Volkswagen considers factory closures as German auto industry faces growing challenges

Volkswagen Group announced on Monday that it is considering closing an automotive manufacturing plant and a components factory in Germany. If implemented, this would mark the first time in Volkswagen's history that it has shuttered factories in its home country.

Since the beginning of 2024, several German car manufacturers have shifted their focus away from electrification, opting instead to implement cost-cutting measures and layoffs to navigate challenging market conditions. Experts noted that this slowdown is primarily driven by a significant drop in electric vehicle (EV) sales, underscoring the urgent need for the sector to mitigate the potential adverse effects of "de-industrialization."

SUPPLIER CRISIS TROUBLES AUTOMAKERS

In the first half of 2024, Volkswagen Group's revenues reached 158.8 billion euros (174.68 billion U.S. dollars), up 1.6 percent year-on-year, while operating profit was around 10.1 billion euros, down 11.4 percent compared to the previous year. Global sales amounted to approximately 4.35 million vehicles, slightly lower than 4.37 million during the same period last year.

Volkswagen CEO Oliver Blume noted that the overall environment has become increasingly challenging, with Germany gradually losing its competitive edge. The company's consideration of closing its German plants highlights the broader transformation challenges confronting the German automotive industry.

As a traditional powerhouse in the automotive sector, Germany has recently been hit by a wave of bankruptcies and layoffs among its component suppliers. ZF Group plans to cut 11,000 to 14,000 jobs in Germany by 2028. Continental has announced layoffs impacting 7,150 employees, and Bosch is set to reduce 1,200 jobs in its software division.

In the first half of 2024, 20 German automotive component suppliers with annual revenues exceeding 10 million euros filed for bankruptcy, marking a 60-percent increase from the previous year, according to management consultancy Falkensteg.

The ifo Institute for Economic Research, a key indicator of German economic trends, released a report showing that Germany's business climate index fell to 86.6 points in August, the lowest level in six months.

Clemens Fuest, president of the ifo Institute, noted that business sentiment in Germany is declining, with satisfaction with the current situation decreasing and future expectations becoming increasingly pessimistic.

CHALLENGES FACING ELECTRIFICATION

The German government's decision in December 2023 to prematurely end EV subsidies has contributed to consumer hesitancy. New EV registrations in July decreased by 36.8 percent year-on-year, according to the Federal Motor Transport Authority. The market share of new EV registrations dropped from 15.8 percent in the same period last year to 12.5 percent in the first half of 2024.

The persistent decline in electric vehicle sales has led German automakers to slow down their electrification efforts. Mercedes-Benz has delayed its target of achieving a 50-percent share of EV sales from 2025 to 2030. Porsche has abandoned its goal of having EVs account for 80 percent of new vehicle sales by 2030. Volkswagen is considering closing its Audi Q8 e-tron production facility in Belgium.

Volkswagen CFO Arno Antlitz stressed that the future is electrical, but the past is not over yet, adding that Volkswagen Group will continue to invest in the research, development, and production of traditional fuel vehicles.

Thomas Peckruhn, vice president of the Central Association of the German Automotive Industry, pointed out that slowing market demand and the high investment required for EV development pose significant challenges to corporate profitability. As a result, multinational car manufacturers have adjusted their electrification strategies, placing renewed emphasis on internal combustion engines and adopting a dual approach of both fuel and electric vehicles.

Experts believe that while German automakers have temporarily slowed their electrification efforts, they are likely to reinvest in EV businesses in the future and explore new opportunities as technology advances and the market matures.

DE-INDUSTRIALIZATION EFFECTS CONTINUE TO EMERGE

The German economy faces multiple challenges, including high inflation, elevated interest rates, and weak export demand.

Fuest said that Germany faces the risk of "de-industrialization," with sectors such as chemicals and automotive experiencing contraction and automotive production declining for several consecutive years.

Since the outbreak of the Russia-Ukraine conflict, the European Union has followed the United States in imposing embargoes and restrictions on Russian natural gas, leading to tight energy supplies and increased inflationary pressures.

The United States has taken advantage of the situation to export high-priced natural gas to Europe, further driving up energy costs, which in turn has significantly impacted Germany's energy-intensive industries.

American unilateral industrial policies are also a major factor harming German manufacturing. The U.S. Inflation Reduction Act introduced a range of measures, including substantial subsidies, to promote the development of EV and other green industries domestically. This has led many European companies to redirect their investment plans to the United States.

Zheng Chunrong, director of the German Studies Center at Tongji University, emphasized that the effects of "de-industrialization" cannot be ignored.

"The German economy, historically built on manufacturing, will face significant long-term impacts if de-industrialization continues," he said.