Volkswagen in Crisis Mode
"All Happy families are alike; each unhappy family is unhappy in its own way" ―Leo Tolstoy ,Anna Karenina
This quote from my favorite author Leo Tolstoy, trascendes its initial scope of 19th century Russian Families to be more than applicale to current Automotive Sector.
While my previous article , was dedicated to explain how Stellantis fall followed a promising rise. In this one, I will discuss the case of Volkswagen ,another giant, passing, not for exactly the same reasons, through an imprecended crisis.
VW is indeed dealing with immense pressures from various fronts: a difficult transition to electric vehicles (EVs), intense global competition, economic challenges, and internal restructuring.
Above 2 graphs are showing how Operating Porfit kept declining since 2017 (Graph1). Almost the same is observed for the Company stock (Graph2).
I will try to delve into the reasons behind these challenges, assess their impact on VW’s workforce and local communities, and explore whether these issues are unique to VW or part of a broader industry trend affecting automakers in Europe and globally.
VW’s Strategic Challenges with the Switch to EV's
Volkswagen committed to the EV transition early on, driven by the EU’s Green Deal and emissions standards requiring the phase-out of internal combustion engines by 2035. Since 2019, VW has invested billions in developing EVs and building out the necessary infrastructure. Despite these efforts, VW is struggling to keep pace with competitors like Tesla and Chinese automakers BYD and Nio, which have captured global EV market share with lower production costs and faster innovation cycles.
In China—a crucial market for VW—demand for VW’s EV models has been disappointing, with sales of its ID. series falling below expectations. This underperformance has allowed local brands, which benefit from lower costs and government support, to gain ground. As a result, VW has considered closing or downsizing some of its German plants, where high production costs and limited demand are putting additional strain on profitability.
VW’s challenges are also pronounced in Europe, where recent changes to Germany’s EV subsidies have reduced incentives for buyers, leading to sluggish domestic EV sales and underutilized factory capacity. Some VW plants in Germany are now operating below 50% capacity, increasing financial pressure on the company as it attempts to make EV production more profitable.
Economic and Competitive Pressures
Volkswagen’s challenges are reflective of broader issues within the European automotive industry. Major European carmakers like Stellantis, Renault, and Mercedes-Benz face similar pressures, as they try to accelerate EV production while dealing with high operating costs and regulatory demands. Chinese automakers, such as BYD and Nio, are further reshaping the landscape by bringing competitively priced EVs into the European market. These companies have started establishing production facilities in Europe to avoid import tariffs, making them a formidable threat to local brands.
On a global scale, the EV market continues to expand, with EV sales expected to reach 17 million units in 2024. China, Europe, and the United States are leading this growth, with projections showing that EVs will account for around 45% of China’s car sales, 25% in Europe, and over 11% in the U.S. by year-end 2024. However, this growth is concentrated in a few regions, with emerging markets in Southeast Asia, Latin America, and Africa lagging due to economic constraints and limited infrastructure.
Rising Operating Costs
The cost of raw materials and energy has soared, adding to the operational expenses of automakers like Volkswagen. Battery production relies on lithium, nickel, and cobalt—all of which have experienced significant price inflation due to demand surges and supply chain constraints. Additionally, energy prices in Europe have escalated due to geopolitical factors, impacting the cost-effectiveness of VW’s European manufacturing operations. These rising costs have placed a considerable burden on VW, impacting its ability to maintain competitive pricing and profitability in the EV market.
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Internal Restructuring and Workforce Tensions
VW’s efforts to cut costs as part of a €10 billion savings plan have sparked significant unrest among its workforce. The company recently announced potential job cuts and plant closures, ending a long-standing employment guarantee that had been central to its labor policies. This decision has led to anxiety among VW’s German employees and sparked protests from unions, which argue that management is prioritizing investor returns over job security.
In Wolfsburg, where VW is headquartered, local communities are feeling the effects of VW’s restructuring. Many residents rely on VW for employment, and the company’s recent moves have led to concerns about the local economy’s stability. Real estate values in Wolfsburg are starting to fluctuate as employees reconsider their future in the area. VW’s decision to make cuts and potentially move some operations out of Germany has ignited tensions with labor unions, who are pushing back against changes that could undermine the job security of thousands of workers.
Is VW an Isolated Case?
Volkswagen’s struggles are part of a larger restructuring trend within the global automotive industry. As carmakers adapt to electrification, they face common challenges: high production costs, rapidly evolving regulations, and intense competition from new entrants. European automakers, in particular, face challenges unique to their region, including high labor costs and reduced consumer subsidies for EVs. According to McKinsey, if European automakers do not adapt swiftly, their share of the global market could decline significantly by 2035, potentially losing both domestic and international market share.
Globally, while the EV market is growing rapidly, established automakers face stiff competition from new players, especially in key markets like China and Europe. Legacy brands like VW must navigate complex regulatory, economic, and market conditions, balancing the need to invest in EVs for advanced markets while maintaining affordable ICE vehicles for regions where EV adoption is slower.
What Lies Ahead ?
As VW and the broader automotive industry navigate this transformative period, a few strategies could prove pivotal:
To Sum Up:
Volkswagen’s current crisis reflects the pressures facing not only the company but also the entire European automotive industry. Successfully navigating these challenges could allow VW to reclaim its position as a leader in the global EV market. However, failure to adapt could lead to severe economic consequences for both VW and the German auto sector.
As VW restructures, the company’s response will serve as a bellwether for the broader industry. European automakers must embrace a future focused on affordability, sustainability, and adaptability. For legacy brands like VW, decisiveness in this transformation will determine their role in the new automotive era.
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