The German automotive industry could have bottomed out, so believes the country's car association Verband der Automobilindustrie (VDA). However, as explained in the Q409 Germany Autos Report, the artificially inflated domestic demand in 2009 increases our concerns that the market may see a significant fall next year. In fact, the VDA forecasts passenger car sales to plunge to a record low of 2.6mn units in 2010.

The car-buying frenzy in Germany continued in H109 when passenger car sales reached 2.06mn units, up 26% year-on-year (y-o-y), according to VDA estimates. However, the increase, which was primarily supported by the government scrappage scheme, has skewed market demand in favour of smaller and compact vehicles, while the commercial vehicle segment continued to bear the brunt of lower economic activity due to the downturn. Therefore, sales of commercial vehicles plunged by a staggering 29% y-oy, to 120,700 units in H109. With the passenger car segment accounting for a significant proportion of the industry's total sales, the report limits its end of year sales forecast to 3.8mn units, up nearly 10% y-o-y.

For 2010, however, although we expect some recovery in the commercial vehicle sales, the fall in the passenger car market will act as a drag on overall sales taking end of year sales down 20% y-o-y.

In H109, total production fell 24% y-o-y, to 2.03mn units. Going forward, German carmakers are likely to be scrambled between the dynamics of domestic and export demand, by end-2009 and in 2010. The fall in overseas demand is likely to take production down to 5.13mn units in 2009, 15% lower than in 2008. While external demand could begin looking up thereafter, the slump in domestic demand will mean that carmakers could produce 5% fewer vehicles, to 4.9mn units, y-o-y in 2010, according to BMI forecasts. Although we expect gradual and positive growth from 2011, it could be 2013 before the market returns to its pre-crisis level.

Meanwhile, the economic downturn also comes as a tough test for the industry participants, most of whom have earned reputations as well-established brands in the global auto industry. However, a major shake-up in the form of changed ownership and/or alliances could change the competitive landscape of the industry.

The crisis has accelerated the merger between Volkswagen (VW) and Porsche, while the future of Opel, one of industry's major players, remains undecided despite the emergence of its parent General Motors Company (GM) from bankruptcy.

Nevertheless, the strength of the German market comfortably helped it to seal its position as the leader in the Business Environment Rankings for the autos industry in Europe, reducing the likelihood of Russia becoming the largest automotive market in the region in the near future.