Volkswagen's woes reflect a stagnant German economy

No industry is more important to the German economy than automobiles. And no carmaker is more important than Volkswagen.
Now, as the 87-year-old automaker is floating the prospect of job cuts and factory closures as it seeks to return to profitability, Volkswagen's struggles are being reflected in the overall troubles facing the country, which is grappling with a shrinking industrial sector and an economy that is forecast to contract for a second consecutive year.

"The fact that Volkswagen, Germany's largest car manufacturer, largest industrial employer and the world's No. 2 behind Japanese carmaker Toyota, is no longer ruling out plant closures and compulsory redundancies shows how deep the German industry is now in crisis," said Carsten Brzeski, chief economist at ING Germany.

The issues dragging on profitability at Volkswagen's core brand -- high-priced labor, cumbersome organizational structures and an inability to keep up with advances by Chinese automakers -- mirror those facing Germany's overall economy.

On Monday, the German government said the economy would contract 0.2% in 2024, down from a previous projection of 0.3% growth. Dragging output down is the industrial sector, which has failed to recover from the shocks of the coronavirus pandemic and Russia's invasion of Ukraine in 2022.

Germany also appears to have lost some clout in the European Union, which voted Friday to impose higher tariffs on electric vehicles imported from China, a key trading partner of Germany.

Some economists trace the root of the problems, both at Volkswagen and in Germany as a whole, to a missed opportunity to invest in the future during what many call the "golden decade," when the country's output expanded 14% after the global economic downturn of 2008.

"The German economy did really well, and so did Volkswagen," said Jens Südekum, an economist at Heinrich Heine University in Düsseldorf.

In those years, Volkswagen exported cars with combustion engines across Europe and to China, becoming the largest automaker in the world by sales in 2016. It held that position until 2019, despite a scandal over illegal cheating on emissions tests in Europe and United States, which cost the company more than 31 billion euros, or USD 34.6 billion.
The German government racked up budget surpluses from 2014 to 2019. Interest rates were negative, and Germany could have borrowed to invest in public infrastructure, digitization and the transformation to a green economy. Instead, it passed a law enshrining a balanced budget into its constitution, a move that continues to limit investment.

"In a sense, Germany was too successful and people become complacent, thinking that success would just go on forever," Südekum said. "And now we know that's just not the case."

The same could be said of Volkswagen, which has sold millions of gas-powered cars in China since the 1990s. But it failed to take seriously the threat posed by Chinese brands such as BYD, Geely and Nio, which focused on developing fully electric and hybrid cars and building a supply chain to support them.

The lack of foresight vexed IG Metall, which represents 120,000 Volkswagen workers in Germany. The union has raised mismanagement claims against Volkswagen's leaders, who have scrambled to invest billions in recent years to shift production at German plants to electric vehicles.

Thousands of workers at Volkswagen staged a rally last month before the first round of wage talks with company leaders. The workers blew whistles and banged on drums, vowing to defend the 120,000 jobs at six factories in Germany and demanding a wage increase of 7%.
"Cutbacks are not a future concept," Thorsten Gröger, a lead negotiator for IG Metall, told the crowd, which had gathered in the courtyard of the summer palace of the House of Hanover, a former royal dynasty. He called for the automaker to reduce bureaucracy and complexity and develop a strategy for the survival.

But company representatives point to the generous benefits enjoyed by Volkswagen's workers, including the possibility for up to 36 vacation days -- six more than the industry standard.

"We must reduce our labor costs in Germany," Arne Meiswinkel, the human resources chief at Volkswagen and lead negotiator for the company, said as talks started. "We can only maintain our top position and safeguard jobs in the long term if we work more economically."

Workers are pushing back, saying that while they are being asked to make concessions, Volkswagen in the past year has paid out 4.5 billion euros in dividends. The automaker also said this year that it would invest up to 5 billion euros in Rivian, a U.S. maker of electric trucks that has struggled to turn a profit.

"Try explaining that to the workers here," said Stefan Henze, a union representative from Volkswagen's software division, Cariad. "It doesn't add up."

The Volkswagen Group, which owns 10 brands, including Porsche and Audi, is in a stronger position than its flagship brand, which reported a 5% drop in its profit margin in the first six months of 2024.

German media have reported that as many as 30,000 jobs could be lost -- a number that the company has declined to confirm. Such a move would not be without precedent. The company let more than 37,000 employees go from 1971 and 1975, a move that it credits with turning around profitability at the time.

Workers have vowed to take their fight to the streets as soon as a mandatory peace period surrounding the start of talks expires, which could happen by the end of November at the latest.

"Talking has never saved any jobs," a programmer from a Volkswagen factory that produces electric motors, who gave her name only as Anne-Marie, said at the rally in Hanover.

German politicians have weighed whether they should intervene to help shore up Volkswagen, especially in the face of the economic slowdown the country is facing. The automobile industry provides work for 773,000 people, not including jobs at hundreds of smaller companies and suppliers.

One of the largest suppliers, ZF, announced this year that it would cut up to 14,000 jobs within four years, citing a drop in demand for electric vehicles among the reasons.

Last year, the German government abruptly stopped a subsidy to encourage the sale of electric cars, causing many customers to pull back. The move not only hurt demand, but it also caused customers to question Europe's overall ambition to ban the sale of new cars with combustion engines by 2035.

In recent weeks, some politicians in Germany have called for the ban to be lifted, or at least extended, a move that economists say creates further confusion for consumers.

At the same time, the European Union is readying to increase tariffs on electric vehicles imported from China, with the aim of leveling the playing field for European automakers, which they argue have not benefited from the amount of state subsidies that their Chinese counterparts receive.
But Volkswagen, which is heavily invested in China, and the German government oppose the levies, which they fear could lead to retaliation from China.

Economists also warn that duties risk further harming growth when European companies like Volkswagen need to be able to be fast and flexible if they are to remain competitive.

"There should just be an eye toward less regulation and more allowing firms to be more nimble and encouraging further investment," said Erasmus Kersting, a professor of economics at Villanova University who grew up in Hanover and studies the Germany economy.