strength of the euro will start to impact export volumes that have sustained their production during years of weak domestic demand.

German suppliers look healthy

The bright spot in the German industry remains the supplier industry - despite high wage costs, strikes, and worries about the competitiveness of Germany as a manufacturing location. Bosch CEO Franz Fehrenbach was the latest executive to sound the alarm in a speech last month.

The VDA estimates that sales of parts and accessories made in Germany grew 5.1% to €59.6 billion in 2003.Three-fifths of that was domestic turnover, which grew 5.2%, but exports also grew by 5%, the VDA estimates.

German automotive industry labour costs remain the highest in Europe at €33 an hour in 2003, compared with €22.65 an hour in France, €17.83 in Spain and €16.82 in Italy.

But productivity gains, partly from higher output levels, mean that labour cost as a share of sales has not changed much over the last few years. In fact, costs have fallen as productivity has continued to grow. Labour accounted for only 23.1% of the sales of German suppliers in 2003, compared with 23.8% in 2000. The producer price index for German automotive parts for OE applications was 2% lower at the end of 2003 than in 2000.

Employment numbers in 2003 grew by 3.7% over 2002 to more than 325,000.

Germany has a positive trade balance in automotive parts of about €17 billion - and the growth in export orders (up 200%) was much stronger than for the domestic market. With most component exports going to the euro zone, there is only a small direct currency effect on volumes.

German first tiers are supplying more high tech systems such as ABS and ESP brakes, common-rail diesel engine management systems and controllers for safety and body systems across Europe, says the German trade association.
The immediate prospects are for more of the same. During 2003 the order intake index for German suppliers was running 60% higher than in 2000. The reason? Suppliers increased their share of the industry's value-added with more systems responsibilities, new technologies and higher equipment rates.

SupplierBusiness.com