Volkswagen scrapped its decades-old job guarantees at six German plants on September 11, Bloomberg and other media outlets reported. Before, Volkswagen promised no layoffs until 2029. Back in early September, Volkswagen issued a statement saying that the company was considering closing two German plants to save billions of euros in costs. When bullets are loaded and safety bolt is pulled open, the next step for Volkswagen is inevitably layoffs in Germany. As a business card of Made-in-Germany, has Volkswagen really been mired in this predicament?
“I’m a remnant from the old times. There is no ship that can bear me in the new era.”
In the first half of this year, Volkswagen sold approximately 4.35 million vehicles worldwide, slightly lower than the 4.37 million vehicles sold in the same period last year. Despite a 1.6% increase in revenue to 158.8 billion euros, operating profit decreased by 11.4% to 10.1 billion euros. In order to reverse the unfavorable situation, Volkswagen announced a cost-cutting drive last year, aiming to reduce costs by 10 billion euros by 2026.
Throughout the history of Volkswagen’s development, the Chinese market has been the biggest boost in its way to be a leading automaker. During its golden age, Volkswagen sold over 4 million vehicles annually in China, accounting for more than 40% of its global sales and ranking first in the Chinese passenger car market. However, in 2023, Volkswagen only sold over 3 million vehicles. In the second quarter of this year, Volkswagen slumped to a loss of nearly 200 million euros in China, compared to a profit of 348 million euros in the same period last year. On September 4, Oliver Blume, CEO of Volkswagen, said at a staff meeting that there will be no more checks from China.
Is it because Chinese people don’t buy cars? In 2023, global car sales reached 92.72 million units, a year-on-year increase of approximately 11.03 million units. During the same period, China’s car sales stood at 30.09 million units, a year-on-year increase of roughly 3.6 million units. Chinese people have purchased nearly 1/3 of the global increase in car sales. Then where did the Chinese checks go?
In the first half of this year, BYD won China’s best-selling car brand, while Volkswagen and Toyota, which had previously occupied the top two positions, fell to second and sixth place respectively. It is not surprising that Chinese consumers have made such a choice, as electrification and intelligence have become mainstream in the Chinese market. Volkswagen, facing difficult transition due to large size, naturally have to pay the price for their past glory.
Edward Newgate, better known as Whitebeard, lamented in the face of the changing times before his death, “I’m a remnant from the old times. There is no ship that can bear me in the new era.” This sad song was once sung for Nokia and Kodak, is it now for Volkswagen?
To be fair, Volkswagen is not without the foresight to see the arrival of a new era, as it was once among the earliest car companies to plan electric vehicle development. In just August, Volkswagen announced that it would build the world’s second largest R&D center in China to develop new pure electric models. However, not vision but courage restrains its development, as the company has unrealistic fantasies about the era of gasoline cars, neither willing to give up the dominance of internal combustion engine cars nor willing to miss the trend of electric cars. The company firmly believes that as long as there is one gasoline car in the world, it must be a German car. As long as there is a fuel car, Germans are reluctant to move out of the ancient temple. Little does it know that the larger the temple, the greater the shadow casts.
Considering the reality in Germany, if Volkswagen continues to promote electrification and intelligent transformation, the union will oppose it in order to protect the interests of traditional workers. The old suppliers will naturally not sit idly by, and the State of Lower Saxony, which owns 20% equity of Volkswagen, will also affect the board of directors. When there are too many constraining factors, Volkswagen’s transformation seems more like a struggle when drowning.
Who is the elephant in the room
Some European media believe that it is Chinese electric vehicles that have affected Volkswagen’s sales, and even the “barbarians at the gate” are responsible for the unemployment of German workers. If you read these reports, you may think that Chinese electric vehicle is the scourge of God, waving their teeth and claws to destroy all the “pride of Europe”.
But what about the fact? According to data from research firm DataMorce, in June 2024, the market share of Chinese electric vehicles in the European market had just reached 11%, which is grabbed by over ten Chinese car brands combined. In the first half of this year, Volkswagen ranked first with a market share of 20.62% in China’s mid-range car market (between RMB 200,000 and RMB 300,000). Next were Tesla and Toyota, with only one Chinese domestic carmaker in the top five.
Moreover, from 1984 to 2023, Volkswagen’s dominant position in the Chinese market lasted 40 years, during which it remained the best-selling brand in China and helped Volkswagen become one of the world’s top two carmakers in terms of sales.
According to the decision of the board of directors, Volkswagen’s goal is to achieve a profit margin of 6.5% by 2026. But in the first half of this year, this figure dropped from 3.8% of last year to a pitiful 2.3%. Therefore, in the field of production and manufacturing, when the low capacity utilization rate of factories cannot be offset by saving supplier costs, the most effective way to reduce costs is, of course, to shut down factories. The industrial capital needs a suitable excuse to escape from Germany. Why does Volkswagen leave Germany? This is the question that should be considered.
When everyone is blaming China’s electric vehicles for driving Volkswagen to a dead end with a 10% market share, no one dares to point out the real crisis facing the German automotive industry.
The average industrial electricity price in European countries ranks first in the world, with that in Germany and Italy particularly high. In September, the daily average base electricity price in Germany was 131 euros per megawatt hour, the highest level since June of this year. At present, the price of industrial electricity in Germany is about 2.5 times that of the United States, which makes it very difficult for Germany, the manufacturing powerhouse. And all of this stems from the Russia-Ukraine conflict.
Before the Russia-Ukraine conflict, 55% of Germany’s natural gas came from Russia. After the conflict, Germany cut its natural gas imports by 32.6%. In August 2022, the wholesale price of German natural gas once exceeded 300 euros per megawatt hour, which was about 7 times the price before the Russia-Ukraine conflict. As a country that is extremely dependent on natural gas imports, the German industrial sector is extremely sensitive to natural gas prices, and manufacturing is a relatively low-profit industry compared to other industries, which makes the production costs an unbearable burden for Volkswagen Group.
By using large amounts of financial subsidies, Germany finally stabilized energy prices by the end of 2023, but they are still more than 60% higher than the average price in 2019. This makes Germany, a major manufacturing country, very difficult.
After the epidemic and the conflict between Russia and Ukraine, the demand for automobiles in European countries continued to decline. In addition, the global inflation caused by the Federal Reserve’s move in 2020 has squeezed the purchasing power of European consumers. Another consequence of inflation is that central banks around the world significantly raised interest rates, increasing borrowing costs for the manufacturing industry. The continuous depreciation of the euro against the US dollar has further pushed up import costs. The rise in raw material prices, the increase in production costs for enterprises, the compression of profit margins, and the decrease in investment willingness have formed a vicious cycle. This is also the reason why Volkswagen’s sales are increasing but profits are decreasing.
Failure of Volkswagen is a failure of “Made in Germany”
As the EU introduced its greenhouse gas emission targets for 2025 and 2030, Ford and Volkswagen Group face the biggest gap with the EU’s 2025 CO2 goals. In order to avoid being fined by the EU, the German government provided a subsidy of 6,000 euros for each self-produced pure electric vehicle, which was reduced to 4,500 euros after the start of the Russia-Ukraine conflict. This expense comes from the capital redundancy provided by the federal government to deal with the COVID-19 crisis in 2021 and is classified as the “Climate and Transformation Fund” (KTF). Since 2016, a total of 2.1 million vehicles have been provided with subsidies of nearly 10 billion euros, which were originally planned to last until the end of 2024. In this way, Volkswagen can become the biggest beneficiary of subsidies.
After the German top court’s ruling last year to deplete the KTF’s budget significantly, the German government had no choice but to cancel subsidies for electric vehicles. This directly led to a 68.8% year-on-year decrease in German pure electric vehicle sales in August to only 27,024 units. In the first half of this year, Volkswagen Group’s electric car sales fell to just over 310,000 units, down 8% from last year, and there was no improvement in the second half of the year. If this trend cannot be reversed, the sales will fall by 18% compared with last year. This is one of the reasons why Volkswagen has been slow in its shift toward electrification.
The crisis for Volkswagen is also what the German manufacturing companies face. In the first half of this year, a total of 11,000 companies in Germany went bankrupt, an increase of 40% compared with the previous year and a record high in 10 years.
Data from the German Federal Statistical Office show that industrial output fell by 2.4% month-on-month in July, far lower than market expectations. Among them, the automobile manufacturing industry was even more sluggish, falling 8.1% month-on-month. The former “industrial heart” now needs “artificial bridges”. In the first half of this year, 20 German auto parts manufacturers with annual revenue of more than 10 million euros filed for bankruptcy, a year-on-year surge of more than 60%. In addition, ZF laid off 11,000-14,000 employees, Continental Group laid off 7,150 employees, and Bosch laid off 1,200 employees.
“If coffee isn’t enough to cheer you up, why not try Chinese tea”
“Energy relies heavily on Russia, economic development relies on China, and national defense security relies on the United States.” This is the Associated Press’s view of Europe. It can be said that China has played an indispensable role in Germany’s journey to becoming a major manufacturing powerhouse.
When Angela Merkel took office in 2005, Germany’s GDP growth rate was only 1.7%. However, as Merkel visited China 12 times during her 16 years in office, she became the Western leader with the most visits to China. China has become Germany’s largest export market in Asia, digesting a large number of German-made industrial products. According to data from the German Federal Statistics Office, during Merkel’s tenure and one year after leaving office, the total bilateral trade between Germany and China increased from 61.17 billion euros in 2005 to nearly 300 billion euros in 2022. China has become Germany’s most important trading partner for seven consecutive years.
Merkel has a clear understanding of Sino-German relations. She knows that the German government serves enterprises. Indeed, the government serves the people. However, enterprises provide jobs for the people and tax revenue for the government. Ultimately, the government is still to serve the enterprise.
However, the current “traffic light” ruling coalition has become a bastion of values. Although the Chinese market is an indispensable pillar of the German automobile industry, the Green Party is shouting for decoupling from China. For Annalena Baerbock and Omid Nouripour, German corporate profits can be sacrificed in the fight against a nihilistic enemy.
As the locomotive of the European economy and a former manufacturing powerhouse, Germany is now also facing the risk of “deindustrialization.” In the past five years, the proportion of manufacturing in Germany’s GDP has dropped from 23.4% to 22.0%, and the total output value has also dropped from 2.0 trillion euros to 1.90 trillion euros. The IFO Institute, an authoritative German economic research institution, has significantly lowered its future forecast for the German economy, lowering its economic growth forecast for 2024 from 0.4% to zero, and its forecast for 2025 has also been revised down from 1.5% to 0.9%. The Kiel Institute for World Economics is even more pessimistic, predicting that German GDP will shrink by 0.1% this year.
From this perspective, Volkswagen’s closure of the factory seems more like a gesture by the German capitalists: Volkswagen is a loyal company that has never closed its factories for more than 80 years, but they have lost confidence in the current German government and future governments. The company is tired of paying for the rhetoric of politicians.
Therefore, Volkswagen and BMW have successively invested in China, and Mercedes-Benz has also announced that it will invest more than RMB 14 billion in China with its partners. Data released by the Bundesbank show that German direct investment in China continues to rise this year, with the total amount reaching nearly 7.3 billion euros in the first half of this year. The core purpose of this seemingly fragmented move is only one: to abandon the burden, make new bets, and keep the company alive.
At the 2024 Annual Meeting of the World Economic Forum in Davos at the beginning of this year, German Finance Minister Lindner did not think that Germany was the “sick man of Europe” and said that Germans were just a little tired and wanted to drink a cup of coffee. But if coffee isn’t enough to cheer you up, why not try a cup of Chinese tea.