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Q&A: IAA organizer discusses the state of the industry

Frankfurt/Main. The week before the 60th International Automobile Show IAA opens its doors in Frankfurt Bernd Gottschalk, president of the Association of the Automobile Industry (VDA) which organizes the IAA, talks about the hopes the industry is pinning on this year's IAA to kick-start a recovery.

Q: Mr. Gottschalk, many automotive managers place all their hopes in the 2003 IAA. What are your expectations for the show?

A: Every IAA in Frankfurt is an important exhibition to the VDA. However, this year the tension is very high: manufacturers, suppliers, dealers and the VDA associate the IAA 2003 with the hope for a long due impetus for the revival of the economic situation of the auto industry.

Q: Where does your optimism originate from? Most economists and analysts of the automotive industry have not yet noticed any convincing signs that there will be an economic upswing.

A: I also warned to be cautious when the quite encouraging number of new registrations in July 2003 was analyzed. A slight increase during one month should not be overrated. It neither means that there has been a new boost nor is it the prelude to an independent upswing within the automotive industry. However, what makes me optimistic regarding the IAA in Frankfurt are the novelties in the important high volume segment, such as for example with the Golf V by VW and the Opel Astra. On top of that the average age of the German automobile population is so old now that a renewal becomes increasingly necessary.

Q: Nevertheless many people interested in buying new cars are still holding back.

A: There is a high number of consumers saving their money. It is a sign that consumers are still very insecure and the continuous discussions over tax increases do not support them in gaining a more positive outlook. However, we believe that this year's IAA with its 60 world premieres will give the market new impetus. Nevertheless it will take some time until customers' inclination to buy will have an effect on production, despite the fact that original equipment manufacturers (OEMs) are hoping for a fast startup for their new models. I am also positive that in 2003 we will reach the forecast total of approximately 3.25 million new registrations. 2004 will be better.

Q: What is your forecast for 2003 regarding benchmark figures?

A: I believe that in regard to German manufacturing locations we will get close to five million. Export - which, despite the general trend, has increased - plays a big part here. We will most probably slightly exceed the forecast number of 3.55 million exported cars. German brands are also doing remarkably well in North America.

Q: In the USA many brands use a lot of incentives to promote new cars. Could financial purchasing incentives be a solution for the difficult situation in the German market?

A: No. They don't solve anything, neither there nor here in Germany. In the end no one profits from incentives, not even the customer as his car will lose much of its resale value. Such buying incentives are like a drug - and "no power to drugs" is also an important saying regarding the purchase of cars. I am glad that we have not had such a high number of discount campaigns as they have in the USA. Nonetheless it does worry me to see that some are making similar attempts in Germany. Sweet poison is no better than ordinary poison.

Q: And what about German OEMs' ability to make innovations? Japanese competitors for example have had a high increase in patent applications. Is there a danger that Germany might lose its pole position regarding engineering?

A: This mustn't happen and it won't happen. German manufacturers and their dealers know that they can only keep their competitive advantages through top technologies that customers can relate to. The number of German patent applications is twice as high as that of Japanese manufacturers. And we are also far ahead of the Americans. Last year the German automobile industry spent 15 billion euros on research and design engineering - more than three times as much as in 1990. This development is not a coincidence but is based on a very clear strategy...

Q: ...which an increasing number of international competitors meanwhile also pursue.

A: Of course, we have to constantly fight for our lead. Competition is becoming tougher. On individual sectors there is without doubt an increasing competition regarding the lead in engineering.

Q: Many surveyors of the industry worry about the decrease in productivity in comparison to global standards.

A: German manufacturers have undisputedly improved in regard to important vehicle engineering and production processes. The number of vehicles built per employee is not representative. This very simplistic key data does not take into account if simple vehicles or highly complex premium limousines are manufactured.

Q: The vertical integration of German OEMs has fallen from an average of 35 percent at the beginning of the eighties to less than 25 percent. Is that not a worrying trend?

A: Most German suppliers nowadays have a wider production range than ever. Nevertheless, some OEMs have realized that they have reached the limit. This is also about OEMs' core competencies. The system wouldn't work if OEMs didn't do anything but assemble the components. During the last three years vertical integration has not fallen any further but remained stable at 25 percent - an indication that many companies are starting to change their views.

Q: There has probably also been a change of view in regard to lowering gasoline consumption. Since the introduction of VW's three liter Lupo there hasn't been much talk about the subject. Are fuel prices still too low?

A: You can't be serious (laughs). Since the beginning of 1999, before the introduction of the eco tax, fuel prices have risen by nearly 40 percent. More than two thirds of the increase are due to higher taxes. And for more than three years the demand in Germany has been low. That is no coincidence. Our reaction to the situation was to build cars with lower fuel consumption. A third of all new vehicles use a maximum of six liters of fuel per hundred kilometers. Twice as many as in 1998. With the three liter car the industry demonstrated that it is able to design such an ambitious product. So far none of the international competitors have managed to follow in our footsteps.

Q: Why should they? Most people who are interested can't afford it anyway.

A: Those vehicles are technology leaders: they not only have low consumption but are also comfortable and have high safety standards. New materials and technologies to reduce fuel consumption are expensive. And one can not engineer vehicles solely based on Greenpeace or the Ministry of the Environment's demands.

Q: Porsche Carrera GT, Mercedes SLR, Bugatti - how does the German industry plan to comply with its voluntary commitment to reduce exhaust emissions if it constantly develops new vehicles that use a lot of gasoline?

A: In regard to the planned reduction of fuel consumption by 25 percent by 2005 so far everything is going well according to plan, as we have already reduced consumption by 20 percent. Of course, any further reduction will become technically increasingly difficult and therefore more expensive. Despite all that we will reach our target. And to tell you the truth all those Lamborghinis, Bentleys and Rolls-Royces are no more than flag bearers for German engineering efficiency. There are so few of them that they don't have any impact on the total fuel consumption whatsoever.

Q: Key word diesel particle filters. Why has the German industry "decelerated" the process for such a long time instead of striving for the technological leadership?

A: Wait for a few more days. There will be a wide range of new quality filters exhibited at the IAA. And what is wrong with the fact that German OEMs were not satisfied with the filter technologies that have been used to far and which don't even comply with the Euro-4 norm? We want filter systems that work without the use of additives, have a longer life expectancy and that regenerate themselves instead of being exchanged ever so often. Customer friendly engineering needs its time.

Q: Looking at the public discussions about soot filters the general impression was that the industry didn't want to touch on the subject while it was still in development.

A: Had we started to work on the subject no earlier than when the environmental activists started to demand solutions from us we would not be able to show such advanced technologies at the IAA in Frankfurt. The German industry takes such reproach with composure. We have never refused to work on the subject of filters and neither will we in future. Particularly as our companies are worldwide leaders regarding diesel engines - just think of common-rail or piezoelectric technologies. Neither will we refrain from discussing the exhaust emission Euro-5 norm from 2010 with politicians. However, one thing needs to be understood: you can't find better solutions on the push of a button and we also have to receive a return on the investments made for Euro-4.

Q: Recent polls regarding the reliability of cars and service quality show that manufacturers from the Far East often get better marks than German providers. Does this annoy you?

A: I can assure you that we take such research very serious. German corporations know very well that they cannot rely on certain image advantages. That is why they work very hard on optimizing the running of their companies and on integrating suppliers, dealers and repair shops even further. You also have to bear in mind that buyers of German produced cars also have higher expectations for their vehicles...

Q: ...as they also paid more for their autos than they would have paid for most cars from other countries.

A: The price difference is not so crucial. With our premium brands customers receive the most modern innovations as we are ahead of our competitors, who cannot offer those innovations until later. Many of those innovations are related to electronics. That is something that - in the customers' best interest - we cannot dispense with. They are primarily safety and comfort features, which make the cars safer and better. Regarding the susceptibility to faults we are striving for a reduction to zero. Everyone is working very hard on that.

Q: What does the automotive industry make of the expansion of the European Union to include East European countries?

A: There are two sides to the coin. On one hand it will open new markets to the industry with big opportunities for quality and quantity related growth. On the other hand the already extremely high number of East European factories run by German companies shows that their cost effectiveness and meanwhile also engineering know-how are undeniable.

Q: What is the VDA looking for in terms of guarantees regarding redundancies?

A: We don't think much of "protectionism demands." Competition can sometimes be tough and difficult but that is widely being accepted. What we definitely need is a major reform of the job market. We need more flexibility regarding working hours and even more consideration of company specific and region specific peculiarities. Why for example does every kitchen and service area within an automobile corporation have to be paid for according to IG-Metall tariffs?

Q: An increasing number of young people cannot find an apprenticeship. What could the German automotive industry do about that?

A: In comparison to other sectors the automotive industry has already reached a high number of apprentices, with just above 5 percent of the total number of employees. The number is particularly high in Eastern Germany. The training and also further education of qualified staff is a key to maintaining our competitiveness. In a recent appeal to all its members the VDA has expressed the need for this.

Q: Lets return to the subject of the IAA: many companies are not taking part in 2003 due to the costs involved. Will you have to reduce your prices in future?

A: It is not a matter of "many companies" not taking part, it is only a few. That doesn't have any effect on the quality of the exhibition. It is important to us to emphasize the IAA's core area of competence, which is the whole value-added chain in the automotive industry. Despite the current economic situation we expect a total of 850,000 visitors. Two years ago we had 812,000.

Q: I repeat my question: will the prices for IAA exhibitors fall?

A: The rents for stands have remained reasonable - and in future will continue to be reasonable. The IAA has its price.

Q: Are other cities being considered as a venue for the automobile IAA, such as Berlin or Hanover?

A: This current discussion about the location is the best proof for how attractive the IAA is. We are bound by contract to have Frankfurt as our location until 2005.

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