The transport transformation can strengthen German industry.

Since the invention of the automobile by Carl Benz in 1881, the automotive industry has produced millions of vehicles. And while numerous advances in vehicle engineering have been witnessed over the past century, one core principle has remained unchanged: reliance on the internal combustion engine as principal part of the power train. However, new innovations in electric vehicle technology, combined with the exigencies of climate change, have suggested that the reign of the internal combustion engine could be coming to an end. Indeed, the automobile industry seems to entering an era of substantial transformation, if not a full-fledged technological revolution.

  • The future belongs to carbon-neutral vehicles and mobility services

    The recent wave of innovation in the area of electric vehicles has been driven in no small part by the goal of slowing down human-induced global warming and decarbonising the energy and transport sectors.
    Yet other factors are at work: Alternative powertrain technologies have reached a state of market readiness; digitalisation is opening new doors in the transport sector; and in large cities a growing number of people are now interested in driving cars without necessarily owning one. These trends are not only visible in Germany, but worldwide, and they are triggering significant macroeconomic effects.

    The mobility transition and the energy transition in transport have the potential to improve quality of life while also reducing the risks of climate change. However, changes in the transport sector may necessitate painful adjustments on the part of individual groups or society as a whole.

    Specifically, concerns have been voiced about the dangers posed to Germany’s export-oriented automotive industry. Regardless of the regulatory decisions made by German and/or European policymakers, the success of the German automotive sector will depend crucially on its ability to adjust to changing market requirements - both domestically and internationally. There can be little doubt that decarbonisation and digitalisation will exert significant impacts on the number of jobs, structure of employment, and value creation chains in the automotive sector. Our success in managing undesired or negative societal impacts – while they are difficult to quantify at present – will be augmented if political and business leaders take an active hand in shaping the transformation process, rather than being driven in a reactive sense by it. Business leaders in the automotive industry are increasingly aware of this fact.

    The private sector should be responsible for determining the powertrain and efficiency technologies they wish to develop and implement so that emission reduction goals can be met. However, German companies will only be able to remain at the vanguard of the automotive industry if they lead the way in the decarbonisation of powertrain technologies and in the development of new mobility services. Technical hurdles, increasing international competition and ever more stringent regulatory policies mean automobile manufacturers are confronted by a complex nexus of challenges.174

    174. PwC (2016), S. 3

  • Creating jobs with industrial policy that guides structural change

    The German automobile sector’s success in defending and expanding their international market shares will have direct impacts on domestic employment levels. We can expect the greatest number of jobs to be lost if the speed of structural change exceeds the ability and/or willingness of the automotive sector to adapt. Structural change is already well underway; actions being taken today will determine in part whether Europe remains a major location for the production of automobiles in the future.175

    Proactive efforts to steer structural change can help to secure employment in the automotive sector. Business and political leaders have been devoting particular attention to the manufacturing of powertrain technology, which currently employs some 250,000 workers domestically. The speed at which new powertrain technologies replace the internal combustion engine will be a critical determinant of the future of these jobs.

    At present, it is difficult to predict the specific technologies that will become ascendant, or the pace at which change will occur.176 However, it is clear that the production of electric powertrains is less labour intensive than the production of combustion engines and traditional gearboxes. Existing studies come to the conclusion that the macroeconomic employment effects associated with the rise of electric vehicles will remain limited in the period up to 2030 (see fig. 11.1). However, these studies presuppose that battery-power electric vehicles will not achieve rapid growth in market share prior to 2030.

    It appears reasonable to assume that the negative employment effects associated with policy intervention to guide the transition to sustainable transport would be less severe than the consequences of being left behind in the international race to adopt new transportation technologies. This race is already underway, as can be seen first and foremost in China. In China, experts only see strong growth prospects for vehicles with alternative powertrain technologies and for vehicle components that are “highly relevant for alternative vehicles”.177 Against this backdrop, it would appear the greatest risk to German industry is posed by efforts to maintain the status quo.

    The rise of electric vehicles is not only relevant for automobile manufacturing. Oil companies could begin to suffer earlier than expected from the success of battery-powered vehicles.178 However, it is not reasonable to assume that supplying energy to the transport sector will require fewer jobs in the future than it does today. New jobs will be created for the expansion and maintenance of power infrastructure and/or the production of electricity-based fuels. However, cost factors and public-acceptance issues suggest that alternative fuel production will primarily occur in other countries.

    Economics effects will also result from changing patterns of mobility as part of the mobility transition: motorised transport will decrease while shared mobility and self-driving vehicles become more prevalent. For example, a recent study estimates that shared mobility and associated connectivity services and features could expand automotive revenue pools by some 30 per cent by 2030, or by 1.5 trillion dollars.179 This would have salubrious effects on employment.

    By contrast, self-driving vehicles could have a negative impact on employment levels. In particular, they have the potential to eliminate jobs in the freight, taxi and public transportation industries. More than 83,000 people are employed as public transportation drivers in Germany.180

    The macroeconomic effects of the transport transformation will depend on a range of additional factors that are difficult to estimate at present. A particularly decisive role will be played by how the total cost of mobility develops over time; the effects to consumer spending and savings rates that arise from higher or lower individual transportation expenditures; and the effects resulting to supply chains and trade relationships from technological innovation and associated behavioural adaptation. Experience tells us that public support for government policy is often mediated by how such policy impacts jobs. As a result, improving our understanding of how the transport transformation will impact the labour market is of key concern. Enhancing our understanding of this issue is crucial for assessing various strategies for guiding structural change, not least to ensure there is sufficient support for such intervention among political leaders and the citizenry at large. In this connection, it is important to communicate that the transport transformation cannot be held responsible for employment effects that are the unavoidable result of automation and the digitalisation of production (viz. Industry 4.0).

    175. See IG Metall (2016), p. 6 and Wissmann, M. (2017), p. 7.
    176. ELAB (2012); TAB (2012); Öko-Institut (2016) sowie Ulrich, P.; Lehr, U. (2016)
    177. TAB (2012), S. 194
    178. FitchRatings (2016)
    179. McKinsey & Company (2016), p. 4.
    180. VDV (2016), S. 30.

  • Financial markets are recognising the importance of sustainable transport

    Considering the degree to which the automotive sector is intermeshed in capital markets, we can expect significant financial-market consequences to result from how the automotive sector meets the challenges of climate change. By the same token, the importance attached to climate change by financial market actors could have crucial impacts on the business strategies pursued by automotive manufacturers.

    The nexus between climate change and the transport sector poses a range of potential risks to the stability of financial markets. For example, the geophysical consequences of a warming planet or ambitious environmental policies to combat climate change could lead to significant losses in automotive sector investments. And while the transport sector does not appear to pose an acute risk for the stability of financial markets at present, risks of this type cannot be discounted.181 The risk of a black swan event – that is, an event with a uniquely powerful impact whose probability was underestimated based on Gaussian risk calculations – is not sufficiently accounted for by traditional financial risk models.

    Financial analysts typically draw conclusions by examining cyclical patterns in historical data. Accordingly, they fail to systematically account for the risks posed by climate change. And to the extent that their risk estimates fail to account for a warming planet, they are necessarily subject to a significant margin of error. In this way, scientists, policymakers and financial market regulators have a responsibility to communicate the risks of climate change to investors. Such efforts to raise awareness represent an important tool for promoting the success of the transition to sustainable transport.

    The perceived risks to traditional business models will grow as climate change risks become more visible. Financial market actors are increasingly aware of the risks to their investments that emanate directly from climate change as well as from associated regulatory policies.To an increasing extent, investors have been taking an active role in the management of the companies in which they are invested in order to promote adaptation to climate change. Alternatively, they have been divesting from endangered subsectors in order to avoid holding stranded assets. As atmospheric carbon concentrations continue to rise, we can expect investors to devote even more attention to which companies have a dim future in a warming world. In coming years, for example, we can expect investors to increasingly withdraw from holding investments in oil, gas and coal companies.

    Divestment can also be expected in companies that do not extract or process fossil fuels but which are highly dependent on the fossil fuel industry. The automotive sector is particularly exposed to this risk.182 If individual manufacturers choose to cling to their existing business models, they will become increasingly vulnerable to changes in investment behaviour that is motivated by an awareness for climate change.

    Disinvestment from such companies will lead to their declining market capitalisation and undermine their ability to finance their activities. While climate considerations are not yet a significant driving force in capital markets, there are numerous indications that investors are becoming increasingly sensitive to the financial risks of climate change. In a recent publication, BlackRock, the world’s largest investment fund, stressed that it views “climate aware investing ... as a necessity”.183 Other institutional investors with some 30 trillion US dollars under management have been pressuring the automotive industry to take proactive measures to ensure climate change does not exceed 2 degrees Celsius. In this connection, they have been working with rather than against policymakers and civil society groups.184

    In public discourse concerning the transition to clean energy and sustainable transport, financial markets have been largely ignored. However, capital markets actors have the potential to become an extremely important driver of the transition to sustainable mobility. We should therefore keep our eyes on the financial sector, and encourage the active support of financial market actors in this process.

    181. BMF (2016a), p. 12 ff. and BlackRock (2016).
    182. BMF (2016a), p. 16 and UBA (2016b), p. 47.
    183. BlackRock (2016), p. 9.
    184. IIGCC (2016), p. 3.

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