Is Volkswagen okay?

German automaker Volkswagen has long been synonymous with the kind of all-round reliability that can get you to Vegas and back when Spirit Airlines lets you down. But Germans may now be re-thinking those vibes after Monday’s news.

Volkswagen CEO Thomas Schaefer has circulated an internal memo – now backed up by his boss and group CEO Oliver Blume – flagging the possibility of closing factories in Germany for the first time in the company’s 87-year history.

To boot, they’re also looking to rescind VW’s long-time pact with German labour unions, which would’ve barred layoffs until 2029.

Why? According to the executives, VW isn’t on track to meet its 2026 annual savings target of $11B, and it’s now facing an “extremely tense situation”.

So okay… why? Here are four big drivers, and why they matter:

1. A big bet on China

While Volkswagen was born and raised in Europe, its biggest market today is in China. And that’s by design. VW made the same bet that many multinationals made: there are 1.4 billion folks in China, so let’s go sell a billion cars, right?

Kinda. Local Volkswagen deliveries are down 7% year-on-year, its China market share is now down to ~14% (from ~20% five years ago), and China now makes up maybe 12% of VW’s total operating profit (down from ~40% at its peak).

So what happened? China’s economic woes mean its consumers are watching their spending. And for reasons we’ll explore below, when folks do spend, they’re now more likely to buy local – VW lost its crown as China’s top-seller in 2022.

2. More competition back home

VW is still Europe’s (and the world’s) top automaker by sales, but it’s not feeling it lately. First, EU sales are still below pre-Covid levels, meaning the two markets where VW sells three quarters of its cars (China and Europe) are both now cooling.

But second, competition is now fierce: Japan’s brands now have a 13% EU market share, followed by Korea (9%) and China (3%). But what’s really spooking auto executives is this: China’s EV market share is expanding rapidly, from 0.5% in 2019 to more than 8% last year. And that takes us to…

3. Weak EV execution

Nearly a fifth of all cars sold globally were EVs last year – the world now sells as many EVs in a week as it sold each year a decade ago. But while Tesla and BYD together sold nearly 5 million units last year, Volkswagen Group only sold 700,000 across all its ten brands (from Audi and Bentley to Porsche and VW).

A big part of the problem is execution, with consumers not loving VW software, for instance. And VW’s long product development cycle means it takes years (rather than ~20 months in China) to course-correct with better products.

But that’s arguably all a symptom of a deeper challenge: it’s tricky to pivot a massive, 87-year-old automaker with 650,000 employees and 115 factories. Which leads us to…

4. High costs

VW’s profit is still a cool $5B per quarter, but it’s shrinking. Folks often blame Europe’s high energy costs, but the reality goes deeper than that: even after Russia’s invasion spiked energy costs ten-fold, energy still contributed maybe $750 in costs per vehicle.

And sure, that’s a lot when the VW brand is skating on 2.3% margins. But VW’s rivals in China enjoy a cost advantage of 20-30%, partly due to state subsidies.

That’s why, as you weigh up all these drivers, it makes sense that Europe’s automotive boardrooms have been giving off stressed vibes lately. 

INTRIGUE’S TAKE

It’s not just Europe’s boardrooms that are on edge here. Cabinet rooms are fretting, too. Why?

• It took Europe’s (and the world’s) top phone-maker Nokia just six years to lose 90% of its market after the iPhone arrived, and yet…
• Unlike Nokia, Europe’s auto sector accounts for ~7% of the region’s GDP and ~6% of its jobs, thanks to the sector’s 17,000 suppliers.

Of course, VW has a plan: it’s buying new stakes in US and China-based EV players; it’s circling back to hybrids as EV sales cool; and it’s pushing the EU (via Berlin) to avoid getting slapped with retaliatory tariffs from China.

But none of that will be easy. Even internally, any major changes need VW’s board, which includes (for example) leaders from the German state of Lower Saxony, key union reps, and members of the powerful Porsche family.

And if the board agrees, layoffs in Europe are then costly, and angry workers can then head to the ballot box, sweep new governments into power, and point the EU in very different directions.

So all that to say… yes dear Intriguer, your choice of car helps you look awesome while picking young Billie up from soccer practice. But it also kinda shapes our world.

Also worth noting:

• Manufacturing contributes around a fifth of Germany’s GDP, and Germany is the biggest economy in the EU.
• VW has around 39 plants and 90,000 employees in China. Its main China-based rival (BYD) is opening its first factory in Europe (Hungary) next year.