A brand new, gleaming Mercedes vehicle rolls off the production line roughly every three minutes at the carmaker’s Rastatt plant in south-western Germany.
A total of 185,000 of its upmarket A-Class, B-Class and all-electric EQA cars were assembled here last year in the factory, close to the French border. They are then taken by road, rail and ship to their new owners, perhaps to zip through European capitals, Chinese cities, or along California’s coastal roads.
Mercedes-Benz Group (MBG) produces hundreds of thousands such vehicles a year from eight German factories: Rastatt is one of three in the state of Baden-Württemberg, near the company’s physical and spiritual home in Stuttgart. The carmaker lends its name to a whole area of this affluent city – the Benzviertel, where its headquarters and museum are located – and to its Bundesliga football club’s stadium.
But Mercedes and the country’s wider economy now stand at a crossroads. Vladimir Putin’s invasion of Ukraine has prompted a race to find new energy supplies amid sanctions and Russia’s throttling of gas pipelines – a crisis that has already forced Germany to extend the life of its three remaining nuclear power plants.
The failure of diplomatic policy towards Moscow has also prompted much soul-searching in Germany over its choice of business partners, with questions now being raised over the wisdom of its reliance on China.
As winter closes in and demand for energy increases, Mercedes and its rivals have had to adapt to ensure they can keep production facilities such as Rastatt running.
Somewhat fortuitously, Mercedes says its decision last year to make its production carbon-neutral from this year left it well placed to respond. “We had a big advantage, because we finalised a large green energy contract for all of our factories last year,” says Jörg Burzer, the MBG board member responsible for production and supply chains. “This is a contract which focuses on wind, solar and hydroelectric power.”
Germany’s businesses and households had grown accustomed to plentiful Russian gas and oil for many years. Russia accounted for more than half of the country’s natural gas supply in 2020.
Mercedes is less dependent on these supplies than some of Germany’s energy-intensive industries, notably steelmakers, pharmaceutical companies and chemicals producers such as BASF, which said in October it would permanently “downsize” its European operations. However, the carmaker still relies on gas for certain production processes, particularly in its foundries.
Burzer says MBG was able to effectively halve its gas usage by turning off the gas power plants at its sites and by ramping up renewables. “We are very strongly focused on green energy,” he adds, “but even without the mild start to the winter we would have been well placed to get through.”
On a visit to the company’s enormous site at Sindelfingen, about 40 miles east of Rastatt, Burzer gestures out of the boardroom window at the sprawling plant where some 35,000 people are employed. “You can’t see it from here, but behind the chimney is the multistorey car park, the first one here where the roof has been completely covered with solar panels.”
This is part of the company’s “thousand roofs” programme, launched this year, which will see solar panels on factory roofs across Germany and beyond. It recently announced plans to build a 100-megawatt windfarm on its test track at Papenburg, in northern Germany, which will cover more than 15% of the company’s annual electricity needs in Germany. Details of a large planned offshore wind development will soon be unveiled, Burzer adds.
The energy shock to Europe’s industrial powerhouse has not been as extreme as initially feared: although smaller German firms have borne the brunt of soaring costs, gas storage facilities have been successfully filled before the onset of winter.
The shift in the country’s diplomatic approach has been perhaps more seismic. Putin’s war has prompted the chancellor, Olaf Scholz, to effectively break with the decades-long approach of Wandel durch Handel: the belief that social and political change in other countries can be brought about by trade.
His predecessor, Angela Merkel, has come under fire for Germany’s diplomatic failures, but refuses to criticise the decision to facilitate even greater Russian gas supplies through the controversial Nord Stream 2 gas pipeline, halted by Scholz just before the Kremlin’s troops poured into Ukraine.
There has also been outcry over the role of former Social Democrat party (SDP) chancellor Gerhard Schröder, who led the country from 1998 to 2005 before monetising his friendship with Putin through lucrative roles on the boards of Nord Stream 2 and Russian state oil company Rosneft.
Now another of the pillars of its economy is up for reassessment: its relationship with China. Germany is in the middle of a “structural shift” following the shocks of the war, the energy crisis and pandemic disruption to global trade, according to analysts, even if the business community has only belatedly started to adapt.
Carsten Brzeski, chief economist at the research arm of bank ING, believes corporate Germany has been slow to adapt by restructuring its supply chains and production processes. “There are two major shifts, one is energy,” he says. “Then there are global headwinds.”
Germany’s largest manufacturers, including Mercedes and the other carmakers, have enjoyed booming sales in China, while the country’s Mittelstand of small and medium-sized engineering companies have powered Chinese production.
China is by far Mercedes’s biggest market: it sold nearly 223,000 vehicles there in the third quarter of this year, representing 42% of its total sales in the period. Now Germany is working out how to recalibrate relations with Beijing.
The three-way agreement between the members of the country’s ruling coalition – Scholz’s SPD, the Greens and the Free Democrats – has labelled the relationship with China a “systematic rivalry”. It also refers to human rights issues and Taiwan, as well as the need for economic diversification.
Last month, accompanied by a high-powered economic delegation, Scholz was the first western leader to be granted a state visit to China since the outbreak of Covid and Xi Jinping’s moves to strengthen his power.
Back home, Scholz has come in for criticism – including from coalition partners – for pushing through a deal allowing Chinese state-owned shipping company Cosco to buy a near-25% stake in three terminals at Germany’s largest port, Hamburg, the city where he was once mayor.
“Germany needs to reinvent itself,” says Noah Barkin, an expert in Europe-China relations at US analysts Rhodium Group. “There is a realisation that Germany is too dependent on China, that its biggest companies are too reliant on the Chinese market. If you go back 10 years, that was seen as a strength, and now increasingly it’s seen as a vulnerability.”
Mercedes has full faith in its recent strategic decisions, says Burzer. “We are very closely connected to China on the product and market side, and of course we are a promoter of global trade.” These decisions include its push towards more electric vehicles and “preparing products for the future and according to market conditions in China and the US, and our ‘luxury’ strategy”, Burzer says.
“These are the correct decisions, which will also make us successful in the future.”
