Scholz Is Learning That It’s Not Easy Going Green

(Bloomberg) --

In the shadow of the decaying Ensdorf coal plant, Olaf Scholz met with businesses and political leaders on Wednesday to celebrate the site’s future as a chipmaking factory for electric vehicles. It was a promising sign for the German chancellor after a hectic week of pitching Europe’s economic powerhouse as it pivots away from energy-intensive old technologies.  

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“The fact that the good old days are gone doesn’t mean that the good new days can’t begin,” Scholz said at the event, which marked a $3 billion deal between auto supplier ZF Friedrichshafen and American semiconductor maker Wolfspeed Inc.

The windswept site in Germany’s tiny western Saarland region is, literally, half a world away from the South American capitals the 64-year-old toured just earlier this week. On Sunday, Scholz was in Buenos Aires, Argentina, securing access to that country’s hydrogen resources. On Monday, he was in Santiago, Chile, negotiating lithium supply for German industry. Later that day he was in Brazil, unveiling a €200 million environmental package with money earmarked for renewable energy initiatives. On all these stops, the underlying message to corporate Germany and the wider world was the same: Berlin is open for business.

During the long Angela Merkel years, companies like Mercedes-Benz AG and Volkswagen AG were free to mint fortunes in China, and BASF SE and Uniper SE profited from cheap Russian energy. Those boom times are over. Russia’s invasion of Ukraine forced Moscow’s most reliable oil and gas customer to search for supply elsewhere. The realization that Germany’s automotive industry is too reliant on Taiwan for chips and Chinese suppliers for battery materials prompted Berlin to make moves to reduce its exposure. Under Scholz’s stewardship, German industry is struggling to find new technologies and trade partners to provide the backbone for the coming green transformation.  

Herbert Diess, CEO of Volkswagen AG, and Scholz, during a ceremony for the SalzGiga fuel cell gigafactory.Photographer: Krisztian Bocsi/Bloomberg

Scholz needs private sector investment to help him wean the country off coal, gas and nuclear power, which means selling Germany as the destination for next-generation companies. Making matters more complicated, he has to do this while navigating the red tape of EU subsidy restrictions and Germany’s own considerable bureaucracy, and while selling a pandemic and war-weary public on an unpopular truth – the transition to a greener, cleaner world won’t happen without some loss of prosperity.

Read also: How Will Higher Energy Prices Affect German Industry?

For industry, the writing is already on the wall. Hard hit by the energy crisis, chemical makers such as BASF and Lanxess are starting to relocate the production of certain chemicals, meaning that future investments – and related jobs – are also more likely to go abroad. And having dragged their feet early on in the transition to green energy, German carmakers like Volkswagen and BMW now risk losing their status as global leaders. The US Inflation Reduction Act, a $369 billion measure passed last August to overhaul the American energy ecosystem, created additional challenges. 

“If you go back a year, we said, let’s build up Europe first and then go to North America,” Northvolt CEO Peter Carlsson said on Friday in response to a question about the Swedish battery maker’s plans to build a new factory in Germany. “And then the IRA came. It became pretty much impossible to compete in North America unless you build up your manufacturing and your supply chain there.”

To meet these challenges, and get the German economy running entirely on green electricity by 2035, the chancellor has thrown his full support behind what he calls the new industrial revolution. That entails investing €6.6 billion to speed up the construction of electric car charging stations, and spending more than €10 billion on a clean-energy subsidy program. The hope is that this federal largesse – along with measures to cut taxes and red tape – will uncork billions of euros in private investment on everything from electric vehicles to wind turbines to solar panel modules. 

“It will be decided this year whether the German government will achieve the expansion targets it has set for itself,” said Simone Peter, Chairwoman of the Renewables Association BEE. 

A street-side electric vehicle charging station during its installation in Frankfurt.Photographer: Alex Kraus/Bloomberg

It’s early days in Germany’s green transition, but there have already been some wins. In addition to the Saarland project, Tesla’s Brandenburg factory, approved under Merkel, came online last year, and home-grown companies are also benefiting from Scholz’s subsidies. One is steel giant Salzgitter AG, which is seeking to halve its emissions by 2030 by producing less carbon-intensive steel – a plan the government has supported with over €1 billion in subsidies. 

The company had “very, very carefully” analyzed whether it would have been more profitable to move certain operations outside of Germany, said program leader Martin Zappe, and ultimately decided against it. “It is a cost game, and that led to the decision being made in favor of Salzgitter,” he said in a recent panel discussion.

A wind turbine and hydrogen plant that is part of the Salzgitter Low CO2 Steelmaking green steel project.Photographer: Krisztian Bocsi/Bloomberg

Of course, Germany isn’t the only country vying for a top spot in the coming green economy, and competition is stiff. This was on display on Tuesday, when Economy Minister Robert Habeck, who is currently in talks with chip producers Intel and TSMC about building new factories in Magdeburg and Dresden, appeared on a talk show to discuss ongoing negotiations with Northvolt about building an electric vehicle battery factory in Schleswig-Holstein.

The deal had been approaching the finish line, Habeck said, until the IRA was passed and threatened to upend it. Discussions resumed after Germany doubled down on its efforts, but the incident demonstrated to extent to which the government is at the mercy of corporate interests. “I can’t promise that they’ll come [to Germany],” Habeck told viewers. “But you see how hard we’re working to create competitive conditions here.”

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