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The German economy has recovered and sees some reasonable growth. But why?

The German automotive industry can be regarded as an early driver behind this trend: while GDP grew a modest 0.9 per cent in 2005, the revenues of the German car industry already went up four per cent – and in 2006 the car industry grew yet another 7.7 per cent.

The German automobile industry has doubled its revenues over the last 10 years and has established itself as the most important sector in German industry. Today, it contributes almost 20 per cent to overall industrial production and its revenues of €254 billion in 2006 represented 11 per cent of German GDP.

Manufacturers like Daimler, BMW and VW are highly competitive players in the global market. Their value chains run through many countries and German manufacturers produce in 23 countries around the world – 13.8 million cars in 2006 (including Chrysler). 5.8 million cars left German factories, making Germany the world’s third largest manufacturer after Japan and the USA. These countries produced 11.5 million and 11.3 million vehicles, respectively. (1)

Increasing exports, low demand at home

Germany exported 4.2 million cars in 2006, representing growth of 2.5 per cent. High export figures mirror the leading position German manufacturers hold in the premium segment with brands like Mercedes, BMW, Porsche and Audi. More recently, the increase in exports has also been significantly boosted by strong demand for diesel cars all over the world.

What about internal demand? After all, the car is said to be “the Germans’ most beloved child”. Certainly, there is some truth in this saying, but the demand for passenger cars among consumers had been falling for some years. Even aggressive discounting by dealers did not help to push sales of new cars.

But 2006 indicates a turnaround. The readmissions grew by 4.5 per cent, whereas the demand was largely driven by corporate buyers, who have become significantly more important customers for the automotive market. Ten years ago, about one third of all new passenger cars were bought by companies; today it is at least every second passenger car.

Strong automotive banking sector

The automotive financial services sector has often achieved double-digit growth during the past ten years. Today, three out of four new cars are either leased or financed via lending. The banks and leasing companies owned by the manufacturers are the main players in the field, holding a 60 per cent share of the market. There is quite a tradition here: the first automotive bank was founded by a manufacturer some 80 years ago.

With financing or leasing the automotive banks of the car producers helped to bring 2 million new and second-hand cars to the market in 2006. Leasing saw a significant decline, which was balanced by increasing sales of alternative financial services. Leasing went down 9.7 per cent, the total number reaching 739,000. At the same time, lending for new cars went up 6.6 per cent, resulting in 1.3 million new cars financed through lending.(2)

The future of the market depends partly on general economic development worldwide and in Germany. However the economy develops, Germans will still replace their old cars every few years and lending and leasing are becoming more popular in the used car market.

As a result, risk management is and will continue to be an important issue for banks and financial service companies, since it remains to be seen whether the current economic growth will persist. Also, despite the fact that the number of insolvent companies is in decline, bad debts are increasing. In particular, the number of private customers who cannot pay their debts has been rising dramatically. Finally, fraud is an issue of growing importance and problems like false information provided by the customer and identity theft are proving difficult to tackle. Against this background, automotive banks have always been pioneers in implementing and using automated decision systems and are at the leading edge, making up to 80% of their credit decisions using sophisticated risk management tools and reliable systems to implement scoring and decision rules. The latest advances in technology, such as the new tools to share and validate information about applicants from credit bureaux or other organisations, and the new methodologies to predict the effect of different actions, will help them to optimise results against true economic benchmarks at a one-to-one customer level.

Rainer Woidich - Head of Experian Decision Anaytics, Germany

*1 VDA  - Verband der Automobilindustrie (www.vda.de)

Originally featured in Motor Finance , January 2007

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