Volkswagen Considers Closing Factories In Germany – CleanTechnica

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Volkswagen dropped a bombshell on the German economy over the weekend. According to Bloomberg, it is considering closing some factories in Germany for the first time in its 87-year history, a move that risks a feud with unions. If it decides to do so, it will expose the deep woes roiling Europe’s auto industry. After years of ignoring overcapacity and slumping competitiveness, the German auto giant’s moves are likely to kick off a broader reckoning in the industry. The reasons are clear — Europe’s efforts to compete with Chinese rivals and Tesla in electric cars are faltering. The proposed factory closures are intended to save the company about $10 billion in the near future.

Volkswagen employs nearly 700,000 people worldwide, which means any significant changes to its business will have ripple effects on several national economies and many individual workers. Oliver Blume, the CEO of Volkswagen Group, kicked off talk of factory closures when he said recently, “The European automotive industry is in a very demanding and serious situation. The economic environment became even tougher, and new competitors are entering the European market. In addition, Germany in particular as a manufacturing location is falling further behind in terms of competitiveness. In this environment, we as a company must now act decisively.”

The Guardian reports that Volkswagen may also cancel its plans for a compact electric SUV that was meant to secure production at the company’s main factory in Wolfsburg from 2026 onward, and the Trinity models planned for production in Zwickau. Thomas Schäfer, the chief executive of the Volkswagen brand, said “Plant closures at vehicle production and component sites can no longer be ruled out.”

Volkswagen Confronts Its Unions

Unions are a powerful force in the German economy, Daniela Cavallo, the head of the works council at Volkswagen, said it would mount “fierce resistance” to the proposed closures and accused the company’s board of directors of failing in its duty to manage the company effectively. “With us, there will be no site closures,” she said. “Instead of making one sided savings at the expense of the workforce, we now need a strategic boost for the actual weaknesses: product, complexity, processes, synergies. That is the plan we need. What is ultimately at stake is the future viability of industry in this country and a corresponding knock-on effect. We will not allow VW to sell out Germany as a business location.”

Carvallo said in an interview on Volkswagen’s intranet that its management had made “many wrong decisions” in recent years, including not investing in hybrids or being faster at developing affordable battery-electric cars. Instead of plant closures, the board of directors should be focused on reducing complexity and taking advantage of synergies across the entire Volkswagen group, Cavallo claimed.

Thorsten Gröger, a lead negotiator for the IG Metall union at Volkswagen, said it was an “irresponsible plan that shakes the foundations of Volkswagen and poses a massive threat to jobs and sites. This course is not only shortsighted, but highly dangerous. It risks destroying the heart of Volkswagen.” He promised the union would fight vigorously to protect the jobs of its members.

Political Considerations For Volkswagen & Germany

Reuters says the new Volkswagen plans are the latest blow to German Chancellor Olaf Scholz, whose three-way coalition government was slammed in regional votes on Sunday that saw the far right Alternative for Germany party top the poll in one state and come second in Saxony. Carsten Brzeski, global head of macro at ING Research, said the decision highlighted the consequences of years of economic stagnation and structural change without growth. “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.”

After years of ignoring overcapacity and slumping competitiveness, the announcement by Volkswagen is likely to kick off a broader reckoning in the industry, Bloomberg says. “VW is recognizing just how serious the situation is,” said Harald Hendrikse, an auto analyst with Citigroup. “We’re living in a difficult geopolitical world, and Europe has not won that battle.”

With car sales still nearly a fifth lower than pre-pandemic levels in Europe, manufacturers including VW, Stellantis NV, and Renault SA were operating more than 30 factories at levels analysts consider unprofitable, according to data from Just Auto. That includes Volkswagen’s sprawling home factory in Wolfsburg, the largest automobile assembly plant in Europe. The continent is uniquely exposed to the twilight of the combustion era. The massive investments required to compete in electric cars, the loss of cheap Russian energy, and dwindling prospects in China mean those days are coming to an end.

Warning Sign For Manufacturing

Troubling signs have been on the rise. Volkswagen’s shares are near the lows reached in the aftermath of the 2015 diesel crisis. In July, the group cut its outlook for the year after sales declined in the first half. Spending on new models pushed automotive net cash flow into negative territory as compared with a positive €2.5 billion ($2.8 billion) a year earlier. Margins for volume brands, including the namesake Volkswagen brand, have narrowed, while profitability of the Volkswagen Group has gotten worse. Just recently, Audi announced it was closing its factory in Belgium and moving production back to Germany to cut costs.

Pushed by a slowdown in the pace of EV adoption, Renault CEO Luca de Meo — a former Fiat and VW executive — has advocated for an alliance that would pool assets across Europe. The plan would be similar to the way Airbus was created to make European aircraft manufacturers competitive with Boeing. But timing for such strategic initiatives looks to be running short. “If even VW mulls closing factories in Germany, given how hard that process will be, it means the seas have gotten very rough,” said Pierre-Olivier Essig, a London based equities analyst at AIR Capital. “The situation is very alarming.”

A key part of Germany’s postwar economic miracle, Volkswagen was on an expansion course for decades, buying Skoda in the Czech Republic, Bentley in the UK, and Lamborghini in Italy among its 10 brands across five European countries. After the diesel cheating scandal in 2015, it responded with aggressive investments into electric vehicles, but those investments haven’t paid off. China was once the company’s largest market, but Volkswagen has been losing market share in that country recently as more Chinese manufacturers are bringing more electric cars to market than ever before. Volkswagen and other German manufacturers such as Mercedes and BMW just aren’t able to keep up with the fast pace of development in China’s automotive marketplace.

Much of the success of Chinese brands is based on the extraordinary new technologies available from a multitude of local manufacturers. As Larry Elliott, the economics editor for The Guardian, wrote recently, “Germany is an analog country in a digital world.” Bernd Westphal, an economic policy adviser for Germnay’s Social Democrats and chancellor Olaf Scholz said, “I am deeply concerned” about VW’s plans. “Despite all understanding for the challenges facing the automotive industry, plant closures and job cuts are not a convincing strategy.”

The Takeaway

Is it possible we are seeing the beginning of a massive economic transformation, one that severely impacts legacy automakers around the world? If so, the livelihoods of millions of workers are on the line, as well as the economies of several nations. We can be forgiven for thinking that Tesla was the change agent driving all this, but in fact China was the biggest disrupting influence of all. While conventional wisdom said that Western automakers would tap vast new markets in China, what they did in essence was sow the seeds of their own destruction by teaching the Chinese how to build cars more cheaply than ever before.

Today, a car — any car — can be manufactured in China for less than half what it costs to do so in America or Europe. That sort of economic advantage will smash through any trade barriers erected to protect indigenous manufacturers. Many of us applauded when the UAW won higher wages for its members in 2023, and we may have a soft spot in our hearts for workers in Germany who depend on their jobs at Volkswagen to feed their families, but there is a sense that a paradigm shift of enormous proportions is underway and the fallout will be devastating to many on the lower rungs of the prosperity ladder. There certainly will be unknown and unknowable political ramifications as well if that happens.

Perhaps in a few generations, economic forces will raise the well-being of Chinese workers to the point where some other nation can challenge it, but for the foreseeable future, it appears that China, once the servant of Western economies, has now become master of its own fate.