Car alarms are sounding all over Germany this week after warnings from Volkswagen (VW) that, without radical reform, Europe’s largest car maker has “at most two years” left.
At an emotional meeting attended by 25,000 workers at its Wolfsburg headquarters, VW managers said its six plants in Germany have a combined capacity to produce 500,000 cars more than it is selling. In other words: VW has two factories too many. Job cuts – even factory closures – are likely unless €10 billion in cuts can be secured elsewhere.
“This has nothing to do with our products or poor performance in production, the market is simply no longer there,” said Mr Arno Antlitz, VW group chief financial officer. “We’re spending more money than we are making, and for some time now.”
It is an understatement to say modern Germany’s economy is dependent on its automobile industry. Some claim the automobile industry is the German economy. With annual sales of about €500 billion, the big auto companies contribute every fifth tax euro to Germany’s coffers and, in some regions, employ up to 8 per cent of the local workforce.
VW’s gloomy fortunes, everyone here agrees, are a reflection of struggling German economy.
After two years slipping in and out of recession – and more flatlining forecast this week for 2025 – Germany’s leading Frankfurter Allgemeine daily warned that the VW crisis “reflects the situation in large sections of Germany’s industrial sector”. The centre-left Süddeutsche Zeitung agreed, calling the VW crisis a “wake-up call for Germany”.
The problem at VW is not its products or its employees, union bosses shouted at the podium, but managers with Kaiser Wilhelm-like powers of predicting the future
If so, experts say, Germany Inc has been hitting snooze for too long on a growing pile of problems.
Some claim Germany has always had a weakness for magical thinking about its current problems and future prospects, particularly when it comes to its mobility sector.
Around 1900, Kaiser Wilhelm II reportedly declared: “I believe in the horse. The motorcar is a passing fad.”
His allergic reaction to the new vehicles clogging up Berlin streets is disputed among historians – but none of them question how quickly the kaiser went the way of his beloved horses.
A century later, with a perfect dramatic timing, Volkswagen’s problems – past and present – collided to present an uncertain future.
In Braunschweig, former chief executive Martin Winterkorn shuffled into court to face fraud charges over the diesel fraud scam exposed in 2015. At the same time, half an hour away in VW’s Wolfsburg headquarters, managers faced down heckling VW workers.
The problem at VW is not its products or its employees, union bosses shouted at the podium, but managers with Kaiser Wilhelm-like powers of predicting the future. Like VW’s last chief executive, Herbert Diess.
In 2018, three years after Dieselgate, Mr Diess told Stern magazine: “I wouldn’t write off diesel anytime soon.” Two years later Mr Diess – annual salary, excluding bonuses, of €9.9 million – announced he was writing off diesel after all, and betting the farm on electric cars.
“It’s better to help shape change now than to chase after developments,” he announced, as VW chased after developments.
Developments such as Tesla’s factory outside Berlin. It opened in March 2022, after just 22 months of construction, and produces 500,000 vehicles annually – with further expansion plans looming.
Developments such as China. It overtook Japan last year with five million cars exported and is on an aggressive campaign to drive sales by boosting visibility with glossy showrooms in all big German cities – including Mercedes and BMW home turf of Stuttgart and Munich.
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Developments such as production costs. German industrial production costs of about €46 an hour compare unfavourably to half that in the neighbouring Czech Republic, home of VW’s Skoda brand.
Last year Germans bought 519,100 Volkswagen brand cars, down 12 per cent on a decade ago, while sales of its cheaper Skoda models were up 6 per cent in the same period.
As VW managers dropped their bombshells this week, Germany’s powerful IG Metall – a force to be reckoned with in Wolfsburg – hit back quickly.
Union chiefs see a pre-emptive management move in looming pay talks, where they are seeking an extra 7 per cent for their members.
Union-backed members of the VW works council pointed out this week how, a decade ago, they presented management with a 400-page folder filled with ideas – gathered by VW employees – to save €5 billion annually. None was implemented by management in the decade since, they say, and now the annual savings requirement has doubled.
A €10 billion cost-cutting programme began last year but union representatives say “madness” persists in production, thanks to redundant bureaucracy and safety checks.
Car analysts dispute VW’s analysis that “the market is simply no longer there”, suggesting the car company is no longer where the market is.
After a late embrace of e-mobility, VW has been under pressure to catch up – and has made some progress. Sales figures for the year to July in Germany show VW’s ID3 and ID4 electric cars, taken together, now outsell Tesla’s popular Model Y; add in Skoda and Audi and VW group electric cars in its home market are outselling the Model Y by 2.5:1.
But VW remains saddled with a legacy business model and higher costs. Its e-auto production software is already considered out of date while problems at its in-car software division has caused huge delays in VW, Audi and Porsche roll-outs.
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A decade after Dieselgate, economist Marcel Fratzscher sees the latest VW crisis as home-made. Its protracted denial of the electro-mobility era has come home to roost – particularly in its largest market.
“VW is far too dependent on China, where it earns 40 per cent of its revenues,” said Prof Fratzscher of Berlin’s DIW economic institute.
That fixation has come at a cost, as Chinese customers embrace domestic brands or hold off on a purchase altogether.
VW is in good company with negative headlines. Almost every other German blue chip company – ThyssenKrupp, Miele, Continental, Bosch, Deutsche Bank and SAP – has announced significant job cuts, often paired with production transfers abroad
A 7 per cent slide in China sales has hit VW’s bottom line badly, with group operating profit down 11.4 per cent to €10.1 billion.
“VW has little to offer the Chinese in the low-cost segment, the Chinese make those vehicles themselves,” said Prof Jens Südekum of the University of Düsseldorf, and an adviser to the federal economic ministry. “What we are looking at here, though, is a structural question about [the future of] Germany’s industrial base.”
VW is in good company with negative headlines. Almost every other German blue chip company – ThyssenKrupp, Miele, Continental, Bosch, Deutsche Bank and SAP – has announced significant job cuts, often paired with production transfers abroad.
Rounding out a grim week, two leading German economic institutes lowered their economic forecasts for 2025 to 0.4-0.5 per cent.
Munich’s IFO links the slump in investment and production to Germany’s high energy costs, lingering pandemic effects and China’s shifting role in the global economy.
Other analysts lay some of the blame with Chancellor Olaf Scholz in Berlin, where his bickering sends mixed signals over public investment and budget austerity. Nine months after abolishing electric car subsidies, Berlin rolled out new tax subsidies this week for electric company cars.
Similar to the IFO, the Kiel Institute (IfW) presented a negative economic outlook this week, pointing the finger firmly at German companies’ boom-era complacency.
“Old core industries have been resistant to change for far too long,” said Prof Moritz Schularick, IfW president. “As long as this remains the case, we will watch our growth opportunities dwindle.”
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