Key Takeaways
Europe’s top carmaker, Volkswagen, is considering closing factories for the first time in its history because electric vehicles from China are reducing its market, and energy costs are rising with Germany’s energy transition.
Cost-cutting drives are planned to trim costs by $11 billion over the next 2 years, but these appear insufficient, so factory closures are on the table.
Because of organized labor’s significant management role in the company, labor strife is expected as Volkswagen adjusts to the EV future being driven by governments in Europe.
The same pressures exist in the United States, where Ford is losing $44,000 per electric vehicle while trying to comply with the Biden-Harris administration’s policies and regulations, and other automakers are also struggling.
China’s ownership of the world product value chain for electric vehicles is substantial, far exceeding OPEC’s collective share of the world market for oil.
Volkswagen, the leading automaker in Europe, is contemplating an unprecedented closure of its factories in Germany due to increasing price pressures from Asian competitors and the high costs associated with transitioning to all-electric vehicles. As VW, which constitutes the bulk of Volkswagen’s sales, embarks on a significant cost-reduction initiative aimed at saving 10 billion euros ($11 billion) by 2026—primarily through attrition-based job cuts—the company finds that these measures alone are not enough. Consequently, VW is now evaluating the possibility of shutting down a major vehicle plant and a component factory in Germany, which it deems outdated. This potential move has triggered a strong backlash from the works council, which has pledged “fierce resistance” against the executive board’s proposals. Factories in Osnabrueck, Lower Saxony, and Dresden, Saxony, are among the sites under consideration for closure.
Volkswagen, which employs about 680,000 people, has also announced the termination of its job security program, in place since 1994, which guaranteed employment until 2029. The company emphasized that all potential changes would be discussed with the works council. Volkswagen brand chief Thomas Schaefer commented, “The situation is extremely tense and cannot be resolved through mere cost-cutting measures.” This decision may lead to a conflict with Volkswagen’s labor unions.
Volkswagen attributes the potential closures to a challenging economic climate, new competition in Europe, and diminishing competitiveness in the German economy. Over the past five years, the company has seen its value decline by nearly a third, making it the poorest performer among major European car manufacturers. It faces numerous challenges in Europe, the United States, and particularly in China, where domestic electric vehicle (EV) manufacturers like BYD are capturing market share. China’s dominance in the global EV supply chain is substantial, far surpassing OPEC’s share of the global oil market, which poses a formidable challenge for competitors.
Volkswagen has lost more stock value than any major competitor over the past two years as a result of years of economic stagnation and structural change without growth. Some believe that its management has made “many wrong decisions” in recent years, including not investing in hybrids or being faster at developing affordable battery-electric cars.
The automaker owns 10 brands, including VW, Audi, Porsche and Lamborghini. It has faced falling sales, amid decreased demand in Europe, especially for its electric vehicles. And Volkswagen’s share of the Chinese market, its largest market, has shrunk as domestic rivals have produced affordable electric cars. Despite plans by the European Union to introduce tariffs on imports of electric cars from China, those competitors are expanding into Europe.
The German economy, Europe’s largest, contracted in the months from April to June, shrinking 0.1 percent from a year earlier. The figures dampened hopes that the country might be pulling out of stagnation, which is driven by high energy and labor costs. Germany has some of the highest electricity prices in Europe because of its green transition plans.
For Volkswagen, closing its German factories would mark a historic first since its founding in Wolfsburg in 1937. However, such closures and the end of the job security agreement face strong opposition from union leaders and workers’ representatives, who hold half the seats on the company’s supervisory board. Unions are preparing for wage negotiations set to begin this fall, with nearly half of Volkswagen’s global workforce based in Germany.
Volkswagen is Not Alone
The automotive industry in Western nations is working to boost efficiency and cut costs to stay competitive against the lower-priced electric vehicles from China. China’s dominance in the EV battery supply chain and the processing of crucial minerals for electric vehicles allows it to price its products substantially lower than those from Western manufacturers. In response, Western countries are raising tariffs on Chinese-made electric vehicles to shield their domestic auto industries, pushing Chinese companies to set up production facilities in Western markets. While Chinese-made vehicles have yet to significantly impact the U.S. market, they have already secured over 20 percent of Europe’s EV market share.
General Motors is cutting over 1,000 salaried positions globally within its software and services division as part of its strategy to streamline operations. These layoffs represent about 1.3 percent of the company’s global salaried workforce of 76,000, which includes roughly 53,000 U.S. employees. The reductions involve around 600 positions at GM’s technology campus near Detroit. Automakers are making cost cuts and reducing staff amid fears of a downturn in the industry, while investing heavily in emerging sectors such as electric vehicles. In the U.S., the shift towards electric vehicles is driven by the Biden-Harris administration’s regulations on tailpipe emissions and efficiency standards, which manufacturers must comply with or face substantial fines.
Stellantis, the owner of brands like Chrysler, Ram, Jeep, and Dodge, plans to lay off 2,450 workers in the U.S. due to the discontinuation of the older generation Ram 1500 pickup. However, the new version of the vehicle will remain in production. Stellantis is also revising other parts of its lineup, with the Dodge division ceasing production of the gasoline-powered versions of its well-known Challenger and Charger models.
The automotive sector is grappling with ongoing challenges as it transitions to electric vehicles, which, despite being viewed as the future, are currently not achieving strong sales. At the same time, major automakers must decide which profitable gasoline-powered models to retain. Ford, for example, is shifting its focus toward hybrids in a major overhaul of its electric vehicle strategy. The company recently abandoned plans for a large electric SUV due to market conditions and is grappling with losses of around $44,000 per electric vehicle sold, while seeking ways to cut costs.
Conclusion
For the first time in its 87-year history, Volkswagen is considering shuttering factories in Germany, citing the need to remain competitive. The decision “shakes the foundation” of Volkswagen, which is Germany’s largest industrial employer and Europe’s top carmaker by revenue. As one critic put it, “If such an industrial heavyweight has to close factories, it may be the long overdue wake-up call that (Germany’s) economic policy measures need to be stepped up considerably.”
But Volkswagen is not alone as other car makers are suffering too. Western nations are pushing auto makers into electric vehicles to meet their climate goals, without adherence to what needs to be an orderly transition. While electric vehicles sales are increasing, they are no longer increasing at a rate that meets Western politicians’ demands. Those politicians have set regulations and mandates to purge gasoline and diesel vehicles from personal transportation options that consumers do not want. That may mean that the auto industry may need to be rescued again in the future.
