Since Germany is the only Western country that is still industrialized, with the sanctions against Russia and the resulting high energy prices for the Germans, we are destroying the West's last chances to preserve West's industrial and military capacity.
"Volkswagen is going through its deepest crisis in years. So is Germany. And that's no coincidence.
While the carmaker's travails are exposing missteps, they also show how Germany's economic model is struggling to keep up with a changing world. Fixing these problems will require changes both for the carmaker and one of the world's largest economies.
"VW's problems mirror to a degree the problems of the German economy, and the problems of the German economy are reflected in VW," said Moritz Schularick, president of the Kiel Institute for the World Economy, an independent think tank. "Resistance to change is something that hangs over both."
Tepid sales, mounting foreign competition, and an expensive electric-vehicle strategy that hasn't wowed buyers have left VW's stock trading around 14-year lows. On Tuesday, the company canceled a 30-year agreement to avoid compulsory redundancies at the VW brand, setting up a battle with workers as it looks to rightsize its cost base.
Meanwhile, Germany's economy is stagnating. Its GDP, almost flat since 2019, shrunk 0.3% last year, and some economists expect it to contract again this year.
VW is Germany's largest employer and car making is the country's flagship industry, accounting for 5% of gross domestic product, according to several estimates.
"VW is to Germany what Nokia was to Finland or Samsung is to South Korea . . . There's a scenario where that sector will shrink significantly and replacing those jobs with equally well-paid jobs will not be easy," said Dirk Schumacher, Europe economist at Natixis.
Germany's economic malaise and the crisis at VW have joint roots, according to economists and analysts: Heavy reliance on China, high costs and an eroding technological leadership.
Manufacturing accounts for a fifth of Germany's gross domestic product, about twice the U.S. level, with a focus on capital goods and cars. For years, this was a good fit for a globalizing world: German companies built factories in emerging markets, dug Chinese subways and made cars for the new middle classes. While the Midwest was ravaged by deindustrialization, Germany's industrial base grew.
Nowhere was the boom clearer than at VW. A decade ago, the company recorded 5.2 billion euros, equivalent to around $5.7 billion, of operating profit from its Chinese joint ventures, and that doesn't include income from brand licensing, parts sales or exports of high-end models from Germany.
Covid-19, geopolitics and China's maturing economy changed that. As tariffs and other trade barriers rose around the world, German exports began falling. China had been Germany's largest trade partner since 2015, so slowing growth there hit German companies hard, as did the rise of Chinese competitors. "China," said Schularick, "turned from tailwind to headwind."
EV giant BYD overtook VW last year as China's bestselling car brand. VW has relaunched its China strategy and expects its joint ventures there to bring home as little as 1.5 billion euros in operating profit this year.
"When Western executives returned to China after the pandemic . . . everybody expected the country to be sitting in a deep Covid hole but they had used the time to invest, become more competitive, cheaper and faster," said Ulrich Ackermann, head of foreign trade at Germany's VDMA mechanical engineering industry association.
In 2020, China overtook Germany as the biggest exporter of machinery and equipment, according to German trade statistics. Today it produces more industrial machines than the U.S., Germany and Japan together.
China isn't alone to blame. The scale, cost and inflexibility of VW's operations in Germany mean the company has thinner profit margins than its rivals despite owning a lucrative portfolio of luxury badges including Audi and Porsche. That makes the company vulnerable to macroeconomic or industry challenges. The tepid post-Covid recovery in European car sales, no longer masked by cash flows from China, is just the latest example.
In the year through July, about 17% fewer vehicles were registered in the eurozone and U.K. -- key markets for the VW brand -- than in 2019. Justifying its call for compulsory redundancies, management said the division had lost two plants' worth of production.
While European peers Stellantis and Renault have trimmed staff in recent years, VW's head count has grown modestly. VW finds it hard to let workers go because of its unusual governance. The state of Lower Saxony owns 20% of the company's voting shares, and a special "Volkswagen law" sets a high bar for significant changes to its operations.
"It is more like a state-owned company than a private one," said Ferdinand Dudenhoffer, director of Germany's Center Automotive Research.
Volkswagen's operational skew toward its high-cost home territory is unusual. Germany accounted for 57% of its assets and 44% of its employees in 2023 but only 19% of revenue. At Toyota, VW's closest rival in terms of scale, Japan accounted for 23% of revenues, 27% of assets and 18% of employees in the year through March.
After years of wage restraint boosted its competitiveness in the early 2000s, Germany briefly became the world's largest exporter of goods. This advantage has since faded. German labor is now among the most expensive in the West, and labor productivity has been flat since 2019.
In Germany, Europe's top car producer, an auto worker cost about 62 euros an hour last year, compared with 29 euros in second-ranked Spain, according to an analysis by the German Association of the Automotive Industry.
The Ukraine conflict related sanctions on Russia and Berlin's decision to forgo nuclear energy have also left Germany with high energy costs. Natural gas is three to five times more expensive than in China and the U.S., and electricity is 60% to 75% more pricey than before the pandemic, according to the BDI Federation of German Industry.
"German industry is slightly more energy intensive than the average and Germany depends more on industrial production, so that higher energy costs have a strong impact," said Clemens Fuest, president of the IFO economic institute in Munich.
VW is also losing the tech race. The company's decades of excellence in combustion engines was little help in developing EVs, where it has struggled to stand out even though it outspends peers on research and development.
Despite its engineering tradition and research institutions, Germany doesn't have a sizable tech sector.
R&D spending in Germany amounts to about 3% of GDP, more than the European average, said Fuest. "The problem is that a large part of this is concentrated in the automotive sector," he said." [1]
Lithuania's economy is deeply dependent on Germany. Lithuania reached a dead end together with Germany. Germany has Sara Wagenknecht with an exit plan. Lithuania has so far nothing here.
1. Germany's Problems Are VW's Problems As High Costs Rage. Bertrand, Benoit. Wall Street Journal, Eastern edition; New York, N.Y.. 12 Sep 2024: A.1.
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