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E-Cars Drive Germany's Tech Future.

It's not so much the "dieselgate" emission-cheating scandal that is keeping German car executives awake at night these days. It's more the possibility of their multibillion-euro industry suffering the same fate as Nokia, the iconic cellphone maker taken down by smartphones. In that nightmare scenario, disruptive new technologies such as electric-powered cars and autonomous driving could do to German carmakers what the iPhone did to the Finnish company--push them into near obsolescence.

The automotive world is at a crucial juncture in its development. New entrants like Elon Musk's Tesla and Chinese automakers Byton and Nio are pioneering not only innovative new technologies to power cars but also smart new systems to build them. At the same time, Silicon Valley giants like Apple and Google are using their IT clout to develop the software and collect the data needed to make vehicles drive themselves. Nowhere, arguably, are the ramifications of such game-changing automotive technologies greater than in Germany, where industry heavyweights BMW, Daimler (the maker of Mercedes cars), and Volkswagen (which owns brands like Audi, MINI, and Skoda) keep the German economy purring.

There's another reason for the German auto industry, which has been woefully slow in getting into electric cars, to kick into overdrive: In early October, EU lawmakers drafted a law seeking an even greater reduction in carbon dioxide emissions for Europe's new cars than had previously been required. The legislation calls for a 20 percent reduction by 2025 and 40 percent by 2030. Carmakers also have to ensure that zero- and low-emission vehicles, like e-cars or vehicles that emit less than 50 grams of C[O.sub.2] per kilometer, account for 20 percent of new-car sales by 2025 and 35 percent by 2030.

Automaking is by far Germany's biggest industry. In 2017, the sector employed more than 820,500 people in Germany and generated revenues of 423 billion [euro] ($487 billion); exports accounted for 272 billion [euro]--more than 16 percent of all German exports that year. Overall, carmakers account for 13 percent of all industrial value created in Germany, according to the Institute for Economic Research (Ifo). The country is also Europe's largest automotive hub, home to around 950 carmakers and automotive suppliers. Serving the car industry is a key part of the business of industrial giants Siemens and Robert Bosch.

Germany's famed excellence in mechanical engineering has given its auto industry a competitive edge in the past, but that engineering prowess is no guarantee of success in the future. The complex mechanical vehicles German automotive engineers excelled at designing and building--accounting today for four-fifths of the world's premium cars--are being replaced by battery-powered, Internet-connected computers-on-wheels that will drive themselves. The mechanics of an electric car are simpler--7,000 components compared to an internal combustion-powered vehicle's 20,000--but the electronics are more complex.

For Germany's car industry, the technological shift to electric cars and autonomous driving represents a formidable challenge. It involves much more than simply replacing a fuel tank with a battery or a combustion engine with an electric one. It requires new electronic engineering and data-processing capabilities--and new ideas to differentiate the cars from the competition.

German carmakers have fallen woefully behind in shaping these technologies--they've stayed keen on building bigger, faster, more powerful vehicles with gasoline and diesel engines--but they're now marshaling their massive financial and human resources to catch up and, ideally, maneuver into a pole position. The industry invested nearly 25.5 billion [euro] in R&D in 2017, accounting for more than 35 percent of total German industry R&D expenditure; that includes about 114,000 researchers and developers on the payroll. Four of Europe's five biggest R&D spenders come from the German automotive sector, according to the 2016-2017 European R&D scoreboard by KMPG: VW led (again) at 13.7 billion [euro], followed by Daimler at 7.6 billion [euro] and component supplier Robert Bosch at 5.6 billion [euro], with BMW in fifth place at 5.2 billion [euro]. And according to the Ernst & Young European Automotive Survey, more than 40 percent of German automotive companies want to increase their R&D budgets in the future.

Volkswagen, Europe's biggest R&D spender, is likely to hold onto the lead; the company has announced that it will spend 34 billion [euro] between now and the end of 2022 on developing electric cars, autonomous driving technology, and other advanced mobility services. "The electric drivetrain doesn't give carmakers as many options to differentiate ourselves as we're accustomed to today," Volkswagen CEO Herbert Diess told the German business press. "One definite area will be the intelligence embedded in the car. Software will play a crucial role here and define its character."

Analysts also see the value created in the auto sector shifting from making components and assembling vehicles to owning innovation assets such as software and, particularly, the data that fuels various new car technologies. It appears, however, that VW has some way to go to meet its goals: of the 10,000-some developers working at the company's headquarters in Wolfsburg, only a few hundred are currently software engineers.

The other big players are also working to catch up. In September, Daimler's Mercedes brand introduced its first fully electric car, targeted at the upscale battery-driven car market currently dominated by Tesla. The brand aims to have as many as 10 electrified car variants by 2022. The Stuttgart-based group has also taken the unprecedented step of putting a non-German without an educational background in mechanical engineering in charge of its future. Ola Kallenius, the tech-savvy Swede in charge of Daimler's research and Mercedes car development operations, will succeed the group's long-serving chief executive, Dieter Zetsche, next year. Kallenius has been instrumental in introducing Silicon Valley management techniques at the carmaker and has worked closely with Zetsche to prepare for a new era of electric and self-driving cars.

BMW is also kicking into high gear. Despite an early and promising start in the e-car sector, with nine models on the market in 2011, the company has let years go by without meaningful model updates or a clear strategy. The carmaker is now developing a new SUV and sedan to launch over the next couple of years, as it steps up efforts to electrify its entire lineup. By 2025, it plans to offer 25 electrified vehicles, of which at least 12 will be fully electric, all built on a new modular platform. A new fully electric MINI will hit the street in 2019. The Munich-based company is also finishing up development of its fifth-generation electric drivetrain.

As Germany automakers accelerate development of new electric cars, however, they face another major obstacle: how to power them. The battery-manufacturing sector is currently dominated by Asian firms, particularly Japan's Panasonic, South Korea's Samsung, and China's BYD and CATL. Although Germany's Big Three manufacturers have all sought e-car batteries made in Europe, none want to get involved in the production themselves. Daimler got out of the business, Bosch didn't even want to start, and BMW has awarded a 1 billion [euro] contract to the new CATL factory in Erfurt, in eastern Germany. All claim the competition is too tough, too advanced, and too risky financially--despite warnings from analysts of the dangers of becoming too dependent on batteries made elsewhere.

The German government now wants to take battery cell production into its own hands to reduce the risk of dependence elsewhere. Economics minister Peter Altmaier has proposed the construction of two large-scale factories, funded with 1 billion [euro] each, and has earmarked another 600 million [euro ]for R&D. The research facility would collaborate with the publicly funded Fraunhofer Institute, according to the plan.

Plenty is at stake for Germany, whose industrial might and future is intricately linked to its auto industry. Andreas von Bechtolsheim, the German engineer who earned his PhD at Stanford and went on to co-found Sun Microsystems, warns the country could be sidelined in the tech sector if it doesn't zero in on its strengths. "Germany hasn't been kicked out yet but it can't afford to fall any further behind," the 62-year-old tech investor told reporters. "It's too late to enter the smartphone sector or the search-engine business. For Germans, the focus has to be cars."

John Blau, Contributing Editor

Dusseldorf, Germany
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Title Annotation:PERSPECTIVES
Author:Gobble, MaryAnne M.; Blau, John
Publication:Research-Technology Management
Geographic Code:4EUGE
Date:Jan 1, 2019
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